Explanations of the Economic Cycle AS Economics Unit

Aims and Objectives

Aim: Understand explanations of the economic cycle Objectives: Describe different explanations of economic cycle Analyse speculative bubbles in UK and World Economy

Speculative Bubbles
Rapid economic growth can lead to a rapid rise in asset prices, as people seek to buy these assets, such as housing. Causing a speculative bubble. When people realise asset prices have risen above their real values, they tend to sell them in an attempt to make profit before its too late! Bubble bursts, destroying consumer and business confidence. http://news.bbc.co.uk/1/hi/programmes/newsnight/9677271.stm

The UK Bubble
UK House Price Inflation and Consumption Growth
40 30 House Price Inflation % 20 10 10 8 6 4 2 0 1984 Q1 1986 Q2 1988 Q3 1990 Q4 1993 Q1 1995 Q2 1997 Q3 1999 Q4 2002 Q1 2004 Q2 2006 Q3 2008 Q4 0 -10 -20 -30 Date House price inflation Growth in consumption -2 -4 -6 Consumption Growth %

Source: M Young (2010) UK Household Sector Spending: the Significance of Households Accumulation of Assets and Liabilities

UK Household Debt
September 1988 September 2008 % of % of annual annual % of % of billions disposab billions disposab liabilities liabilities le le income income Financial 311.2 100.0 109.5 1568.3 100.0 174.8 Liabilities Secured 213.7 68.9 75.2 1182.7 75.4 131.8 Debt Unsecured 97.5 31.1 34.4 385.6 24.6 43.0 Debt Secured Debt: Property acts as collateral for the debt, which can be used to pay off the debt if necessary. Unsecured Debt: No property is needed as collateral. Usually used to fund purchase of small items.

Source: M Young (2010) UK Household Sector Spending: the Significance of Households Accumulation of Assets and Liabilities

The UK Bubble
UK Debt 1993-2009
1600000 Total Debt / Secured Debt (m) 1400000 Unsecured Debt (m) 1200000 1000000 800000 600000 400000 200000 Total debt 0 34303 34730 35155 35581 36007 36433 36860 37287 37711 38138 38564 38990 39416 39844 34089 34515 34942 35369 35795 36219 36646 37072 37499 37925 38352 38776 39202 39629 40056 Secured debt Unsecured debt 0 100000 200000 250000

150000

50000

Date

Source: M Young (2010) UK Household Sector Spending: the Significance of Households Accumulation of Assets and Liabilities

The UK Bubble
Growth of UK Debt
20 18 16 Growth of Total Debt % 15 14 12 10 10 8 6 0 4 Growth of Secured/Unsecured Debt %

34638 35003 35369 35734 36099 36464 36830 37195 37560 37925 38291 38656 39021 39386 39752 40117 2 34454 34819 35185 35550 35915 36280 36646 37011 37376 37741 38107 38472 38837 39202 39568 39933 -5 Annual growth in total debt, % Annual growth in unsecured debt, % 0 Annual growth in secured debt, %

Source: M Young (2010) UK Household Sector Spending: the Significance of Households Accumulation of Assets and Liabilities

The UK Bubble
Debt Accumulation and Average House Prices 1994/2009
250000 1600 1400 200000 1200 House Price 1000 800 100000 600 400 200 0 34516 34881 35247 35612 35977 36342 36708 37073 37438 37803 38169 38534 38899 39264 39630 39995 34335 34700 35065 35431 35796 36161 36526 36892 37257 37622 37987 38353 38718 39083 39448 39814 Total Debt, bn Av. House Price 0

150000 Debt bn

50000

Source: M Young (2010) UK Household Sector Spending: the Significance of Households Accumulation of Assets and Liabilities

The UK Bubble

However. http:// www.bbc.co.uk/news/business-170

http:// www.bbc.co.uk/news/business-164

http:// www.bbc.co.uk/news/business-152

360% Interest Rate p.a

Political Cycles
Political parties, may try to engineer a boom Gordon Brown selling off gold! Once election over government may then deflate AD to avoid demand pull inflation. Government Failure

Inventory Changes
Can cause recessions. Stocks of un-finished goods build up when firms are too optimistic about demand for their products. Knock on effect is that they are forced to cut production by more than the original fall in demand. De-stocking

Outside Shocks
Demand shocks and Supply Shocks Storm damage from hurricane Katrina in New Orleans affected both demand and supply.

Iraq War

Outside Shocks Iraq War

Look Out Below

http://www.economi