While the general tendency has been for RGDP to grow over time, the rate of growth has been inconsistent.  The following graph represents roughly twenty years of RGDP data.  The blue arrow indicates a period of time where RGDP was increasing.  The red arrow indicates a period where RGDP is shrinking.  And then the economy began another lengthy expansion.  The ongoing cycling of the economy between expansion and contraction is referred to as the “business cycle”.  While we won’t attempt to explain its underlying cause in this class, the business cycle has existed for at least centuries.  It is partially what Karl Marx was referencing in his critique of capitalism.  

An “economic recession” is officially defined as a period of at least six months of negative economic growth.  The gray bar, in the above graph, represent a recession that occurred in the early 2000s. 

To emphasize the volatility of economic growth, the following diagram measures year-over-year change in RGDP.  You can see that even during an economic expansion, the rate of growth varies dramatically. 

So, why does the business cycle matter?  There are two important reasons.  First, there is simply the lost productive potential.  The difference between the projected RGDP (had the recession not occurred) and actual output is referred to as the “output gap”.  This loss in economic potential is permanent and consequential. 

But perhaps a more important reason to worry about economic recessions is their tendency to create “unemployment”.  Unemployment is when someone who wants to be working can’t find a job despite actively seeking to find one, or someone who wants to be working but is temporarily laid off from a job.  It doesn’t refer to persons who voluntarily choose not to work for personal reasons – school, retirement, homemaking, etc.

The following graph shows the relationship between the unemployment rate and economic recessions (indicated again by the gray bars).  We’ll define the unemployment rate formally and discuss what the percentage means in the next section.  For now, note that during economic expansions, unemployment declines.  During contractions, it increases.  This makes sense.  During an expansion, more goods and services are being produced and so the demand for labor goes up.  During a contraction, demand for goods and services declines and so demand for labor does as well.  The spike in unemployment during the Covid crisis was particularly remarkable.