Expansion
What is Expansion?
An expansion is a period of increasing economic activity, characterized by rising output, employment, and income.
An expansion is the phase of the business cycle following a trough, during which the economy experiences sustained growth. During an expansion, businesses increase production, hire more workers, and invest in new projects. Consumer spending rises, and the overall economic outlook improves. Expansions can vary in length and strength, but they typically last longer than contractions.
Expansion: a worked example
Bellmont enters an expansion at the trough with real GDP of $900B and an unemployment rate of 8%. Its labor force holds steady at 50 million, so 4 million people are unemployed and 46 million are employed. Over the expansion firms add 1.5 million net jobs, lifting employment to 47.5 million and cutting the unemployed to 2.5 million. The unemployment rate becomes (2.5 ÷ 50) × 100 = 5%. Real GDP climbs to $963B, a gain of $63B, or 63 ÷ 900 × 100 = 7%. Consumption and investment both rose, so aggregate demand shifted right along an upward-sloping short-run aggregate supply curve, which is why the inflation rate drifted from roughly 1.5% up to roughly 3% while output grew.
The mistake students make with expansion
An expansion gets equated with an economy above potential. The label describes the direction of travel, not the position. An expansion starts at the trough, when real GDP is still well below potential and unemployment still exceeds the natural rate, so output can rise for a long stretch with a recessionary gap still open. A second error is calling one strong quarter an expansion. The phase requires sustained increases in output, employment, and income across the whole economy, not a single upbeat reading in one sector.
Expansion questions
How long does an economic expansion last?
Expansions have no fixed length. Some run a few quarters, others stretch on for many years, and duration depends on what is driving the growth and on whether imbalances such as heavy debt or an asset bubble build up along the way. Expansions usually outlast contractions, so an economy spends most of its time in this phase. An expansion does not die of old age, it ends when something breaks the momentum.
What is the difference between a recovery and an expansion?
Recovery names the early part of an expansion, the stretch running from the trough until real GDP regains its previous peak. Once output passes that old peak, economists usually just call it an expansion. Both describe rising real GDP after a contraction, so on an AP exam either word points to the same phase of the business cycle, with unemployment falling and the recessionary gap closing.
Does an expansion always cause inflation?
Expansion raises inflationary pressure only as real GDP approaches and passes potential output. Early in an expansion the economy has idle factories and unemployed workers, so a rightward shift in aggregate demand buys large output gains and only slight price increases along a fairly flat stretch of short-run aggregate supply. Near and beyond full employment the same demand increase buys less extra output and more price increase.
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Related terms
Common comparisons
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