Main content
Tracking real GDP over time
Read about fluctuations in GDP from year to year.
Key points
- A business cycle is the relatively short-term movement of the economy in and out of recession.
- A significant decline in national output is called a recession; an especially lengthy and deep decline in output is called a depression.
- The highest point of output before a recession begins is called the peak; the lowest point of output during the recession is called the trough.
Introduction
You might have heard a TV news reporter saying something along the lines of "the economy grew 1.2% in the first quarter". Reports like this are referring to percentage change in real GDP. By convention, GDP growth is reported at an annualized rate—whatever the calculated growth in real GDP was for a particular quarter is multiplied by four when it is reported, as if the economy were growing at that rate for a full year.
Tracking real GDP over time
The graph below shows the pattern of US real GDP since 1900. Notice that the generally upward longterm path of GDP has been regularly interrupted by short-term declines.
A significant decline in real GDP is called a recession. An especially lengthy and deep recession is called a depression. The severe drop in GDP that occurred during the Great Depression of the 1930s—which you probably learned about in history class—is clearly visible in the figure, as is the Great Recession of 2008 to 2009.
Real GDP is important because it is highly correlated with other measures of economic activity, like employment and unemployment. When real GDP rises, so does employment.
The most significant human problem associated with recessions—and their larger, uglier cousins, depressions—is that a slowdown in production means that firms need to lay off or fire some of the workers they have. Losing a job imposes painful financial and personal costs on workers and often on their extended families as well. In addition, even those who keep their jobs are likely to find that wage raises are scanty at best—or they may even be asked to take pay cuts.
The highest point of the economy, before a recession begins, is called the peak; conversely, the lowest point of a recession, before a recovery begins, is called the trough. Thus, a recession lasts from peak to trough, and an economic upswing runs from trough to peak.
The movement of the economy from peak to trough and trough to peak is called the business cycle. It is intriguing to notice that the three longest trough-to-peak expansions of the 20th century have happened since 1960. The most recent recession started in December 2007 and ended formally in June 2009. This was the most severe recession since the Great Depression of the 1930s.
A private think tank, the National Bureau of Economic Research, or NBER, is the official tracker of business cycles for the US economy. However, the effects of a severe recession often linger on after the official ending date assigned by the NBER.
The table below lists the pattern of recessions and expansions in the US economy since 1899
| Peak | Trough | Months of contraction | Months of expansion |
|---|---|---|---|
| June 1899 | December 1900 | 18 | 24 |
| September 1902 | August 1904 | 23 | 21 |
| May 1907 | June 1908 | 13 | 33 |
| January 1910 | Janurary 1912 | 24 | 19 |
| January 1913 | December 1914 | 23 | 12 |
| August 1918 | March 1919 | 7 | 44 |
| January 1920 | July 1921 | 18 | 10 |
| May 1923 | July 1924 | 14 | 22 |
| October 1926 | November 1927 | 13 | 27 |
| August 1929 | March 1933 | 43 | 21 |
| May 1937 | June 1938 | 13 | 50 |
| February 1945 | October 1945 | 8 | 80 |
| November 1948 | October 1949 | 11 | 37 |
| July 1953 | May 1954 | 10 | 45 |
| August 1957 | April 1958 | 8 | 39 |
| April 1960 | February 1961 | 10 | 24 |
| December 1969 | November 1970 | 11 | 106 |
| November 1973 | March 1975 | 16 | 36 |
| January 1980 | July 1980 | 6 | 58 |
| July 1981 | November 1982 | 16 | 12 |
| July 1990 | March 1991 | 8 | 92 |
| March 2001 | November 2001 | 8 | 120 |
| December 2007 | June 2009 | 18 | 73 |
Summary
- A business cycle is the relatively short-term movement of the economy in and out of recession.
- A significant decline in national output is called a recession; an especially lengthy and deep decline in output is called a depression.
- The highest point of output before a recession begins is called the peak; the lowest point of output during the recession is called the trough.
Self-check questions
Return to the first graph in this article, but don't use the table. If a recession is defined as a significant decline in national output, can you identify any post-1960 recessions in addition to the recession of 2008–2009? Note: This requires a judgment call.
