2.5 The economic cycle Flashcards
What does the economic cycle describe?
The fluctuations in the levels and rates of growth of GDP over a period of time
What is a boom in the economic cycle?
A time of rapid growth and expansion in the economy
What is a downturn in the economic cycle?
The boom slows and the rate of growth decreases
What is recovery in the economic cycle?
Positive growth returns, slowly at first, then picking up the pace
Describe the characteristics of a boom (CoR)
Rate of growth of GDP increases, and the level of demand increases
Firms respond to this by increasing output, using more resources, like labour
Unemployment falls - newly employed have more income to spend, further increasing demand
Incomes may also generally increase as firms try to attract more labour
New businesses start up and existing ones expand
As boom progresses, inflation likely to increase as demand begins to exceed economy’s supply (demand-pull inflation)
Policies to reduce inflation - reduce spending
Describe the characteristics of a recession (CoR)
Downturn leads to falling sales and profits
Output falls, firms need fewer resources like labour
Some employees are made redundant and unemployment rises
Real wages may fall
Unemployed have less disposable income, demand falls
Firms reluctant to invest, slows economy further
Inflation no longer a problem as there is no longer upwards pressure on prices
Expansionary policies will be used
What is a recession?
Two consecutive quarters of negative economic growth
What happens in a boom?
GDP, inflation, unemployment, output, incomes
% growth in GDP: rapid
Inflation: high
Unemployment: low
Output: high
Incomes: rising
What happens in a downturn?
GDP, inflation, unemployment, output, incomes
% growth in GDP: Slowing
Inflation: Slowing
Unemployment: Increasing
Output: Increasing
Incomes: Static
What happens in a recession?
GDP, inflation, unemployment, output, incomes
% growth in GDP: Negative
Inflation: Low
Unemployment: High
Output: Falling
Incomes: Falling
What happens in a recovery?
GDP, inflation, unemployment, output, incomes
% growth in GDP: Increasing
Inflation: Low or rising
Unemployment: Falling
Output: Increasing
Incomes: Static
What does how well a business does in different parts of the economic cycle depend on?
The income elasticity of demand for the product
How are businesses affected by the boom period?
Sale of normal goods increases significantly
Output will rise and investment will increase
Unemployment is low and consumers have more to spend
Sale of inferior goods fall as consumers substitute normal goods instead
Price may rise and demand exceeds supply
May be skills shortages - increased costs, increased prices
How are businesses affected by the downturn period?
Sale of income elastic goods begin to fall
Sale of other goods begin to slow
Unemployment begins to rise - less spending
Investment slows as expectations of growth diminish
Output slows
Costs and prices rise more slowly
How are businesses affected by the recession period?
Sale of normal goods falls significantly
Unemployment is high , consumers have less income to spend
Output of normal goods and investment falls
Sale of inferior goods will increase as consumers buy fewer normal goods and replace them with inferior goods
Prices may fall - supply exceeds demand
Costs fall, prices reduce
How are businesses affected by the recovery period?
Sale of normal goods begin to recover
Sales of other goods begin to rise
Consumers feel worst is over so spend more
Unemployment falls
Investment increases as confidence returns
Output begins to rise
What does the circular flow of income model?
The basic working of the economy and the interactions between households, banks, government, abroad and firms
Describe households role in the circular flow of income.
Supply factors of production to firms (labour etc) and in return, they receive income
May not spend all of this income on payment for goods and services, but may put into savings with the bank, which is a leakage from the economy
Describe firms role in the circular flow of income.
Supply goods and services to households - provides sales revenue
Pay business tax etc to government
Describe govts role in circular flow of income..
Spend on public health, infrastructure etc - injections
Describe banks role in circular flow of income.
Provide finance which businesses use to pay for investment - injection into circular flow
What do leakages do?
Reduce the demand for domestically produced goods and services by diverting part of incomes to savings etc
What do injections do?
Increase demand for domestically produced goods and services.
When is the economy in equilibrium?
Total leakages = total injections
