Tracking Real GDP over Time
Overview
By the end of this section, you will be able to:
- Explain recessions, depressions, peaks, and troughs
- Evaluate the importance of tracking real GDP over time
Economic Business Cycle
When news reports indicate that “the economy grew 1.2% in the first quarter,” the reports are referring to the percentage change in real GDP. By convention, governments report GDP growth is at an annualized rate: Whatever the calculated growth in real GDP was for the quarter, we multiply it by four when it is reported as if the economy were growing at that rate for a full year.
Figure shows the pattern of U.S. real GDP since 1900. Short term declines have regularly interrupted the generally upward long-term path of GDP. We call a significant decline in real GDP a recession. We call an especially lengthy and deep recession a depression. The severe drop in GDP that occurred during the 1930s Great Depression is clearly visible in the figure, as is the 2008–2009 Great Recession.
Real GDP is important because it is highly correlated with other measures of economic activity, like employment and unemployment. When real GDP rises, so does employment.
The most significant human problem associated with recessions (and their larger, uglier cousins, depressions) is that a slowdown in production means that firms need to lay off or fire some of their workers. Losing a job imposes painful financial and personal costs on workers, and often on their extended families as well. In addition, even those who keep their jobs are likely to find that wage raises are scanty at best—or their employers may ask them to take pay cuts.
Table lists the pattern of recessions and expansions in the U.S. economy since 1900. We call the highest point of the economy, before the recession begins, the peak. Conversely, the lowest point of a recession, before a recovery begins, is the trough. Thus, a recession lasts from peak to trough, and an economic upswing runs from trough to peak. We call the economy's movement from peak to trough and trough to peak the business cycle. It is intriguing to notice that the three longest trough-to-peak expansions of the twentieth century have happened since 1960. The most recent recession started in December 2007 and ended formally in June 2009. This was the most severe recession since the 1930s Great Depression. The ongoing expansion since the June 2009 trough will also be quite long, comparatively, having already reached 90 months at the end of 2016.
| Trough | Peak | Months of Contraction | Months of Expansion |
|---|---|---|---|
| December 1900 | September 1902 | 18 | 21 |
| August 1904 | May 1907 | 23 | 33 |
| June 1908 | January 1910 | 13 | 19 |
| January 1912 | January 1913 | 24 | 12 |
| December 1914 | August 1918 | 23 | 44 |
| March 1919 | January 1920 | 7 | 10 |
| July 1921 | May 1923 | 18 | 22 |
| July 1924 | October 1926 | 14 | 27 |
| November 1927 | August 1929 | 23 | 21 |
| March 1933 | May 1937 | 43 | 50 |
| June 1938 | February 1945 | 13 | 80 |
| October 1945 | November 1948 | 8 | 37 |
| October 1949 | July 1953 | 11 | 45 |
| May 1954 | August 1957 | 10 | 39 |
| April 1958 | April 1960 | 8 | 24 |
| February 1961 | December 1969 | 10 | 106 |
| November 1970 | November 1973 | 11 | 36 |
| March 1975 | January 1980 | 16 | 58 |
| July 1980 | July 1981 | 6 | 12 |
| November 1982 | July 1990 | 16 | 92 |
| March 1991 | March 2001 | 8 | 120 |
| November 2001 | December 2007 | 8 | 73 |
A private think tank, the National Bureau of Economic Research (NBER), tracks business cycles for the U.S. economy. However, the effects of a severe recession often linger after the official ending date assigned by the NBER.
Key Concepts and Summary
Over the long term, U.S. real GDP have increased dramatically. At the same time, GDP has not increased the same amount each year. The speeding up and slowing down of GDP growth represents the business cycle. When GDP declines significantly, a recession occurs. A longer and deeper decline is a depression. Recessions begin at the business cycle's peak and end at the trough.
Self-Check Questions
Without looking at Table, return to Figure. If we define a recession as a significant decline in national output, can you identify any post-1960 recessions in addition to the 2008-2009 recession? (This requires a judgment call.)
Hint:
Two other major recessions are visible in the figure as slight dips: those of 1973–1975, and 1981–1982. Two other recessions appear in the figure as a flattening of the path of real GDP. These were in 1990–1991 and 2001.
According to Table, how often have recessions occurred since the end of World War II (1945)?
Hint:
11 recessions in approximately 70 years averages about one recession every six years.
According to Table, how long has the average recession lasted since the end of World War II?
Hint:
The table lists the “Months of Contraction” for each recession. Averaging these figures for the post-WWII recessions gives an average duration of 11 months, or slightly less than a year.
According to Table, how long has the average expansion lasted since the end of World War II?
Hint:
The table lists the “Months of Expansion.” Averaging these figures for the post-WWII expansions gives an average expansion of 60.5 months, or more than five years.
Review Question
What are typical GDP patterns for a high-income economy like the United States in the long run and the short run?
Critical Thinking Questions
Why do you suppose that U.S. GDP is so much higher today than 50 or 100 years ago?
Why do you think that GDP does not grow at a steady rate, but rather speeds up and slows down?
References
The National Bureau of Economic Research. “Information on Recessions and Recoveries, the NBER Business Cycle Dating Committee, and related topics.” http://www.nber.org/cycles/main.html.