According to the table above, how often have recessions occurred since the end of World War II—1945?
According to the table, how long has the average recession lasted since the end of World War II?
According to the table, how long has the average expansion lasted since the end of World War II?
Review question
What are the typical patterns of GDP for a high-income economy like the United States in the long run and the short run?
Critical thinking questions
- Why do you suppose that US GDP is so much higher today than 50 or 100 years ago?
- Why do you think that GDP does not grow at a steady rate, but rather speeds up and slows down?
Want to join the conversation?
What would the answer be for the last critical thinking question--why do you think that GDP does not grow at a steady rate, but rather speeds up and slows down?(12 votes)
One reason could be credit and debt. When the economy is doing well people and businesses borrow and spend a lot of money which leads to higher incomes for other people who in turn spend more which leads to a sort of snowball effect. Eventually the amount of debt people have taken on forces people to curb their spending which leads to lower incomes which forces more people to curb spending creating an opposite snowball effect. This is just one reason that has been explained to me.(24 votes)
According to the table, how long has the average expansion lasted since the end of World War II? The solution says it's 60.5 months, but I calculated it myself and it should be 58.4 months. Am I wrong? :((6 votes)
I got the same answer as You - 58.36 mth.
They didn't count Oct 1945 - Nov 1948 - 37 mth - dunno why because it's after WWII as it ended at 2nd Sep 1945.(6 votes)
How do you measure GDP of countries that annex foreign territory and its resources with expanding wars? (let's put the case of Germany during WWII)(4 votes)
Even if its less common into industrialized countries these days, by definition the new annexed territory will be accounted into the "Domestic" portion of the invader. But in time of war, making an accurate report of the GDP in these "new" territories must very difficult by the chaos going around and by the fact that it is probably not a priority for the invading country.
In my opinion, GDP reports for times like the WWII were probably containing more approximation than real numbers. You also have to take into consideration that if a territory is disputed, the GDP numbers could vary depending of which organisation is responsible to produce it and where they trace the borders.(5 votes)
- what would be the answers for the critical questions?
Why do you suppose that US GDP is so much higher today than 50 or 100 years ago?
Why do you think that GDP does not grow at a steady rate, but rather speeds up and slows down(2 votes)
Here's what I think:
question 1- newer technology, new inventions/products, etc. gets the real GDP higher.
question 2- referring back to Sal's other video (The business cycle), people get over zealous or depressed; pretty much people's emotions get in the way a lot.
Just to put it in as little words as possible.(2 votes)
- "GDP growth is reported at an annualized rate—whatever the calculated growth in real GDP was for a particular quarter is multiplied by four when it is reported, as if the economy were growing at that rate for a full year." I'm confused about how this annualized report of GDP growth means?(1 vote)
It just basically means that they make a prediction based on the quarter's performance. Let's say that GDP Q1 was 100. They'll multiply that by the number of quarters in a year (4) and they'll say "this is the expected GDP". And then they'll do the math - what's the variation in relation to last year?(2 votes)
Does a period of contraction correspond to a bear market and one of expansion - to a bull market?(1 vote)
Periods of contraction correspond to decrease in rGDP and vice versa for bull markets. According to the AS/AD model for the economy, increases in rGDP typically correspond to increases in price level due to shifts of the aggregate demand and vice versa for bear markets.(1 vote)
- According to the table, how long has the average expansion lasted since the end of World War II?
[Hide solution.]
The table lists the months of expansion. Averaging these figures for the post-WWII expansions gives an average expansion of 60.5 months, more than five years.
Can someone help on how these figures were calculated?(1 vote) 
I have read books about this but I neglect to see any truly inspiring, or noticeable rights here. Is there something i'm missing?(1 vote)- 1. Production efficiency, less unemployment, inflation.
2. Because interest rates going down on expansionary periods, bad investment and high interest rates on recession periods(1 vote) - GDP does not grow at a steady rate but speeds up and slows down based on the business cycle, and whether the labor force is actively and fully being utilized.(1 vote)