Final answer:
The business cycle impacts output and employment, influencing spending and investment in capital goods and durable goods industries. During economic growth, output and employment rise; during recessions, they fall. GDP reflects these changes in economic activity without double counting.
Step-by-step explanation:
The business cycle significantly influences the output and employment levels within the economy, particularly impacting sectors such as capital goods and industries producing durable goods. During an economic expansion phase of the business cycle, businesses and individuals increase spending in the product market, purchasing goods like cars and refrigerators. This increased demand leads to greater output and prompts businesses to hire more workers, which in turn fuels economic growth.
Conversely, in a recession, the cycle is reversed: businesses and consumers cut back on spending due to uncertainty or decreased income. This leads to a reduction in output and employment in those same sectors. Investment in capital goods decreases as businesses expect lower returns on investments during economic downturns. Consequently, industries that produce consumer durables will also experience a decline in production and employment, as consumer spending shifts away from long-lasting goods.
Understanding this cycle is crucial as it dictates how the Gross Domestic Product (GDP), a key indicator of economic health, is composed in terms of final goods and services, thereby avoiding double counting and reflecting the real state of the economy.