Where there’s a recession, there’s a recessionary gap. Probably. Or else...it wouldn’t be much of a recession.
A recessionary gap describes the gap between actual GDP and if-we-weren’t-in-a-recession-rn GDP. The hypothetical GDP, called “potential GDP” is based on estimates, which are assuming full employment.
Usually, recessions come with layoffs, so unemployment goes up. All those unemployed people who wish they had jobs...yeah. All of their unused work hours and ethic that would be contributing value toward GDP makes up the recessionary gap.
When real GDP is lower than the level of GDP with full employment, prices go down. The people who got laid off don’t have money to spend, and the people who have jobs aren’t spending, because they’re afraid they’ll get laid off.
How do we know when the gap is no more? When we’ve got near full employment, and wages are at market equilibrium. It’s not easy bouncing back though; often, firms that survive recessions have learned to do more with less...including fewer employees. So it can be difficult to get back to full employment.
A government might choose not to intervene during a recession, or they might pull an “expansionary policy” strategy to try to boost real GDP. Boom or bust, as the Fed says. (They don’t...but they could.)
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Finance: What is a Business Cycle?3 Views
Finance allah shmoop What is a business cycle Well here's
a guy giving his cycle the business Yeah the bike
moves forward in time but this little white mark on
the tire while it keeps returning to the same place
again and again and again So yeah that's the foundation
of the notion of business as a cycle time continues
but you know business gets hot then cold then hot
then cold and yeah you get the idea Well why
is this the case Well lots factors They mostly revolve
around the wild pagan dance of greed and fear And
they get exacerbated when governments actively monkey around with the
cost of renting money otherwise known as the raising and
lowering of interest rates And if you're new to this
whole space if you lower interest rates and make money
cheap to borrow you heat up the economy or at
least you encourage it to get hot And if you
raise the cost of borrowing money well then you're going
to try to cool it off And the reason he
might want to do that is if inflation is roaring
right All right well in the us the business cycle
Runs roughly every eight years for what is called the
short cycle of business cycles for reasons only partly known
to humankind the money cycle revolves around the presidential election
cycle when historically every couple of terms the population gets
sick of one process of messing up government and they
choose to elect a new way to mess up government
So that's The short cycle happens every seven or eight
years and you see it in the stock market with
generally meaningful corrections Along that pattern there's also ate a
long business cycle that sees major shift about every quarter
century World wars affected numbers Technology innovation affects the numbers
and other exogenous factors like pollution and labor replacement by
robots Yeah yeah it's coming and healthcare or disease changes
and or big innovations that completely repaint the pavement such
that the tire slipped and turn and twist trying to
keep the bicycle upright The key goal Look outfor bollards
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What is a recession? Luckily, it has nothing to do with your hairline...hit play to find out more.