What Is the Relationship Between GDP and the Business Cycle
It is not easy to explain the relationship between GDP and Business Cycle in a few words. It has to be dealt separately in understanding their relationship. Before discussing how and why they affect each other let us understand the meaning of both these terms. Gross Domestic Product refers to the total of all goods and services that has been produced in a country at any given point of time. Business cycle deals with the entire flow of changes that takes place in an economy. Changes here refer to the nation’s economic health.
Before we start with analyzing the relationship between GDP and business cycle, let us understand the four phases of business cycle. They are fall, recession, recovery and boom. Every country’s economy has to go through these cycles that have a great effect on the Gross Domestic Product. So how does each phase affect the GDP of a country? Let us discuss a bit in detail.
During the fall or slump phase where the output is decreased that leads to a decrease in the demand for goods and services. The consumers will start saving more and spend less so that they can face the next phase of setback. Because of the GDP of the nations drops drastically, since this cycle experiences increase in imports. Hence Gross Domestic Product falls due to decrease in domestic activity.
The recession phase has vital affects on employment and production. Both these things falls below par since there is lack of resource supply and the government expenditure goes to an all time high. Because of this GDP level drops further and fears of bankruptcy sets in at an alarming rate. Recovery is a phase where the economy starts to recover at a slow pace. Exports will start slowly thereby decreasing imports. This helps the gross domestic product to pick up a little slowly but steadily.
The final cycle of business is the boom stage where one can see substantial increase in manufacturing. Thereby the volume of output is also enhanced, which results in speedy growth of money. The result of this stage is that the Gross Domestic Product increases considerably. Here again there are fears of higher inflation rates giving rise to increase in prices of essential commodities.
Hence any changes in the business cycle will directly affect the gross domestic product of a country. There is a very close relationship between the two when it comes to the economy of a nation. It is directly proportional to each other in terms of economic health of a country. Any kind of changes be it positive or negative will have the same effect on the gross domestic product. It is a continuous change that happens in every economy from time to time.