Business Cycle Flashcards
What is macroeconomics?
Macroeconomics is defined as the study of the performance of the economy as a whole, and the policies used to improve that performance.
What is microeconomics?
Microeconomics studies the behavior of individual economic agents (households and firms) and sectors of the economy.
What is the long term key objective of the economy?
When will economic growth occur?
Does it occur at a constant rate?
In the long term, economic growth is the key objective for the economy, because it enables people to enjoy a higher standard of living. The economy grows when more resources become available, or as available resources are used more efficiently.
Economic growth does not occur at a constant rate.
State the growth in GDP from 1960 to 2016.
GDP grew from $220 billion in 1960 to $1678 billion ($1.7 trillion) in 2016- a near eight fold increase.
What does the annual rate of change in real GDP describe?
The annual rate of change in real GDP gives us a better picture of changes in the level of economic activity over time. As it measures the % change, it is making a comparison to the previous year.
In which two years did Australia’s GDP fall?
1983 and 1991
What is a boom?
- A boom occurs when the level of economic activity is higher than normal.
- The level of aggregate expenditure is at, or above, the level required for full employment of productive resources.
Describe the characteristics of a boom.
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- A general feeling of confidence throughout the economy.
- Relatively high levels of consumption expenditure, particularly on durable goods and luxuries.
- Relatively high levels of profitability in the business sector.
- A high level of utilization of productive capacity, perhaps with ‘bottlenecks’ in some sectors.
- Relatively low cyclical unemployment.
- High levels of labour market participation.
- Upward pressure on prices in both final and factor markets.
- Relatively high levels of borrowing.
What is a trough?
-The trough is a period of economic malaise in which the level of aggregate expenditure (income, consumption and investment) is below the economy’s potential.
Describe the characteristics of a trough.
- Higher levels of cyclical unemployment.
- Reduced company profits.
- Lower sales of consumer durables.
- Lower levels of consumer and business confidence.
- Reduced pressure on prices.
- Higher savings rates (due to lack of confidence)
- Lower interest rates.
- A lack of confidence and reluctance to spend.
Describe a contraction and why it occurs.
- Economic booms do not last forever.
- In the upswing leading to the boom, investment in infrastructure and capital equipment increases productive capacity. This is fine, as long as there is sufficient demand to purchase the goods and services produced.
- At some point, however, businesses sense that they have enough capacity to meet anticipated demand, which means further investment would carry greater risk.
- The increased levels of consumer spending that drove investment and output may now result in price increases as the economy reaches capacity.
- Government policies designed to restrain high levels of economic activity may contribute to the changing mood in the economy (e.g. high interest rates).
- Bottlenecks (shortages of labour or productive capacity) may occur in some industries.
- At the peak of the cycle, the increase of income, output and expenditure that characterised the boom start to level off.
- Slower growth in spending, output and income start to spread throughout the economy, and it feels as if the economic climate has deteriorated.
- There events give rise to uncertainty as consumers and firms adjust their expectations about the future and change their planned spending as a result.
Describe an expansion/upswing and why it occurs.
- The trough cannot continue indefinitely.
- Productive machinery is eventually worn out and requires replacement, bringing on new investment.
- Businesses undertake product and process innovation at attract buyers and seek a competitive advantage.
- The level of economic activity and confidence gradually rises as the economy resumes its long term growth path.
- The expansion often takes a longer period of time than the downturn, which tends to be short and sharp.
- Investment plays an important role in the upswing because it creates the capacity that firms use to produce final goods and services.
Does the reality of economic activity follow the business cycle model?
Like all models, the business cycle simplifies reality- we would never expect the actual path of economic activity to follow the predictable cyclical pattern implied by the model?
What is the average length of a business cycle?
The average length of a business cycle is 52 months.
The average duration of a contraction period was 19 months.
Average expansion was 32 months.
When did high levels of economic activity occur?
High levels of economic activity in the mid 1980’s, late 1990’s and mid 2000’s.
