2.5.3 Trade (Business) Cycle Flashcards
What is a boom?
A period when the rate of growth of real GDP is fast and higher than the long-term trend
What is a slowdown?
A weakening of the rate of growth, real GDP is still rising but increasing at a slower rate
What is a recession?
A period of at least six months when an economy suffers a fall in aggregate output, employment, investment and confidence
What is a recovery?
A phase after a recession, during which real GDP starts to increase and unemployment begins to fall
What is a depression?
A prolonged downturn in the economy and where a nation’s GDP falls by at least 10 per
cent
Draw a table of the characteristics of booms and recessions
What are possible causes of a recession?
External events
* A recession in a trading partner e.g. the European Union or the USA
* A sharp rise in global commodity prices e.g. rising oil and gas prices
Tightening of macro policy
* Higher interest rates leading to more expensive loans
* A rise in taxation or a cut in government spending
Fall in asset prices or supply of credit
* Steep decline in the level of share or house prices
* A collapse in the supply of credit (e.g. Global financial crisis)
Drop in business and consumer confidence
* Lower business confidence cuts investment and may lead to job losses
* Declining consumer confidence leads to less spending and more saving
What does recession caused by an inward shift in AD look like on an AD/AS diagram look like?
AD has decreased, leading to an
increase in spare capacity i.e. a rising negative output gap, and a fall in real GDP from Y to Y1.
How can recession also be caused by an inward shift in AS?
Recession can also be caused by a supply shock which leads to an inward shift of short run aggregate supply. For example, higher import prices can lead to a rise in the general price level which leads to lower real incomes for consumers and falling profits for businesses. A supply shock might lead to a period of stagflation – i.e. slower economic growth and higher inflation.
What does a recession caused by an inward shift in AS look like?
What are the short term effects of a recession?
The impact of a recession depend in part on causes and also how long it lasts. How does a recession impact business profits and capital investment, unemployment, govt finances and inflation?
Business profits and capital investment.
* Falling demand can cause more businesses to fail and profits fall
* Planned investment declines - hitting industries that make the capital goods
Unemployment
* A steep decline in aggregate demand causes a fall in the demand for labour
* This causes a contraction in employment and a rise in cyclical unemployment
Government finances
* Recession causes a decline in tax revenues and more welfare spending
* The result is usually an increase in the budget deficit and a rising national debt
Inflation
* Many business offer price discounts to off-load excess unsold stocks
* A deep recession risks causing a period of sustained deflation (negative inflation)
What are the long term economic effects of a recession?
- Rising structural long-term unemployment and regional decline
- Low rates of investment can reduce the size of the capital stock
- Persistent budget (fiscal) deficits and a rising national debt leads to austerity (cut in public services)
What are the long term social effects of a recession?
- Falling real wages hits average living standards and reduces demand
- Widening inequality of income and wealth leading to rising poverty
- Social costs such as loss of social cohesion and threats to democracy
What are the two competing views about the effects of a recession?
Hysteresis v Creative Destruction
