Economic growth is usually measured with gross domestic product (GDP) or gross national product (GNP).
GDP and GNP are typically reported in constant dollars, meaning the numbers are adjusted for inflation. This makes it easier to compare economic output across different time periods.
If GDP is rising, more goods and services are being produced and sold in the United States. In other words, a rising GDP signals economic growth - the faster GDP rises, the faster the economy is growing.
If GDP is falling, fewer goods and services are being produced and sold. A sustained decline can lead to a recession or depression.
The U.S. economy tends to move through cycles over time. During some periods, the economy expands, unemployment is low, and consumer confidence is high. When GDP rises, it reflects an expansionary (or expanding) economy.
Low interest rates and tax-friendly laws can support expansion. When borrowing is easier and jobs are available, people and businesses tend to spend more, which helps the economy grow.
Eventually, the economy reaches a peak. It’s hard to identify a peak in real time - you usually only know it was a peak after the economy has already started to slow. Excluding the COVID-related downturn, the U.S. economy expanded for a long period after the Great Recession, beginning around mid-2009. There have been signals of an upcoming recession that did not materialize, and the economy continued to grow.
Even when there’s short-term turbulence, the economy can recover without entering a recession. Still, peaks often share a few common features:
Over time, the economy typically begins to recede (shrink), even if the government (including the Federal Reserve*, the U.S. central bank) tries to prevent it. As noted above, a recession occurs when GDP falls for two straight quarters (six months). Sometimes recessions are triggered by a “bubble” in a specific sector - for example, the U.S. housing bubble, which contributed to the Great Recession. As real estate prices rose significantly (inflation), the Federal Reserve raised interest rates to reduce inflation, which also reduced economic activity.
*While the Federal Reserve and monetary policy is an important topic for the SIE exam, it is unlikely you’ll encounter any specific Series 6 test questions on these concepts. For context, the Fed controls the money supply with two goals in mind - economic growth and manageable inflation levels.
When interest rates rise, borrowing becomes more expensive. That usually leads to less borrowing and less spending. As spending slows, businesses may earn less and reduce hiring or lay off workers. Higher unemployment then reduces spending further. Over time, higher interest rates can help stabilize prices and reduce inflation, but the economy may shrink in the meantime.
At some point, the economy reaches a trough, meaning the lowest point in the cycle. Like a peak, a trough is difficult to identify while it’s happening.
Troughs often share these features:
After conditions stabilize, the economy typically begins to improve. The Federal Reserve may support growth by loosening the money supply - injecting more money into the system and making it easier to borrow at lower rates.
The economy enters recovery when GDP begins rising again. Job openings become more available, consumer confidence tends to improve, and spending starts to accelerate. Recovery and expansion look similar, but recovery is the period right after a recession.
To summarize, economies tend to follow these cycles over time. We typically see the cycles fall in this order:
Expansion
Peak
Recession
Trough
Recovery
The U.S. economy has a history of following these cycles, and it continues to do so today.
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