Trade Cycle Flashcards
Define Boom
A period when the rate of growth of real GDP is fast and higher than the long-term trend
Define Depression
A prolonged and persistent downturn and where a nations GDP falls by at least 10%
Define Recovery
A phase after a recession - Real GDP starts to increase from the trough and unemployment eventually begins to fall
Define Slowdown
A weakening of the rate of the growth
Real GDP is still rising but increasing at a slower rate
What happens to per capita incomes during a boom and recession
Per capita income rises - Boom
Per capita incomes fall - Recession
What happens to confidence during a boom and recession
Rising household and business confidence - Boom
Falling house pools and business confidence - Recession
What happens to jobs during a boom and recession
Rising employment, falling unemployment since labour is a derived demand (more workers needed) - Boom
Falling employment, rising unemployment, potentially rising underemployment- Recession
What happens to real wages during a boom and recession
Rising wages, especially during skilled labour shortages - Boom
Falling real wages - Recession
What happens to inflationary pressure during a boom and recession
Rising demand-pull and cost-push inflationary pressure due to positive output gaps - Boom
Falling inflationary pressure, risk of price deflation - Recession
What happens to business profits during a boom and recession
Rising business profits (unless an inferior good is being sold) - Boom
Falling business profits (unless an inferior good is being sold) - Recession
What happens to trade balance during a boom and recession
Rising deficit, demand for imported goods and services expand - Boom
Falling deficit as demand for imports contracts - Recession
What happens to spare capacity during a boom and recession
Increasing use of scarce resources, takes economy closer to PPF - Boom
Less use of scarce resources- Recession
What happens to planned business investment during a boom and recession
Rising investment, accelerator effect may cause business capital investment to rise more quickly than GDP - Boom
Falling investment, accelerator effect causes investment to fall more sharply than GDP, more spare capacity and less profit - Recession
What happens to the Construction Industry during a boom and recession
Rise in construction output - Boom
Fall in construction output - Recession
What happens to government fiscal balance during a boom and recession
Falling budget deficit - Boom
Rising budget deficit - Recession
Possible Causes of Recession
External Events or Shocks
Tightening of monetary and/or fiscal policy
Fall in asset prices or supply of credit
Drop in animal spirits
How does an inward shift of AD lead to recession
AD has decreased - increase in spare capacity
Rising negative output gap - Fall in real GDP
How does an inward shift of AS lead to a recession
Supply shock - Inward shift of SRAS
Short term effects of recession
Falling demand - Business fail and profits fall
Planned investment declines
Decline in AD leads to fall in AD for labour - leads to contraction in unemployment
Decline in direct and indirect tax revenues - more welfare spending - increase in budget deficit
Deflation - price discounts due to falling demand
Long term effects of a recession
Rising structural long term unemployment- risk of regional economic decline
Low rates of investment reduces size of capital stock
Ageing capital inputs - negative impact on the growth of labour productivity
Difference between recession and depression
Depression is much longer and has a much more severe fall in output and employment than a recession
What happens during a boom
National income is high
Economy will be working beyond full employment
Consumption and investment expenditure will be high
Tax revenue will be high
Wages and profits increase
High imports
Inflationary Pressures
What happens during downturn
Output and income fall
Consumption and investment fall
Tax revenues fall
Government expenditure rise
Wage demands moderate as unemployment rises
Imports decline
Inflationary pressure ease
What happens during recession or depression
Economic activity is at a low
High unemployment
Consumption is low
Investment is low
Imports will be low
Few inflationary pressures
Prices may be falling
