2.5 - Trade (business) cycle

Question 1

Trade (Business) Cycle

Answer 1

• The trade or business cycle refers to the fluctuations in economic activity that an economy experiences over a period of time.

Question 2

4 main phases of a business cycle

Answer 2

1) Expansion:
> Period of increasing economic activity, rising GDP, employment, and income levels.

2) Peak:
> The height of economic growth, where the economy is at its maximum output.

3) Contraction (Recession): > Period of declining economic activity, falling GDP, rising unemployment, and reduced spending.

4) Trough: The lowest point of economic activity before the cycle begins again with expansion.

Question 3

Boom

Answer 3

A boom is characterised by rapid economic growth and high levels of economic activity.

Question 4

Features of an economic boom

Answer 4

1) High GDP Growth:
> Significant increase in the production of goods and services.

2) Low Unemployment:
> Labour is derived demand. There is a high demand for goods and services and so high demand for labour. This leads to low unemployment rates.

3) Increased Consumer Spending:
> High levels of disposable income and consumer confidence drive spending.

4) Rising Investment:
> Businesses invest heavily in capital and technology to expand production due to high demand for their g/s

5) Inflationary Pressures:
> High demand leads to an upward pressure on prices which can lead to increased prices and demand-pull inflation.

6) Stock Market Optimism: > Stock prices tend to rise, reflecting investor confidence.

Question 5

Recession

Answer 5

A recession is a period of declining economic activity spread across the economy, over two consecutive quarters, visible in GDP, income, employment, and production.

Question 6

Features of a recession

Answer 6

1) Negative GDP Growth:
> Decline in the production of goods and services over two consecutive quarters.

2) High Unemployment:
> Reduced demand for goods and services leads to job losses.
> labour is derived demand and so a decrease in the demand for goods and services means a decrease in production and so firms will not need to hire as many workers
> less production means lower revenue for firms so they may need to lower production costs by letting go of workers.

3) Decreased Consumer Spending:
> Lower disposable incomes and consumer confidence reduce spending. less consumption means less AD

4) Reduced Investment:
> Businesses cut back on investment due to uncertainty and lower demand.

5) Deflationary Pressures: > Falling demand can lead to decreased prices

6) Stock Market Declines: > Falling corporate profits and economic uncertainty lead to declines in stock prices.

Question 7

What happens during an economics downturn?

Answer 7

• During a downturn, the economy begins to move from a boom to a recession, output and
  incomes fall which leads to a fall in consumption and investment as well as tax revenues.
• Payments for benefits rise as unemployment rises.
• People begin to accept jobs for lower
  wages due to higher levels of unemployment.
• This causes inflationary pressure to ease and
  a fall in the number of imports.