What is the Economic Cycle?

Phases of the Economic Cycle

1) Boom

Periods of strong output growth, above the trend rate. It is likely that inflation will accelerate, as the growth of aggregate demand outstrips that of aggregate supply.


2) Slowdown

Occurs when the pace of output growth slows without actually falling.


3) Recession

A recession is defined as, at least two successive quarters of falling GDP, associated with rising unemployment, reduced inflationary pressure and improvements in the balance of payments.


4) Recovery

Rising output, falling unemployment, increasing inflationary pressure and a deterioration of the balance of payments.

The Output Gap

The output gap is the difference between the actual level of national output and the estimated potential level.

Positive Output Gap

If actual output (GDP) is greater than potential ouput then this is indicated by a positive output gap. Positive output gaps are often created by rapid increases in aggregate demand. They are commonly associted with coutries such as China and India.

Negative Output Gap

If actual output (GDP) is less than potential ouput then this is indicates by a negative output gap. Negative output gaps may arise due to under-utilisation of factors of production.