The Business Cycle and GDP Flashcards
Business Cycle Definition
The business cycle illustrates how the level of economic growth in an economy fluctuates (changes) over time.
Economic Growth = %change in real GDP
Economic Growth Factors
Economic Growth is influenced by levels of consumption spending (C), investment (I) (business) spending, government spending (G) and export spending (X).
If AD grows, then economy grows.
If AD falls, then our economy grows more slowly or even shrinks.
Measure of Economic Growth
It is measured by (%) changes in real GDP (GDP adjusted for inflation)
Aggregate Demand
Aggregate Demand is the total demand for Australian G+S from different areas of the economy, and overseas markets.
AD = C+I+G+X-M
Aggregate Demand Factors (9 of them)
(Shift Right = increase)
- De/Appreciation of AUD
- Change in disposable income
- Change in consumer confidence
- Change in business confidence
- Change in interest rates
- Change in income taxes
- Change in government sentiment / confidence
- Change in government spending
- Level of unemployment
Effect of Growth in Real GDP
(currently at 75)
If Growth in Real GDP < 100: Consumers are pessimistic about the economy’s future.
- Interest rates are high so disposable income decreased. Inflation is increasing and purchasing power decreases.
If Growth in Real GDP > 100: Consumers are confident in the future of the economy.
- Lower interest rates, higher disposable income, lower inflation and more purchasing power.
If Growth in Real GDP = 100: Consumer’s outlook towards the future of the economy is neutral.
Business Cycle Points:
- Peak
- Trough
- Downturn
- Upturn
- Boom
- Bust
- Recession
Peak: The highest point in an economic cycle, indicating max output and employment.
Trough: The lowest point in a cycle, representing minimum output and employment.
Downturn: A decline in economic activity following a peak.
Upturn: An improvement / rise in economic activity following a trough.
Boom: A period of rapid economic growth, typically characterised by high productivity and output.
Bust: Severe economic downturn/fall in growth, mass loss of jobs, huge decrease in living standards.
Recession: A period of temporary economic decline, during which economic activity is reduced, generally identified by a fall in GDP in two successive quarters.
Formulas
Annual Growth: GDP(June 2022) - GDP (June 2021)/GDP(June 2021)
Quarterly Growth: GDP(June) - GDP(March) / GDP(March)
Annualised Growth: Quarterly Growth * 4
Strong and Sustainable Economic Growth
SSEG: Rate of economic expansion that is both robust and capable of being maintained over the long-term without causing significant negative environmental or social impacts.
The goal is 3-3.5%, which is not currently achieved at (2.7%)
Why Pursue Strong Rates of Economic Growth?
Strong economic growth is the primary means by which nations can improve living standards over time.
Consequences of Too Low Economic Growth
The goal rate of economic growth is 3-3.5%, if the rate falls below this, unemployment will by higher due to lay offs, there will be lower income causing reduced purchasing power and standard of living.
Consequences of Too High Economic Growth
If the rate went above 3.5%, it would cause demand push inflation, increase income inequality, overuse of resources (low spare capacity of workers), cause increased interest rates, and would increase the potential of an economic downturn.
