economic cycle Flashcards
economic cycle/ growth
macroeconomic objective for growth is for growth to be strong sustained and sustainable
what does the economic cycle normally fluctuate around
2.6%
what happens to real output when there is periods of economic growth
increased output/AD, employment
what is the boom
when economic growth is fast and it could be inflationary/unsustainable
when does a boom occur
when output is rising at a significantly faster rate then the trend rate of growth
how would businesses use a boom to their advantage
raise their output and widen their profit margins increasing prices for customers
what might governemts do in recessions
increase spending to stimulate economy
what might happen to gov in periods of economic growth
recieve more tax revenue, consumers spending and earning more- spend less economy doesnt need stimulating, fewer 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 - high profits
- high demand for imports
- inflation
characteristics of a recession
- 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
- Declining AD
- Destocking/ discounting
- Loose policy
- Low demand for imports
what can cause a recession
- policy changes e.g., rise in interest rates or higher taxes & cut in gov spending
- often follow a demand/ supply side shock
causes of a slowdown
( decrease in pace of growth, still growing just at a weaker pace, happens after a boom)
-central banks increasing inflation by increasing interest rates to cool down economy and prevent excess inflation- leads to decrease in C/I
-slowdown in global EG/ trade tensions - neg inpact on countrys exports
whats an output gap
occurs when there is a difference between the actual level of output and the potential level of output. measured as a percentage of national output
negative output gap
occurs when the actual level of output is LESS than the trend level of output
this puts downward pressure on inflation
what does it mean if there is a nagative output gap
unemployment of resources in an economy, labour and capital not being used to full productive potential.
alot of spare capacity
positive output gap
when the actual level of output is GREATER than the trend level of output
why do positive output gaps occur
resources being used beyond normal capacity - labour works overtime
what does a + output gap show
productivity is increasing
what type of pressure does + output gap put in inflation
upwards
benefits to consumers of economic growth
The average consumer income increases as more people are in employment and wages increase.
Consumers feel more confident in the economy, which increases consumption and leads to higher living standards.
Increased wealth and asset levels increases consumer confidence
High consumer spending, employment and income
The government budget might improve, since fewer people require welfare payments and more people will be paying tax.
Increased multiplier effect
drawbacks to consumers of economic growth
Economic growth does not benefit everyone equally. Those on low and fixed incomes might feel worse off if there is high inflation and inequality could increase.
There is likely to be higher demand-pull inflation, due to higher levels of consumer spending. Consumers could face more shoe leather costs, which means they have to spend more time and effort finding the best deal while prices are rising.
Increased unequal distribution of wealth
High interest rates and inflation
Pollution and environmental damage
Governments might increase their spending on healthcare if the
consumption of demerit goods increases.
benefits to firms - economic growth
- Firms might make more profits, which might in turn increase investment.
- This is also driven by higher levels of business confidence.
- Higher levels of investment could develop new technologies to improve productivity and lower average costs in the
- long run.
- As firms grow, they can take advantages of the benefits of economies of scale.
- If there is more economic growth in export markets, firms might face more
- competition, which will make them more productive and efficient- more sales.
short run economic growth
actual rate of economic growth is infulenced by spending or AD incomes rise - more consumer spending - increasing AD
how will firms respond to increase economic growth
increase their output as a result of rising demand but may not be able to meet increased output levels
this causes a gap between change in demand and actual output of firms ‘ output gap’
measure of the difference between actual rate of growth and trend rate of growth
long run economic growth
the trend rate of growth relates to the economys long term ability to increase AGGREGATE SUPPLY of goods/ services which is 2.6% in the Uk
what is a economic shock
A shock is an unexpected or unpredictable event that affects an economy
they alter growth rate from operating as planned or going in a different direction than intended by government.
demand side economic shocks
- economic downturn in a major trading partner
- unexpected tax increases or cuts to welfare benefits
- financial crisis causing bank lending/ credit to fall
- bigger than expected rise in unemployment rates
supply side economic shocks
- steep rise in oil and gas prices or other commodities
- lock down die to coronavirus pandemic
- natural disasters causing sharp fall in production
- unexpected breakthroughs in production technology
Endogenous shocks-
shocks that happen within the UK economy
Exogenous shocks-
shocks that happen outside the UK economy
