The Economic Cycle Flashcards
What is an economic cycle
When GDP growth fluctuates around the trend (or underlying) growth
What is a boom
When the rate of GDP growth is fast and higher than the long-term trend (positive output gap)
What is a business cycle
Short-run fluctuations of national output (real GDP) around its long-term trend
What is national income
Everything produced, earned and spent in a country over a period of time
What is a slowdown
A weakening of the rate of growth, real GDP is still rising but increasing at a slower rate
What is a recession
A period of at least six months when an economy suffers a fall in output. Or a broadly-based contraction in output, employment, investment and confidence
What is a recovery
A phase of the cycle, after a recession, during which real GDP starts to increase and unemployment begins to fall
What is a depression
A prolonged downturn in the economy and where a nation’s real GDP falls by at least 10% from peak to trough
When was the last recession in the U.K.
2008 and 2009 where there was a cumulative fall in RNO of about 5%
What happens during an economic recovery
AD will be rising (= increase in RNO and a fall in the amount of spare capacity)
What is the output gap
The difference between the actual level of GDP and it’s estimated potential level. It is usually expressed as a % of the level of potential output.
What happens if actual GDP is less than potential GDP
There is a negative output gap
What is the actual level of real GDP
The intersection of AD and SRAS
What happens if actual GDP is greater than potential GDP
There is a positive output gap
Features of a positive output gap
- some resources are working beyond their normal capacity
- the main problem is likely to be an acceleration of consumer price inflation
Problems in estimating the output gap
- inaccurate data on the labour force survey
- problems in accurately measuring productivity
- surveys of producers about spare capacity may be inaccurate
- gaps in knowledge about how much businesses are investing and the potential output from new capital
- uncertainties about the number of people who may have left the labour market as ‘discouraged workers’
- hard to measure the amount of under-employment in the labour market at different stages of the cycle
Examples of demand-side shocks
- economic downturn in a trading partner
- unexpected tax increases
- financial crisis causing bank lending to fall
- bigger than expected rise in unemployment
Examples of supply-side shocks
- steep rise in commodity prices
- political turmoil/strikes
- natural disasters
- unexpected breakthroughs in production technology
Possible causes of a recession
External events
Tightening of macro policy
Fall in asset prices or supply of credit
Drop in business and consumer confidence
Short term economic effects of a recession
Business products and capital investment
Unemployment
Government finances
Inflation
Long term economic effects of an inflation
- rising structural long-term unemployment and regional decline
- low rates of investment can reduce the size of the capital stock
- persistent budget (fiscal) deficits and a rising national debt leads to austerity (cut in public services)
Long term social effects of a recession
- falling real wages hits average living standards and reduces demand
- widening inequality of income and wealth leading to rising poverty
- social costs such as loss of social cohesion and threats to democracy
What are the two competing views about the effects of a recession
Hysteresis
Creative destruction
What is hysteresis in a recession
When an economy is disabled by recession there is a risk of loss of output.
Loss of productive capacity due to low capital investment.
High rates of structural unemployment.
What is creative destruction in a recession
Capitalist market economies usually bounce back from a recession.
Print emergence of new businesses.
New technologies act as a catalyst for renewed economic growth and investment.
What is the difference between recession and depression
A depression is a prolonged slump over a number of years where real GDP falls by more than 10% from the peak of the cycle to the trough.
What is the misery index
A light-hearted attempt to use macroeconomic data to track the scale and extent of misery for different countries
How do u calculate the misery index
Unemployment + interest rate - % change in real GDP per capita of a country
Why is GDP growth difficult to measure
- uncertain business confidence levels
- fluctuations in the XR
- external events
- macro policy changes
- rate of business job creation
