The Growth Cycle and Growth Rate Cycle

The __growth cycle__ adds a long-term, smooth growth path to the classical cycle. What would that mean for economic output at nearly every point?

Not most of the time. Anything that fluctuates in a cycle is rarely at the average.

Where would there be the largest positive "gap" between these two?

Sure. During expansions, it crosses above that smooth, average growth path, and during contractions it crosses back to be below it.

That's not it; economic activity will cross that smooth, average path regularly.

Of course.

No, that would be where the biggest negative gap is, but then there would be a positive gap at the peak.

Not quite. Economic output would cross into positive territory during an expansion, but not reach a maximum positive gap until the peak.

So how might you summarize the main difference between this growth cycle and the classical cycle?

Not really. A classical cycle can be depicted as the growth cycle by including one extra thing.

Not really; there is a smooth path included in the growth cycle, but the business cycle still exists.

Right. That smooth path can be thought of as potential output (long run). The growth cycle shows output gaps relative to this.

The __growth rate cycle__ shows fluctuations in growth rates instead of fluctuations in economic output. When would you expect the highest growth rate to take place in a business cycle?

That's not it. What makes a peak a peak is that growth has stopped.

No, at a trough things have stopped contracting, but there's no positive growth rate just yet.

Exactly. When the economy is expanding, growth is at its highest, and the growth rate cycle peaks. Then as the growth rate falls and reaches zero, the classical cycle reaches a peak, and the growth cycle reaches a peak as well, representing the largest positive gap from potential output. The four phases of a business cycle aren't really going away; these ideas of business cycles simply look at them in a little different way.

To summarize: [[summary]]

It's on that path

It comes close to the path, but never touches it

It's either above or below that path

Peak

Trough

Expansion

The growth cycle has a different shape

The growth cycle includes a relative difference from potential output

The growth cycle is completely smooth

At the peak

At the trough

During an expansion

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