Question

Discuss using GDP to evaluate the business cycle.

Answer 1

Answer : Business cycle has four phases. These are :

(I) Contractionary phase : In this phase of business cycle the economy become slow down. When the economy become slow then the unemployment level increase and output level decrease. As GDP shows the value of all domestically produced goods and services and as at contractionary phase the production level decreases hence GDP growth rate decrease.

(II) Trough phase : In this phase of business cycle the economy reach at lowest growth level. In this phase the unemployment level is highest and production level is lowest. As here production level is lowest hence GDP growth rate is minimum.

(III) Expansionary phase : Expansionary phase of business cycle is the recovery phase. From this phase the economy start growing continuously until it reaches to peak point. As in this phase the economy grows hence the unemployment level decrease and output level increase. Due to increase in output level in this phase the GDP growth rate increase.

(IV) Peak phase : In this phase of business cycle the economic growth is highest. In this phase the unemployment level is lowest and output level is highest. Due to highest output level the GDP growth rate is highest in this phase.