The Economic or Business Cycle

The economic rollercoaster...

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Measuring Economic Activity
Gross Domestic Product is a measure of the value of all
outputs in an economy in a single year - the £ value of all
goods and services produced
There are 3 ways of calculating GDP, these are Income
Method, Output Method, and Expenditure method
These will all give the same value of GDP
Current level (2004) of GDP in the UK economy is
around £970 billion.
 Economic or Business Cycle

• Gross domestic Product does not increase at a

constant rate over time – there are variations in
growth rate.
• There can be times of negative growth i.e. GDP
decreases.
• These periodic movements in output, prices, and
employment are known as the Economic or
Business Cycle
 Two Key Features of GDP:

It grows over time

 the long run trend in GDP is positive, around 2.75% per year in
the UK, (This is in real terms allowing for effects of inflation)

It fluctuates as it grows
 GDP exhibits business cycle movements. In the last 15 years it
has varied between plus 4% and minus 2%
 Real Gross Domestic Product (USA)
8000

Here we see the variations of growth over time

6000

4000

2000

0
1959 1963 1967 1971 1975 1979 1983 1987 1991 1995
 Real Gross Domestic Product
8000

The trend rate of growth is indicated by the red line

6000

4000

2000

0
1959 1963 1967 1971 1975 1979 1983 1987 1991 1995
The Pacific Rim Growth
Growth rates vary between different countries.
Developing countries often have faster growth
rates than those found in Europe

Growth rates in Pacific

Rim countries
are around 4-6%.

In U.K. average is
around 2.75%.
 Parts of the
Business Cycle
Boom

GDP

Recovery/Expansion
Recession

time

Trough/ Bust
 Parts of Economic Cycle - Recovery

Consumer confidence grows – leading to increased

borrowing and spending
Firms increase output – build up stock levels
Spare capacity used, then
Investment occurs
Unemployment falls – it make take more than a year
of recovery for large changes in unemployment
levels
 Parts of Economic Cycle - Boom

Low levels of unemployment – shortages of labour

occur pushing up wage rates
High levels of consumer borrowing and spending
Firms working at full capacity
Profit levels high
Inflation Increasing
Interest rates increasing
Boom in housing market
 Parts of Economic Cycle - Recession

Growth rate of GDP is falling or negative

Firms decrease production and reduce stocks
Unemployment rises
Inflation falls
Investment falls
Firms suffer from falling profits, falling returns of
investment, redundancy costs.
 Parts of Economic Cycle - Bust

High levels of unemployment – unemployment

increased to 2.5 million during the recession of the early
90’s, against 900,000 now.
Low levels of investment
Reduced spending by consumers especially on
consumer durables
High levels of spare capacity
Low inflation
Government and Economic Cycle
The government will attempt to control fluctuations
in economic growth
Aims to achieve growth at around trend level
In the past has used Fiscal and Monetary policy to
achieve this objective
In the last 10 years the focus has been on the use of
Interest Rates ( monetary policy) and Supply Side
policies to achieve constant growth.
Over the last 10 years the UK has been recession
free, though growth has been as low as 1.5%