The economic rollercoaster...: The economic rollercoaster... The Economic or Business Cycle


Measuring Economic Activity: Measuring Economic Activity Gross Domestic Product is a measure of the value of all outputs in an economy in a single year - the £ value of all goods and services produced There are 3 ways of calculating GDP, these are Income Method, Output Method, and Expenditure method These will all give the same value of GDP Current level (2004) of GDP in the UK economy is around £970 billion.


Economic or Business Cycle: 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 periodic movements in output, prices, and employment are known as the Economic or Business Cycle


Two Key Features of GDP:: Two Key Features of GDP: It grows over time the long run trend in GDP is positive, around 2.75% 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%


Slide5: Real Gross Domestic Product (USA) Here we see the variations of growth over time


Slide6: Real Gross Domestic Product The trend rate of growth is indicated by the red line


The Pacific Rim Growth : The Pacific Rim Growth Growth rates in Pacific Rim countries are around 4-6%. In U.K. average is around 2.75%. Growth rates vary between different countries. Developing countries often have faster growth rates than those found in Europe


Slide8: Boom Trough/ Bust Recession Recovery/Expansion Parts of the Business Cycle GDP time


Parts of Economic Cycle - Recovery: 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


Parts of Economic Cycle - Boom: 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 Inflation Increasing Interest rates increasing Boom in housing market


Parts of Economic Cycle - Recession: Parts of Economic Cycle - Recession Growth rate of GDP is falling or negative Firms decrease production and reduce stocks Unemployment rises Inflation falls Investment falls Firms suffer from falling profits, falling returns of investment, redundancy costs.


Parts of Economic Cycle - Bust: Parts of Economic Cycle - Bust High levels of unemployment – unemployment increased to 2.5 million during the recession of the early 90’s, against 900,000 now. Low levels of investment Reduced spending by consumers especially on consumer durables High levels of spare capacity Low inflation


Government and Economic Cycle: 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%