Economic contractions, troughs, expansions and peaks are unpredictable phases of economic activity referred to as economic business cycles. The gross domestic product, or GDP, is the total market value of goods and services the country produces. As the economy goes through business cycle changes, these positively or negatively affect the GDP.
During a contraction, economic output slows, usually due to decreased demand for products and services, an increase in the cost of raw materials or both. This means that companies are not making as many products or offering as many services. As a result, companies will begin to lay off employees and the unemployment rate begins to rise. Since GDP is a measure of the value of economic output and during a contraction output decreases, the GDP also decreases. Even though the GDP decreases during a contraction, it is still positive.
Advertisement Article continues below this adAn economic trough occurs after a contraction. A historically high national unemployment rate and low economic output usually mark this trough, which often signals that the economy is already in or heading toward a recession. Unlike a contractionary phase in which the GDP decreases but is still positive, during a trough the GDP is negative. A negative GDP means that economic output does not grow at all.