BUSINESSCYCLES
The ups and downs of the general level of economic activity.
4/7/2008
Vivek Agrawal
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BUSINESS CYCLES
The business cycle is the ups and downs of the general level of economic activity. Allmodern, industrialized countries have fluctuations in their rates of economic activity,leading to the observation that one nation's economy is "booming" while anothereconomy is in a "recession." When an economy goes from a positive to a negativerate of growth, it is said to have reached a "peak" and entered a recession. When aneconomy goes from a negative to a positive rate of growth, it is said to have reacheda "trough" and entered a "recovery."
WHAT IS
THE
BUSINESS CYCLE?
Although something worthy of being called "the business cycle" does exist, attemptsat finer classifications or subcategories of business cycles have not been particularlyfruitful. Some economists have simply used a broad dichotomy between "major" and"minor" cycles. Descriptively this can be meaningful. A particularly severe recession isreferred to as a "depression." The Depression of the 1930s was quantitativelydifferent from the 1990-1991 recession. The output of the economy fell by almost 50percent in the former and by less than 1 percent in the latter.It is sometimes useful to speak of the cycles of specific time series; that is, theinterest rate cycle, the inventory cycle, the construction cycle, and so forth. Giventhe diversity of general economic cycles, one can find turns in the general level of economic activity in which individual sectors of the economy do, at least for a time,appear to be independent of the rest of the economy. The most frequentlymentioned individual cycles are the inventory cycle, the building or constructioncycle, and the agricultural cycle. The standard business cycle is sometimes referredto as the inventory cycle, and some business cycle theorists popularly explain theseverity of turns in the economy by the coincidence of timing in the individual cycles.The idea of the timing of individual time series relative to the general level of business implies specific dates for the business cycle. How does one establish thepeaks and troughs for the business cycle? To say whether something leads or lags thebusiness cycle, one must have some frame of reference; hence, the business cycle isreferred to as the
reference cycle
and its peaks and troughs as
reference turning points
. (See Table 1.)For the United States, the reference turning points are established by the NationalBureau of Economic Research (NBER), a nonprofit research organization. This
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