Note: This is post #115 in a weekly video series on basic economics.
The “real” part of the real business cycle (RBC) refers to real shocks to an economy, specifically to supply shocks. As Tyler Cowen of Marginal Revolution University says, RBC is useful for a complex supply shock, such as a sudden rise in oil prices. But it can also explain many of the economic downturns throughout human history. For instance, in ancient times when economies relied primarily on agriculture, a drought would be truly awful for the economy.
(If you find the pace of the videos too slow, I’d recommend watching them at 1.5 to 2 times the speed. You can adjust the speed at which the video plays by clicking on “Settings” (the gear symbol) and changing “Speed” from normal to 1.25, 1.5 or 2.)
Click here to see other videos in the Introduction to Economics series.