The Economic or The Economic or Business CycleBusiness Cycle
Measuring Economic ActivityMeasuring Economic Activity
We calculate the value of a country's output or wealth We calculate the value of a country's output or wealth generated in a year by measuring GDP-Gross Domestic generated in a year by measuring GDP-Gross Domestic Product Product
GDP is a measure of the value of all outputs in an GDP is a measure of the value of all outputs in an economy in a single year - the £ value of alleconomy in a single year - the £ value of all goods goods and and services producedservices produced
Current level (2012) of GDP in the UK economy is Current level (2012) of GDP in the UK economy is around £1400 billion.around £1400 billion.
Economic or Business CycleEconomic or Business Cycle
• Gross domestic Product does not increase at a Gross domestic Product does not increase at a constant rate over time – there are variations in growth constant rate over time – there are variations in growth rate. rate. • There can be times of negative growth i.e. GDP There can be times of negative growth i.e. GDP decreases.decreases.• These changes in the rate of growth of GDP overtime These changes in the rate of growth of GDP overtime is known as the Economic or Business Cycleis known as the Economic or Business Cycle
Two Key Features of GDP:Two Key Features of GDP:
It grows over timeIt grows over time the long run the long run trendtrend in GDP is positive, around 2.5% per year in in GDP is positive, around 2.5% per year in
the UK, (This is in real terms allowing for effects of inflation)the UK, (This is in real terms allowing for effects of inflation)
It fluctuates as it growsIt fluctuates as it grows GDP exhibits GDP exhibits business cycle business cycle movements. In the last 15 years it movements. In the last 15 years it
has varied between plus 4% and minus 2%has varied between plus 4% and minus 2%
Below we see the variations of growth of the economy over time
The yellow bars show negative growth – a recession, the economy is shrinking,The blue positive, growth – the economy is growing.
The Pacific Rim Growth The Pacific Rim Growth
Growth rates in Pacific Rim countriesare around 4-6%.China 8 or 9% is normal
In U.K. average isaround 2.5%.
Growth rates vary between different countries.Developing countries often have faster growth rates than those found in Europe
Boom
Recession
Recovery/Expansion
Parts of the Business Cycle
GDP
time
Downturn (UK)
Parts of Economic Cycle - BoomParts of Economic Cycle - Boom
Low levels of unemployment – shortages of labour Low levels of unemployment – shortages of labour occur pushing up wage ratesoccur pushing up wage rates
High levels of consumer borrowing and spendingHigh levels of consumer borrowing and spending
Firms working at full capacityFirms working at full capacity
Profit levels high – high levels of consumptionProfit levels high – high levels of consumption
Inflation IncreasingInflation Increasing
Interest rates increasingInterest rates increasing
Boom in housing marketBoom in housing market
Imports increasingImports increasing
High levels of Govt. Tax revenuesHigh levels of Govt. Tax revenues
Parts of Economic Cycle - DownturnParts of Economic Cycle - Downturn
Growth rate of GDP is starting to fall Growth rate of GDP is starting to fall
Firms decrease production and reduce stocksFirms decrease production and reduce stocks
Unemployment starts to riseUnemployment starts to rise
Inflation fallsInflation falls
Investment fallsInvestment falls
Firms suffer from falling profits, falling returns from Firms suffer from falling profits, falling returns from investment.investment.
Parts of Economic Cycle - recessionParts of Economic Cycle - recession
High levels of unemploymentHigh levels of unemployment – – unemployment unemployment increased by 1 million during the recession of 2008-10increased by 1 million during the recession of 2008-10
Reduced spending by consumers especially on Reduced spending by consumers especially on consumer durablesconsumer durables
High levels of spare capacity for firmsHigh levels of spare capacity for firms
Low inflationLow inflation
Negative economic growth – the economy is Negative economic growth – the economy is shrinkingshrinking
High numbers of firms going bustHigh numbers of firms going bust
Increased govt. Borrowing and spendingIncreased govt. Borrowing and spending
Parts of Economic Cycle - recoveryParts of Economic Cycle - recovery
Consumer confidence grows – leading to increased Consumer confidence grows – leading to increased borrowing and spendingborrowing and spending
Firms increase output – build up stock levelsFirms increase output – build up stock levels
Spare capacity used, then -Spare capacity used, then -
Investment occursInvestment occurs
Unemployment falls – it make take more than a year Unemployment falls – it make take more than a year of recovery for large changes in unemployment of recovery for large changes in unemployment levelslevels
Government and Economic CycleGovernment and Economic Cycle
The government will attempt to control fluctuations The government will attempt to control fluctuations in economic growthin economic growthAims to achieve growth at around trend levelAims to achieve growth at around trend levelIn the past has used Fiscal and Monetary policy to In the past has used Fiscal and Monetary policy to achieve this objectiveachieve this objectiveIn the last 10 years the focus has been on the use of In the last 10 years the focus has been on the use of Interest Rates ( monetary policy) and Supply Side Interest Rates ( monetary policy) and Supply Side policies to achieve constant growth.policies to achieve constant growth.Over the last 10 years the UK has been recession Over the last 10 years the UK has been recession free, though growth has been as low as 1.5%free, though growth has been as low as 1.5%
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