Peak
What is Peak?
The peak is the highest point of economic activity in a business cycle.
The peak represents the end of an expansion and the beginning of a contraction. At the peak, an economy's real GDP stops increasing and starts to decline. Unemployment is low, and inflation may be high.
Peak: a worked example
Quarterly real GDP growth in Merridale runs 2.4%, then 1.5%, then 0.6%, then negative 0.3%, then negative 1.1%. Starting from a level of $300B, the level path is 300 × 1.024 = $307.2B, then 307.2 × 1.015 = $311.8B, then 311.8 × 1.006 = $313.7B, then 313.7 × 0.997 = $312.7B, then 312.7 × 0.989 = $309.3B. The peak is $313.7B at the end of the third quarter, the last quarter before the level turned down. Growth had slowed in each of the two quarters before the turn, sliding from 2.4% to 1.5% to 0.6%, yet the economy kept expanding the whole time because output was still rising. At the peak, unemployment sits at its cycle low and price pressure is at its strongest.
The mistake students make with peak
The peak gets placed where growth is fastest. Students scan a table of growth rates, find the biggest one, and mark it as the top of the cycle, which feels right because that quarter looks strongest. The peak is where the level of real GDP is highest, and that arrives only after growth has already slowed toward zero. A separate confusion casts the peak as the healthiest moment. Output above potential means labor shortages and building price pressure, so the peak is where the inflationary gap is widest.
Peak questions
What happens to unemployment at the peak of the business cycle?
Unemployment reaches its low point for the cycle and often dips below the natural rate. Firms have worked through the pool of available workers, so cyclical unemployment is zero or negative and the remaining joblessness is mostly frictional and structural. Employers compete by raising wages, which lifts production costs, and that wage pressure is one of the forces that ends the expansion and turns the cycle down.
How do you identify a peak on a business cycle graph?
Look for the highest point on the curve before it starts falling, where the slope changes from positive to negative. The horizontal axis is time and the vertical axis is real output, so the peak is a turning point in the level, not in the steepness. On an aggregate demand and aggregate supply diagram the same moment appears as equilibrium output sitting to the right of long-run aggregate supply.
Is the peak the highest real GDP an economy has ever reached?
A peak marks the high point of one cycle rather than of all history. Because potential output grows over time, each new peak normally sits above the previous one, so an economy can pass its old record and keep climbing for a while before turning down. Calling the peak an all-time maximum misses the part that matters, which is that the peak is where an expansion ends.
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Related terms
Common comparisons
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