The Business Cycle: Economic Performance Over Time

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  • 0:43 Examples of the Business Cycle
  • 5:57 The Business Cycle Defined
  • 8:59 Business Cycle Diagram
  • 10:35 Key Points Summary
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Lesson Transcript
Instructor: Jon Nash

Jon has taught Economics and Finance and has an MBA in Finance

Learn the economic terms that describe economic performance over time and how indicators such as unemployment and inflation behave throughout these economic fluctuations.

Welcome to the Land of Macro

Let's take a journey to a galaxy far, far away on the planet Econoworld. I want to welcome you to the nation of Macro, where everything is big.

Steaks are big - 72 ounces big. In the nation of Macro, movie theaters seat 10,000 people. Large iced coffees are big - 31 ounces. Wait a second - that's how big they already are. 31 gallons - now that's big. Nobody's falling asleep during economics lessons in Macro. Chocolate bars are twice as nice. Everything is big in Macro, and so is this lesson.

Let's imagine for a few minutes that you're riding around for four days on a big unicycle in the business district of the city of Growth, which is the capital of Macro. It can't be that difficult to ride a unicycle, you tell yourself with great anticipation of sitting on a seat way up high in the air. Here's where the unicycle takes you and what you observe along the way.

Day One: Expansion

As you pass through the center plaza of the city, you enjoy a quick look at the downtown central park with its soft green grass and a peaceful river flowing through. A few moments later, you pass by a factory that makes chocolate. Now this is really starting to get interesting - either that or the dark chocolate I just ate is starting to kick in right about now. As you pass by, you turn and gaze into some large windows in the front of the factory that allow you a rare look at the activities taking place inside.

'What's going on in there?' you ask yourself. Inside the factory, several machines are going at a solid pace, all connected to each other, and an assembly line is at the end of those machines transporting chocolate bars towards an area where they will get wrapped and boxed up for distribution throughout the land of Macro.

Graph of business cycles from 1880 to 1950
Business Cycle Graph

Workers are spread out across the factory, and most of them seem busy, although you notice several of them standing in a corner goofing off and blowing bubbles. For a quick second you think to yourself 'Wow, what an easy job those people have!' You finally pass by the whole factory and continue on your way through the city, wishing that you could take some of that chocolate with you. As you continue to daydream about chocolate, you happen to pass by the mall, noticing that it's not empty and it's not full. So this is what happens on your first day of riding the unicycle through the city.

Day Two: Peak

The second day, you get back on your unicycle again. As you pass through the city center, you travel the same path as before, and you're most interested in looking in on the factory to see what's going on inside. This time, as you pass by the front window and gaze into the factory, you can tell that every machine is going at full steam. It looks as though the machines are going faster this time. You look around the building, searching for the people who were standing in the corner goofing off before, but they aren't there. Every single person appears to be working very hard, and you even notice more people in there than you saw before. Chocolate bars are flying out of the machines onto the assembly line. All of a sudden, you see one of the machines break down because the workers are working it so hard.

You're quite happy on this day because you just got a raise at your job and you're on your way to the mall to spend it. When you get to the mall, you can barely find a parking spot for your unicycle because there are so many people there. So this is what happens to you during your second day of adventures.

Day Three: Recession

Now it's the third day. You're riding on your unicycle through the city of Growth in the nation of Macro. As you pass by the factory, you gaze into the front window once more to see what's happening in there. This time, the machines are barely going. Almost no one is working in there. Very few chocolate bars are coming out! After you pass the factory, you pass the mall and you notice that almost nobody is there. 'Where did everybody go?' you wonder. On the third day, things aren't looking so good.

Day Four: Trough

Finally, it's day four and you're starting to really get in great shape now because you've been riding this darn unicycle over and over again through the city, which is no joke. Your curiosity swells and you ride past the factory. As you do, you gaze into the window, but this time you can't see anything because the window is boarded up! Once you adjust your eyes, you can see that over the window is a sign that says 'For Sale,' and you realize that your beloved chocolate factory has closed down!

The phone rings and you take the call while you're riding. Although everything is big in the nation of Macro, your mood is definitely not, because this is a call from your boss, and she tells you that business is slow and then lets you go. As you pass by the factory and continue to ride through the city, all you can think of is how many chocolate bars you're going to need once you get home. As you pass by the mall, you notice that there is no mall. It's been demolished by a wrecking ball! What a rough day this has been.

A business cycle takes 53 months to complete
Business Cycle Parts

Thankfully, you wake up the next day full of energy. You once again ride through the city and you discover that not only has the chocolate factory started up again but there's a new mall where the old one used to be. People are starting to drive in and park, and things are looking up once again. Today you stop for a big iced coffee and then your cell phone rings. As you take the call, a really big smile covers your face as a recruiter tells you that you have a new job waiting for you as a chocolate salesman!

The Business Cycle

So what we've been talking about is the business cycle. The economy doesn't grow smoothly - it goes through ups and downs, which economists call economic fluctuations. It grows in a fairly predictable pattern. Although we don't know when it will happen exactly, we know the pattern that will unfold when it does happen. That pattern is a cycle. Economists call this pattern of economic fluctuations the business cycle. The National Bureau of Economic Research (NBER) identifies and dates business cycles and turning points.

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