Chapter 7 BUSINESS CYCLE Flashcards
The business cycle
The business or economic cycle is the shorter-term fluctuation of total output around its trend path.
Some years countries experience higher than average rates of growth i.e. boom and in others lower
than average growth i.e. recession. The cycle will vary in length and amplitude making it highly
irregular.
The trend path
For an economy to achieve sustained growth there must be a sustained increase in capacity
or potential output
This is essentially a supply side issue involving use of more resources, better resources or using resources in a better, more productive, way
Four Phases of the Business Cycle
Boom (peak) phase
Downswing (contraction)
Trough phase
Upswing (expansion phase)
Model vs Reality
The actual economy shows a greater degree of instability and its quarter by quarter movements are unpredictable.
Business cycle and Aggregate Demand
Movements away from this
trend line are a demand issue
If demand outstrips the ability of the economy to supply (a boom)
If demand will fall below the potential level of output (a recession).
What is a boom?
occur at the peak of the cycle. The boom is a period of rapid economic growth, with
growth a good way above its trend level. Booms are unsustainable.
Boom characteristics
High levels of consumption expenditure
High levels of consumer and business confidence
Unemployment low
Participation rates high
Level of borrowing high
Whats a contraction?
in the economy is a period when growth rates slow down,
growth rates start the period above trend levels but end up below trend levels.
Contraction characteristics
Aggregate expenditure fall as Consumption and Investment decline
Levels consumer and business confidence fall
Falling output and income
Inflationary pressures declines
Unemployment starts to rise
Level of borrowing starts to fall as costs of borrowing are high and investment is riskier due to capacity constraints.
What is a trough (recession)?
→ in the economy is a period the level of aggregate expenditure is below
the economy’s potential.
Trough characteristics
Higher levels of cyclical unemployment.
Lower levels of company profits.
Slower rates of consumption
Lower levels of consumer and business confidence.
Savings may rise as people put off consumption decisions (especially if their job is at risk)
Interest rates and inflation bottom
Firms have maximum idle capacity
CAD declines as imports fall
What is a Upswing?
→ the growth rate climbs up above the trend rate again.
Upswing characteristics
Investment increases as productive capital requires replacement
Economic growth rise
Levels of expenditure, income and output increase
Inflation starts to rise
Unemployment remains high then starts to fall
Consumer and business confidence start to rise
Level of borrowing starts to increase
Business profitability starts to rise
What is an economic indicator?
refers to any piece of data or information that can be used to help build a
picture of where the economy is and where it is going
Indicators of economic activity
Gross Domestic Product (GDP)
Consumer Price Index (CPI)
Interest rates
Labour force and unemployment statistics
