9. Economic Cycles

Measuring the economy over time lets us see a recurrent cycle of booms followed by busts. An economic boom is a period of growth in output. GDP expands as demand grows and firms increase production, while employment grows and unemployment falls. Booms are interrupted by recessions, or economic busts. A recession is a period of contraction in GDP. Economic output shrinks as demand falls and many firms reduce production or go out of business. Employment typically falls and unemployment rises in a recession, leading to a negative impact on people’s incomes and well-being.

A deep and prolonged recession is sometimes called a depression. One of the best-known cases was the so-called Great Depression, a severe global economic downturn that began in 1929. Incomes fell sharply and unemployment soared, staying high in many countries until the late 1930s.

Recessions can have many causes. For example, the Great Recession that began at the end of 2007 was a result of excessive risk-taking in the banking sector in the United States that spread to many other countries. The collapse of several large banks and other businesses led to a global economic downturn. The following global recession was caused by something completely different: a COVID-19 pandemic that began in China and spread to other countries, leading to a sharp slowdown in economic activity. Since recessions can have many causes, they are very hard to predict in advance.