Trade (Business Cycle) Flashcards
The business cycle
-This refers to the stage of economic growth that the economy is in.
-The economy goes through periods of booms and busts.
Stages of the business cycle
-Real output increases when there are periods of economic growth. This is the recovery stage.
-The boom is when economic growth is fast, and it could be inflationary or unsustainable.
-During recessions, the real output in the economy falls, and there is negative economic growth.
-During recessions, governments might increase spending to try and stimulate the economy. This could involve spending on welfare payments to help people who have lost their jobs, or cutting taxes.
-During periods of economic growth, governments may receive more tax revenue since consumers will be spending more and earning more. They may decide to spend less, since the economy doesn’t need stimulating, and fewer people will be 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.
Characteristics of a recession
-In the UK, a recession is defined as negative economy growth over two consecutive quarters. The characteristics are:
-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.
Costs and benefits of economic growth to consumers
BENEFITS-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.
COSTS-Economic growth doesn’t 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.
-The benefit of more consumption might not last after the first few units, due to the law of diminishing returns, which shares that the utility consumers derive from consuming a good diminishes as more of the good is consumed.
Costs and benefits of economic growth to firms
BENEFITS-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 advantage 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, but it will also give them more sales opportunities.
COSTS-Firms could face more menu costs as a result of higher inflation. This means they have to keep changing their prices to meet inflation.
Costs and benefits of economic growth to the government
BENEFITS-The government budget might improve, since fewer people require welfare payments and more people will be paying tax
COSTS-Governments might increase their spending on healthcare if the consumption of demerit goods increases.
Costs and benefits of economic growth to current and future living standards
BENEFITS-As consumer incomes increase, some people might show more concern about the environment.
-Also, economic growth could lead to the development of technology to produce goods and services more greenly.
-Higher average wages mean consumers can enjoy more goods and services of a higher quality.
-Public services improve, since governments have higher tax revenues, so they can afford to spend on improving services. This could increase life expectancy and education levels.
COSTS-High levels of growth could lead to damage to the environment in the long run, due to increase negative externalities from the consumption and production of some goods and services.
