Measuring the Health of the Economy

Read this section to understand more about economic growth. Looking at GDP alone does not give much of an indication of the health of an economy. It is the change in GDP that is relevant. If GDP goes up, the economy is growing. This positive movement is what we want as we leave behind the most recent recession. Complete the exercises at the end of the section.

Economic Goals

The Business Cycle

The economic ups and downs resulting from expansion and contraction constitute the business cycle. A typical cycle runs from three to five years but could last much longer. Though typically irregular, a cycle can be divided into four general phases of prosperity, recession, depression (which the cycle generally skips), and recovery:

  • During prosperity, the economy expands, unemployment is low, incomes rise, and consumers buy more products. Businesses respond by increasing production and offering new and better products.
  • Eventually, however, things slow down. GDP decreases, unemployment rises, and because people have less money to spend, business revenues decline. This slowdown in economic activity is called a recession. Economists often say that we're entering a recession when GDP goes down for two consecutive quarters.
  • Generally, a recession is followed by a recovery in which the economy starts growing again.
  • If, however, a recession lasts a long time (perhaps a decade or so), while unemployment remains very high and production is severely curtailed, the economy could sink into a depression. Though not impossible, it's unlikely that the United States will experience another severe depression like that of the 1930s. The federal government has a number of economic tools (some of which we'll discuss shortly) with which to fight any threat of a depression.