The Economic or Business Cycle

Measuring Economic Growth We calculate the value of a country's output or wealth generated in a year by measuring GDP-Gross Domestic Product GDP is a measure of the value of all outputs in an economy in a single year - the £ value of all goods and services produced Current level (2013) of GDP in the UK economy is around £1400 billion.

Economic or Business Cycle Gross Domestic Product does not increase at a constant rate over time – there are variations in growth rate. Gross Domestic Product does not increase at a constant rate over time – there are variations in growth rate. High rates of growth for the UK are anything above 3% a yearHigh rates of growth for the UK are anything above 3% a year Average growth rates for the last 50 years around 2.5%Average growth rates for the last 50 years around 2.5% But since 2000 average rate of growth has been around 1%But since 2000 average rate of growth has been around 1% There can be times of negative growth i.e. GDP decreases – a recession There can be times of negative growth i.e. GDP decreases – a recession These changes in the rate of growth of GDP overtime is known as the Economic or Business Cycle These changes in the rate of growth of GDP overtime is 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 2.5% per year in the UK, (This is in real terms allowing for effects of inflation) the long run trend in GDP is positive, around 2.5% 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 6%. GDP exhibits business cycle movements. In the last 15 years it has varied between plus 4% and minus 6%.

Below we see the variations of growth in the economy over the last 12 years. The chart above shows the variations in GDP growth since We can see growth between 2% and 4% (blue line), then negative growth (recession) from , followed by low growth 0-2%

Boom Recession Recovery/Expansion Parts of the Business Cycle GDP time Downturn (UK)

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 – high levels of consumption Inflation Increasing Interest rates increasing Boom in housing market Imports increasing High levels of Govt. Tax revenues

Parts of Economic Cycle - Downturn Growth rate of GDP is starting to fall Firms decrease production and reduce stocks Unemployment starts to rise Inflation falls Investment falls Firms suffer from falling profits, falling returns from investment.

Parts of Economic Cycle - recession High levels of unemployment – unemployment increased by 1 million during the recession of Reduced spending by consumers especially on consumer durables High levels of spare capacity for firms Low inflation Negative economic growth – the economy is shrinking High numbers of firms going bust Increased govt. Borrowing and spending

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

Economic Policy and Economic Cycle The government will attempt to control fluctuations in economic growth and aims to achieve growth at around trend level In the past has used Fiscal and Monetary policy to achieve this objective From the focus was on the use of Interest Rates (monetary policy) to control inflation and Supply Side policies to achieve constant growth. Massive recession in – 8% fall in UK output Interest rates have been at a record low (0.5%) for the last five years and the government has increased money supply through Quantitative Easing in an attempt to increase economic activity.