GED Social Studies Practice Test: Business Cycles 1: Four Stages of the Business Cycle

Just as life doesn’t stand still, neither does the business cycle. This means that real output of goods and services (and, thus, the GDP and per-capita income) fluctuate (change).

Some times are good (think of the 1920s and 1990s) and some times are not so good (think of the late 1970s), or even catastrophic (think of the Great Depression that began in 1929 and the Great Recession that began in 2007).

There are four stages of the business cycle:

  1. Expansion (or, in some cases, recovery)
  2. Peak
  3. Contraction ( also known as recession or depression)
  4. Trough

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Expansion. During this period, the economy grows (as does personal income). War, it so happens, is good for an economy. During World War II, the GDP more than doubled, because (a) so many goods and services were needed; and (b) most anyone who wanted a job could have one.

Peak. When producers are producing all they can and consumers are consuming all that they can, the economy reaches a peak. The economy seems to be humming. People have jobs and money to spend. But, to use the cliché, what goes up must come down. Producers may reach their ultimate capacity. Consumers may be spending all they can. And then the GDP may stop increasing. So then you get a contraction.

Contraction. When an economy shrinks, rather than enlarges, we call this contraction. A recession is when the GDP declines for two successive quarters (three-month periods). Anything more than that, and the economy runs the risk of falling into a depression. To be honest, there’s no one-size-fits-all definition of a depression, but they usually go on for one or more years. The Great Depression began in 1929 and lasted, more or less, until about 1940 (after things began to improve with the New Deal programs, President Roosevelt throttled back the New Deal programs, and there was a recession-in-a-depression in 1937 and 1938). While a recession is a normal (but definitely unpleasant) part of the business cycle, a depression (and it’s a scary word) is an extreme event. One of the most clever ways of distinguishing between the two (even if it’s not completely accurate) was coined by President Ronald Reagan in the 1980s: “A recession is when your neighbor loses his job. A depression is when you lose yours.”

Trough. When the recession or depression hits as low as it can go (and in 1933, the U.S. unemployment rate was close to 25%, we call this a trough. In the case of the Great Depression, the economy began to grow again (although slowly), after President Franklin Roosevelt and Congress began to implement the “Three R’s” — Relief, Recovery, and Reform — of the New Deal. The free-fall we experienced when the economy entered the Great Recession (which began in late 2007) stopped when the brand-new administration of President Barack Obama and Congress passed a $700-plus billion stimulus package.

Work: It’s a Four-Letter Word

Except for a tiny percentage of people in the world (lucky devils), people work to earn wages (money in exchange for labor or services performed). Of course, there are other reasons why people work (self-esteem, sense of accomplishment, etc.), but in order to get money to live, most people work — or want to. In places where there is high unemployment (especially among the young), you’ll find political and social instability.

Unemployment affects Joe or Jane, but in the big picture, unemployment is a key factor in studying macroeconomics, as unemployment has policy and monetary implications for a nation or a region. In the United States, the federal government looks carefully at the unemployment rate each month to help gauge the health of the economy.

Nations look at the unemployment rate as one key indicator of its economy’s health. But what, exactly, do “employed” and “unemployed” mean? After all, your 90-year-old Great Uncle Fred doesn’t work. Is he unemployed? Is a stay-at-home dad considered “employed”?

Let’s begin with what it means to be “employed.” If you work for pay for another person or establishment more than one hour a week, you’re considered employed. If you work for a family business for more than 15 hours a week, but you don’t get paid, you’re still considered employed. You’re also considered employed if you have a job but you’re not working because of vacation, illness, or work stoppage.

If you do not fall into one of these categories, and you are looking for work (more on that in a bit), then you are considered, by the government’s criteria, to be unemployed. Each month, the federal government’s Bureau of Labor Statistics compiles data culled from telephone and mail surveys to figure out employment and unemployment rates.

You can be out of work but not unemployed. Suppose you have used up your federal unemployment benefits and simply “drop out” — you stop looking for work. Since you are “off the radar,” the government doesn’t count you as unemployed. People who are retired, on medical disability, or unable (for a variety of reasons) to work are not considered unemployed either.

There are different types of unemployment, too. Structural unemployment is usually the result of technological change, movement of industries to other nations, or depletion of natural resources. There are fewer and fewer telephone operators as networks go digital and people use email. In mining communities, for example, when all of the gold (or timber, or coal) has been removed from the earth, there may be mass unemployment. “Gold Rush” towns once dotted the Western states. Today, they are ghost towns.  Seasonal unemployment is just what it sounds like — it depends on the time of year. If you own and operate an amusement park, you’re probably not working during the winter. Many agricultural workers experience seasonal unemployment; once the crops are harvested and shipped, they may not have anything to do until the next planting season.  Cyclical unemployment is usually a feature of the up-and-down business cycle. Below is a chart of the U.S. unemployment rate from 1900 to 1998. The period of highest unemployment was in the 1930s, in the depths of the Great Depression. In 1933, the unemployment rate was 25% — that’s one in four persons who wanted work but couldn’t get any. By the time the U.S. was in World War II, unemployment dropped dramatically, to under 5%.


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