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%