2.5.3 Trade (business) cycle Flashcards
The trade (business) cycle
o This refers to the stage of economic growth that the economy is in.
The economy goes through periods of booms and busts.
o Real output increases when there are periods of economic growth. This is the recovery stage.
o The boom is when economic growth is fast, and it could be inflationary or unsustainable.
o During recessions, the real output in the economy falls, and there is negative economic growth.
Governments during recessions
During recessions, governments might increase spending to try and stimulate the economy. This could involve spending on welfare payments to help people who have lost their jobs, or cutting taxes.
Governments during growth/booms
During periods of economic growth, governments may receive more tax revenue since consumers will be spending more and earning more. They may decide to spend less, since the economy does not need stimulating, and fewer people will be claiming benefits.
Characteristics of a boom
- High rates of economic growth
- Near full capacity or positive output gaps
- (Near) full employment
- Demand-pull inflation
- Consumers and firms have a lot of confidence, which leads to high rates of investment
- Government budgets improve, due to higher tax revenues and less spending on welfare payments
Characteristics of a recession
In the UK, a recession is defined as negative economic growth over two consecutive quarters. The characteristics are:
- Negative economic growth
- Lots of spare capacity and negative output gaps
- Demand-deficient unemployment
- Low inflation rates
- Government budgets worsen due to more spending on welfare payments and lower tax revenues
- Less confidence amongst consumers and firms, which leads to less spending and investment
Trade/business cycle synoptic point **
The trade cycle has large impacts on individuals within the economy. During recessions, consumers will see lower incomes and living standards and firms will see lower revenues and profits.
