Video Transcript: Lesson 4

Okay, welcome to Unit Two. In this video, we'll discuss the business cycle. The  business cycle in developed countries, we can generally see a pattern where  there are periods of economic growth followed by periods of slow growth and  maybe even falling growth, which will be led into a recession. This is known as  the business cycle or trade cycle. The business cycle is the periodic fluctuations  in economic activity measured by changes in real gross national product. Right.  So here we're going to be measuring the gross national product. Right. So the  phases of the business cycle are known as peak, contraction, trough, and  expansion. In a peak, you have reached your full economic potential, and you  will see a slight decrease in output for that period, which will be followed by a  contraction, which means the economy is tightening in a in a downturn. Now  we'll reach a trough, which is known as the opposite of a peak. So the peak is  the top, the trough is the bottom, where we're starting to rebound and go back  up, and then an expansion is felt after we reach the trough, we dig out of the  trough, and now we are growing back into you know a boom cycle in the  economy. While the fluctuations are in practice highly irregular, the most  common illustration of the business cycle shows a standard periodic cycle. Now  you'll see in this graphic that we have a startup phase. We dip down into our  trough. You can see we start above the zero line. We fall below the zero line,  create a trough, which means we have reached the bottom and our contraction,  right, or our downturn. So then we see a recovery, which is known as potential  expansion policy being used. Maybe a loosening of federal funds rate, allowing  banks to offer loans at cheaper rates. Then we go into the boom cycle here,  which is followed by a peak, which you can see will have again a downturn  leading with contraction into a recession, and the second dotted line in the  middle, where you can see the trough comes in. This is where we've reached  the bottom of the recession, and our economy is beginning to rebound and  improve. Then you'll see expansionary policy undertaken by the government,  which will lead us into an expansionary phase. Now, expansion unemployment  will fall. Right, we will see the unemployment go down during an expansionary  period in our economy. Actual GDP will be greater than potential GDP here.  There is an output gap. Unemployment is less than neutral rate of  unemployment. So at the D point on our cycle graph here, you'll be able to see  that potential GDP is less than or actual GDP is greater than potential GDP, and  there is an output gap. Unemployment is less than the neutral rate of  unemployment, which shows very strong economic numbers or a strong  economic system in that part of the cycle. Now you can see where we reach the  peak at D, and we started to contract a little bit, and unemployment increases.  Funds get tighter. Banks are less willing to loan. Rates are going up. Consumers are looking for less loans. So you will see businesses begin to, you know, shed  costs, and a lot of times that happens in the labor force first. So unemployment  will go up in a contractionary period at point B. Now we move along into the 

graph on the cycle at point E. Now at point E, we are starting to settle into our  trough. You can see that the contraction is beginning to flatten out a little bit, and as we move through E, you can see that it will eventually hit that trough. But at  point E, we'll discuss that actual GDP is less than potential GDP. So you know  potential GDP is there. We've already seen a peak effort early in this business  cycle, so we know what our potential GDP is. But we are falling below the  potential of our GDP because we are experiencing a contractionary period in our business cycle. So, therefore, at this point, unemployment is greater than the  neutral rate of unemployment because because businesses are having to cut  costs and they are trying to save cash. Therefore, they will do that through the  unemployment process, cutting labor, etc. Now, as we come out of the E figure,  you'll see that we are creating the trough again, and we are continuing. We are  back to the rebound and expansion phase, and this will give us our actual GDP  number once we reach this maximized peak. Now, point C: long-term growth  trend or or potential GDP equals full employment GDP, and that is equal to  unemployment, which is equal to the natural rate of unemployment.