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The Economic or Business Cycle

The Economic or Business Cycle. Measuring Economic Activity. We calculate the value of a country's output or wealth generated in a year by measuring GDP-Gross Domestic Product

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The Economic or Business Cycle

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  1. The Economic or Business Cycle

  2. Measuring Economic Activity • We calculate the value of a country's output or wealth generated in a year by measuring GDP-Gross Domestic Product • GDP is a measure of the value of all outputs in an economy in a single year - the £ value of all goods and services produced • Current level (2012) of GDP in the UK economy is around £1400 billion.

  3. Economic or Business Cycle • Gross domestic Product does not increase at a constant rate over time – there are variations in growth rate. • There can be times of negative growth i.e. GDP decreases. • These changes in the rate of growth of GDP overtime is known as the Economic or Business Cycle

  4. Two Key Features of GDP: • It grows over time • the long run trend in GDP is positive, around 2.5% per year in the UK, (This is in real terms allowing for effects of inflation) • It fluctuates as it grows • GDP exhibits business cycle movements. In the last 15 years it has varied between plus 4% and minus 2%

  5. 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.

  6. The Pacific Rim Growth Growth rates vary between different countries. Developing countries often have faster growth rates than those found in Europe • Growth rates in Pacific • Rim countries • are around 4-6%. • China 8 or 9% is normal • In U.K. average is • around 2.5%.

  7. Parts of the • Business Cycle Boom GDP Downturn (UK) Recovery/Expansion Recession time

  8. Parts of Economic Cycle - Boom • Low levels of unemployment – shortages of labour occur pushing up wage rates • High levels of consumer borrowing and spending • Firms working at full capacity • Profit levels high – high levels of consumption • Inflation Increasing • Interest rates increasing • Boom in housing market • Imports increasing • High levels of Govt. Tax revenues

  9. Parts of Economic Cycle - Downturn • Growth rate of GDP is starting to fall • Firms decrease production and reduce stocks • Unemployment starts to rise • Inflation falls • Investment falls • Firms suffer from falling profits, falling returns from investment.

  10. Parts of Economic Cycle - recession • High levels of unemployment – unemployment increased by 1 million during the recession of 2008-10 • Reduced spending by consumers especially on consumer durables • High levels of spare capacity for firms • Low inflation • Negative economic growth – the economy is shrinking • High numbers of firms going bust • Increased govt. Borrowing and spending

  11. Parts of Economic Cycle - recovery • Consumer confidence grows – leading to increased borrowing and spending • Firms increase output – build up stock levels • Spare capacity used, then - • Investment occurs • Unemployment falls – it make take more than a year of recovery for large changes in unemployment levels

  12. Government and Economic Cycle • The government will attempt to control fluctuations in economic growth • Aims to achieve growth at around trend level • In the past has used Fiscal and Monetary policy to achieve this objective • In the last 10 years the focus has been on the use of Interest Rates ( monetary policy) and Supply Side policies to achieve constant growth. • Over the last 10 years the UK has been recession free, though growth has been as low as 1.5%

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