Presentation Transcript
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%