3.7.4 GDP cycle Flashcards
GDP definition
Gross domestic product.
Measures the value of a country in terms of its goods and services over a period of time.
What does an increase in GDP mean
An increase in the countrys health in terms of an increase in buying and selling.
What must a business anticipate
The business cycle - regular fluctuations in economic activity over time aka the gdp fluctuates
Outline the four elements of the GDP cycle
Boom
Recession
Slump
Recovery
What are the effects of a recovery/upswing
Increase in production and employement
Increase in consumer spending
Greater confidence in job security.
Business responses to an upswing/recovery
Start up businesses will increase capacity.
Established businesses may decrease capacity as they may initially be cautious and utilise existing capacity.
Long term response may be a strategic response once confidence grows such as investment in current assets.
Outline the effects of a boom
High levels of production and expenditure by firms, consumers and governments.
High levels of prosperity and confidence.
Business response to a boom
Greater strategic decisions made for growth and expansion
Functional needs - mau have sub contracted elements of production
Negative effects of a boom
Skilled workers will become scarce.
Demand for employment will increase - wages will increase - costs will increase - price increase = inflation
Wages and competition for workers will increase.
Relationship between inflation and a boom
Inflation can bring a boom period to an end.
Outline the effects of a recession
Income and output begins to fall due to an incewase in wages and prices. Increase in these leads to an increase in production and a fall in profit.
Government response is to keep gdp up but a fall in demand can silt this.
Business response to recession
Strategic plans for investment expansion put on hold.
Those who are able may look to foreign markets where conditions are more favourable.
Spare capacity (stock and employees) will rise.
Consequently some businesses will fall and bankruptcies will increase.
Interest rates are generally lowered.
Effects of a slump
Government action (fiscal and monetary) can avert a slump and push economy back to recovery.
Production at lowest point
Increased bankruptcies
Consumer spending and confidence is low
Government lowers interest rates still further.
Unemployment is high
Business repsonse to a slump
Strategic decisions around large scale redundancies and closing factories etc.
Functional decisions to focus on basic products at lower prices.
Marketing focus on lower prices and easier repayment strategies.
Gdp fluctuations tend to have a greatest impact at a
Functional level
