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 figures 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 positive change in GDP signals economic growth - the higher it is, the faster the economy is growing.
If GDP is falling, fewer goods and services are being produced and sold. A negative change in GDP signals that the economy is shrinking. If this continues for an extended period, the economy may enter 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.
A low-interest-rate environment and tax-friendly laws can support this cycle. When borrowing is easier and jobs are available, people and businesses tend to spend more, which helps the economy grow.
Eventually, the economy will peak, although it’s difficult to identify the peak in real time. Excluding the economic downturn due to COVID, the U.S. economy has been expanding essentially since the end of the Great Recession, starting around mid-2009. There have been signals of an upcoming recession that have not yet materialized, but the economy continues to grow.
In practice, you can only confirm a peak after the economy has already moved past it. Short-term turbulence doesn’t necessarily lead to a recession; the economy can stabilize and continue expanding.
Generally speaking, an economic peak typically involves the following:
Eventually, the economy will recede (shrink), no matter how much the government (including the Federal Reserve*, the U.S. central bank) may try to prevent it. As discussed, a recession occurs when GDP levels fall for two straight quarters (6 months). In some cases, a recession is triggered by a “bubble” in a specific sector. For example, the U.S. housing bubble contributed to the Great Recession. Real estate prices rose significantly (inflation); to reduce inflation, the Federal Reserve raised interest rates, which in turn 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 7 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 tends to slow down. With less borrowing, spending often declines. As businesses earn less and reduce costs, unemployment can rise as workers are laid off. Lower employment and lower income then reduce spending further. Over time, higher interest rates can stabilize prices and reduce inflation, but the economy may shrink in the meantime.
At a certain point, the economy “bottoms out” at the trough. This is the economy’s lowest point, and - like a peak - it’s difficult to identify precisely when it’s happening.
Generally speaking, an economic trough typically involves the following:
Just as expansions don’t last forever, contractions don’t either. Historically, the economy has eventually bounced back. After prices stabilize, the Federal Reserve may expand the economy by loosening the money supply. This means injecting more money into the system and making it easier to borrow at lower rates.
The economy starts to recover when GDP begins rising again, signaling a return to expansion. Job openings become more available, consumer confidence tends to rise, and spending accelerates. Recovery and expansion are closely related; the key difference is that recovery describes 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, which continues to this day.
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