Professional Documents
Culture Documents
Instability
Content
• Economic or business cycle
• The Nature and Causes of Fluctuations in economic
activity
• The trend rates of economic growth
• The costs and benefits of economic growth
• The use and limitations of national income as an
indicator of changes in living standards
Economic Cycle
• This shows the rate of economic growth compared to long
term trend rates
• The economic cycle shows differences over time between
rapid economic growth (boom, recovery) and alternative
periods where the economy is not growing or is declining in
size (recession or contraction)
• The measure used to assess the growth of the economy is
the comparison of gross domestic product or GDP over
time.
GDP - definition
• GDP – GROSS DOMESTIC PRODUCT
– The Market value of all goods and services produced
within the country.
– (what we produce within the UK/output)
What is the Business Cycle?
• Also known as the trade cycle
• Most economies over time will see an trend of
upward progression
• Does not grow smoothly – fluctuate going through
ups and downs know as the BUSINESS CYCLE
Output
Time
Stages of the Business Cycle
• Boom – (peak) Fast economic growth
• Consumer spending and investment high
• Business will have high demand for goods/services
• Increasing incomes (increasing competition for workers)
• Profits high (high demand for resources = prices rise can lead
to inflation)
• Wages rising?
• High output due to high demand
• Steady economic growth
• Business and consumer confidence high
Stages of the Business Cycle
Recession– (downturn/economic slow down)
• Incomes start to fall
• Output starts to fall
• Possible fall in demand for products
• Decline in profit
• Lay off workers – unemployment
• Consumer (save) and business confidence is low
• Reduced investment
Stages of the Business Cycle
Slump– (depression)
• High unemployment
• Consumer confidence low
• Investment low
• Profits low
• Closures
• Any growth will be slow
Stages of the Business Cycle
• Recovery (expansion/ upswing)
• Income starts rise
• Output increases
• Spending and consumer confidence increases
• More employment as a result
Causes of Economic Growth
• Booms / dips in economic growth can occur due
to a number of reasons:
1. Increase in aggregate demand caused by:
• An increase in consumption – this may be caused by:
a rise in income levels, an decrease in interest rates,
house price inflation
• A rise in the level of government spending
• A balance of payments surplus
Cause of Economic Growth
2. Labour shortages – if there are shortages of
workers in specific areas it means that the economy
will not be able to utilise its resources efficiently and
therefore economic growth will slow
3. Increase in demand for imports – this will worsen
the balance of payments deficit
Demand and Supply side shocks
• Supply side and demand side shocks can lead to
instability in the economy
• Shocks are unexpected events that influence the
demand / supply in an economy
• As the UK operates in a global market their
economy is open to shocks from across the world
Demand Side Shocks
• These can include:
• A significant rise or fall in exchange rates in short
term
• Changes in the rate of economic growth for
countries that you trade a lot with
• Changes in aggregate demand
• A boom in capital expenditure e.g. in construction or
ICT
Supply Side Shocks
• These affect the costs and prices of supply
• These can include:
– Technology
– Natural disasters which impact the supply of particular
goods e.g. crops
– Political situations that influence the supply of particular
products e.g. oil
Trend rate of economic growth
• The trend rate of economic growth shows the rate of
economic growth is the average rate of economic growth
over a period of time
• The trend rate of economic growth is influenced by a
number of factors of supply side including:
– Investment
– Education
– Training
– Technological change
Influences on the trend rate of economic
growth - Investment
• Investment influences the trend rate of economic
growth as higher levels of investment increase AD
and expenditure within the economy
• In addition investment expenditure means there are
more capital goods for workers to use to produce
consumer goods therefore increasing the level of
output in the economy
Influences on the trend rate of economic
growth – Education and Training
• Education and training can increase the growth rate
of the labour force in the economy
• These can both increase the trend rate of growth in
labour productivity in the UK therefore driving the
level of economic growth
Influences on the trend rate of economic
growth - technology
• Changes in technology can reduce the costs of
goods in the economy
• If the costs of supplying products decreases then
production possibility frontier will shift outwards
The Costs and Benefits of
Economic Growth
• There are costs and benefits that are associated
with economic growth
• Some costs are a result of externalities which occur
due to economic growth
• Economists focus on the idea of economic growth
as being sustainable which means it can continue
over the long term
The Costs of
Economic Growth
• Economic growth causes costs for the economy:
• Inflation risks – either demand-pull or cost-push
• The environment – as output increases negative
externalities can increase e.g. pollution
• Regional disparities or differences – Can lead to greater
differences between rich and poor
• Inequalities of income and wealth – these can
Benefits of Economic Growth
• Economic growth has an accelerator effect on
capital investment
• Increases taxation for the government
• Environmental benefits – if the economy is growing
there is more money to invest in cleaner
technologies thereby reducing pollution
The Benefits of Economic Growth
• Economic growth has a number of benefits:
• Improvement to living standards and lower rates of
poverty – especially in developing countries
• Falling levels of unemployment – Economic growth
stimulates levels of employment
Sustainability of Economic Growth
• The aim for most economies is sustainable economic growth
• Factors of production are finite and more resources are being used at
an increasing rate which means sustainability to economic growth is
being questioned
• Other renewable resources are being over used so this is decreasing
the sustainability of economic growth
• If economies are to keep growing at the same rate new ways of using
resources and strategies to reduce waste and resource consumption
need to be enforced
The Use and Limitations of National Income as an
Indicator of Changes in Living Standards
• Economic data:
– GDP
– GDP per capita
– Disposable income
– Working hours
• GDP figures show the total amount of income generated in the economy over a
year
• GDP per capita looks at the income per person in the population
• GDP per capita figures allow for comparison between countries
• To compare figures they need to be converted into a common currency
• To make relevant comparisons also need to look at the differences in the costs of
goods and services between countries – purchasing power parity
Limitations of National Income as an
Indicator of Changes in Living Standards