Recession is typically used to mean a downturn in economic activity, but most economists use a specific definition of "two consecutive quarters of declining real GDP" for recession. By comparison, there is no formal definition of depression. While recessions have averaged around 10 months in length since the 1950s, the recovery/expansion phases have a much wider range of lengths, though around three years is relatively common.
The movement of the economy through business cycles also highlights certain economic relationships. While growth will rise and fall with cycles, there is a long-term trend line for growth; when economic growth is above the , unemployment usually falls. One expression of this relationship is , an equation that holds that every 1% of GDP above trend equates to 0.5% less unemployment.
The relationship between inflation and growth is not as clear, but inflation does tend to fall during recessions and then increase through recoveries. (To learn more about the business cycle, see )
While the business cycle is a relatively simple concept, there is great debate among economists as to what influences the length and magnitude of the individual parts of the cycle, and whether the government can (or should) play a role in influencing this process. , for instance, believe that the government can soften the impact of recessions (and shorten their duration) by cutting taxes and increasing spending, while also preventing an economy from "overheating" by increasing taxes and cutting spending during expansion phases.
In comparison, many monetarist economists disagree with the notion of business cycles altogether and prefer to look at changes in the economy as irregular (non-cyclical) fluctuations. In many cases, they believe that declines in business activity are the result of monetary phenomena and that active government inflation is ineffective at best and destabilizing at worst.
There are numerous other alternate theories on the business cycle and its causes/influences. Real business cycle theorists, for instance, believe that it is external shocks like innovation and technological progress that drive cycles, and that issues like excessive overcapacity can drive downturns. Other theorists suggest that excess or the creation of excess levels of drive business cycles. (To learn more about the Keynesian theory, check out )
The purpose of this post is to explain the economic business cycle, factors that effect it, why a declining market is good, and try my best at explaining our current business cycle.