Business cycle and economic growth
Economic growth and ways to measure
Actual growth (GDP)- % annual increase in a countries real GDP over time OR % annual increase in national output OR caused by an increase in demand
Potential growth- long run expansion of economy's productive potential using trends
Its an increase in value of goods and services produced by an economy over time.
Why economic growth matters
Important because living standards are influenced by access to goods and serivces
With economic growth we are better off
About increase in production within economy
GDP is the value of goods and services produced by an economy over a specific period
GDP includes Consumption (household spending), Investment (spending on capital projects), Government spending (spending by government on goods/ services) and Net exports
Business cycle
Pattern of 'ups' and 'downs' in economy
Measured by change in GDP from 1 quarter to the next
Sequence of slump, recovery, boom and recession
Also called economic cycle
Boom is high levels of consumer spending, business confidence, profits and investment. Price and costs tend to rise and unemployment low
Recession is falling levels of consumer spending and lower profits of businesses, cut back on investment. Spare capacity increases+ rising unemployment
Slump is weak consumer spending and investment, many businesses fail. High unemployment and low prices
Recovery is when consumers increase spending, higher business confidence and investment. Unemployment stops growing
Causes of the business cycle
Alternating periods of stocking and destocking
Changes in value of consumer spending and business investment
Changes in level of business and consumer confidence
Changes in government policy which induces change in economy
Trend growth
Increase trend growth by achieving higher productivity
Expand the size of labour supply
Refers to a smooth path of long run national output- estimate of how fast economy is expected to grow without creating an unsustainable increase inflation
Benefits of economic growth
Lower unemployment
Increased tax revenue for government
Improved business confidence
Creation of new jobs
Rise in average living standards
Increased capital investment
Increased profits
Technological innovation
Drawback of economic growth
Increases inequality
Growing gap between rich and poor
Risk of demand will pull inflation if actual growth exceeds potential growth
Increased demand for exports and a trade deficit
Business confidence
Cyclical and counter cyclical business
Cyclical business is where demand is linked to GDP. For example fashion, electrical, houses, restaurants, advertising
Counter cyclical business do well or ok even when economy is weak. For example value retailers, fast food and home holidays
Firms only invest in firms that are confident about future demand
Optimistic view of future brings investment and brings a boom
Important element in decision making especially investment
Pessimism lead to low investment and provokes a slump
Credit crunch and effects
Increase in fixed rate mortgages
Negative wealth and confidence from falling house prices and a fall in consumer spending
Harder to get loans so house prices fall
Its a liquidity crisis where banks become nervous about loans. Where they are ready to loan they charge a higher interest rate to cover their risk. Results in a fall in supply of credit and increase in cost of borrowing
House prices were a key factor to drive UK in recession in 2009
Responses to the crunch- cut back production capacity, reduce head count, postpone investment, intense sale promotion and destocking