Y1 18) The Economic Cycle (Business Cycle) - Stages, Characteristics and Causes
Summary
TLDRThis script delves into the concept of economic growth, contrasting the ideal steady upward trend with the reality of a fluctuating actual growth line influenced by the business cycle. It outlines the four stages of the cycle: boom, recession, trough, and recovery, highlighting the characteristics of each phase, such as high unemployment and low consumer confidence during recessions. The script also discusses output gaps and the unpredictable nature of economic shocks that can trigger these cycles, emphasizing the complexity and unpredictability inherent in economic growth.
Takeaways
- 📈 The macro objective for growth is to achieve strong, sustained, and sustainable economic growth, ideally represented by a smooth upward sloping line on a GDP over time graph.
- 🔍 In reality, economic growth is not smooth but fluctuates, with periods of increase and decrease, reflecting the actual growth line on the graph.
- 📊 The 'trend growth' or 'potential growth' is the smooth line on the graph representing the long-term growth rate, which is synonymous with the macro objective for growth.
- 🔁 The economic cycle, also known as the business cycle, consists of fluctuations in GDP, with the actual growth line rising and falling over time.
- 🌐 The four stages of the economic cycle are boom, slowdown/recession, trough, and recovery, each characterized by specific economic conditions and behaviors.
- 🚀 During a boom, the economy experiences rampant growth, high production, low unemployment, and high consumer and business confidence, often leading to demand-pull inflation.
- 📉 In a recession or at a trough, the economy suffers with negative growth, high unemployment, low confidence, reduced consumer spending, and investment, potentially leading to destocking and discounting.
- 🌱 Recovery is signaled by green shoots such as recovering consumer confidence, increased spending on big-ticket items, business investment, and construction activity.
- 💡 The concept of output gaps is clearly depicted on the GDP graph, with positive output gaps indicating actual growth above potential growth, and negative gaps the opposite.
- 🔮 Fluctuations in actual growth are caused by unforeseen shocks to the economy, which can be on the demand side, such as changes in interest rates or government spending, or on the supply side, like natural disasters or raw material price increases.
- 🛑 The unpredictability of these shocks explains the occurrence of recessions and the fluctuations in GDP that define the business cycle.
Q & A
What does the macro objective for growth aim to achieve?
-The macro objective for growth aims to achieve strong, sustained, and sustainable economic growth.
How is economic growth typically represented on a diagram?
-Economic growth is typically represented on a diagram with real GDP on the y-axis and time on the x-axis, showing a smooth upward sloping line for ideal growth.
What is the difference between actual growth and trend growth?
-Actual growth refers to the real fluctuations in economic growth over time, while trend growth, also known as potential growth, is the smooth upward sloping line that represents the long-term growth rate without fluctuations.
What are the four stages of the economic cycle?
-The four stages of the economic cycle are boom, slowdown/recession, trough, and recovery.
How is a recession defined in economic terms?
-A recession is defined in economic terms as two successive quarters of negative growth.
What is an output gap and how can it be identified on the economic growth diagram?
-An output gap is the difference between actual growth and potential growth. It can be identified on the diagram as the space between the actual growth line and the trend growth line, with a positive output gap indicating actual growth above potential and a negative output gap indicating the opposite.
What are the characteristics of a boom phase in the economic cycle?
-In a boom phase, growth is rampant with actual growth likely exceeding potential growth, resulting in a positive output gap, high production, low unemployment, high consumer and business confidence, and high profits.
What are the economic indicators of a recession or a trough?
-Indicators of a recession or a trough include declining actual growth below potential growth, a negative output gap, higher unemployment, low consumer and business confidence, reduced consumer spending, less investment, and destocking by firms.
What are the signs of an economic recovery?
-Signs of an economic recovery include increasing consumer confidence, willingness to spend on expensive items, business confidence leading to more investment, expansion of businesses, and an increase in construction activity.
What causes fluctuations in actual growth?
-Fluctuations in actual growth are caused by shocks, which can be unpredictable events affecting either the demand side or the supply side of the economy.
What are some examples of demand-side shocks that can impact the economy?
-Examples of demand-side shocks include sudden increases in interest rates, cuts in government spending, a sudden strengthening of the exchange rate, a housing market crash, or a banking sector crisis.
What are supply-side shocks and how do they affect the economy?
-Supply-side shocks are events that affect the long-term or short-term supply capacity of an economy, such as natural disasters, wars, sudden increases in raw material prices, wage increases, or business tax increases, which can lead to a recession by reducing production and economic growth.
Outlines
📈 Understanding Economic Growth and Cycles
This paragraph introduces the concept of economic growth, aiming for it to be strong, sustained, and sustainable. It uses a diagram to illustrate the ideal smooth upward slope of real GDP over time, contrasting it with the actual, fluctuating growth pattern observed in reality. The paragraph explains the difference between actual growth and trend or potential growth, which are synonymous. It also outlines the four stages of the economic cycle: boom, slowdown/recession, trough, and recovery, detailing the characteristics of each stage. The concept of output gaps, where actual growth may exceed or fall short of potential growth, is also discussed, along with the implications for the economy during boom and recession periods.
🌪 Shocks and Their Impact on the Economy
The second paragraph delves into the reasons behind the fluctuations in economic growth, attributing them primarily to unforeseen shocks. These shocks can occur on either the demand or supply side of the economy and can lead to recessions. Examples of demand-side shocks include sudden increases in interest rates, cuts in government spending, or a housing market crash, while supply-side shocks might involve natural disasters, wars, or sudden changes in the cost of raw materials. The paragraph emphasizes the unpredictability of these shocks and how they can abruptly shift the economy from growth to recession, thus contributing to the business cycle. It also touches on the policy responses to such downturns, such as lowering interest rates and increasing government spending, aiming to stimulate the economy and prevent further decline.
Mindmap
Keywords
💡Macro Objective
💡Real GDP
💡Economic Growth
💡Trend Growth
💡Actual Growth
💡Business Cycle
💡Boom
💡Recession
💡Trough
💡Recovery
💡Output Gaps
💡Demand Pull Inflation
💡Supply Shocks
💡Macro Policy
Highlights
The macro objective for growth is to be strong, sustained, and sustainable.
Economic growth is ideally represented as a smooth upward sloping line on a diagram with real GDP on the y-axis and time on the x-axis.
Actual economic growth often fluctuates, differing from the ideal smooth upward trend.
The terms 'trend growth' and 'potential growth' are synonymous, representing the smooth growth line on the diagram.
Actual growth line fluctuations represent the economic cycle, or business cycle, with periods of increase and decrease.
The economic cycle consists of four stages: boom, slowdown/recession, trough, and recovery.
A boom is characterized by growth peaking above the trend, indicating a very strong economy.
A recession is officially defined as two successive quarters of negative growth.
A trough represents the lowest point of the actual growth line, indicating the worst of the economic downturn.
Recovery is marked by an improvement in the economy, moving away from the trough.
Output gaps are the differences between actual and potential growth, with positive and negative gaps indicating economic conditions.
In a boom, there is a positive output gap with high production, low unemployment, and high consumer and business confidence.
A recession and trough are characterized by negative output gaps, high unemployment, and low confidence leading to reduced spending and investment.
During recovery, consumer and business confidence begins to rise, signaling an improvement in the economy.
Fluctuations in actual growth are caused by shocks, which can be unpredictable and impact both the demand and supply sides of the economy.
Demand-side shocks can include sudden interest rate increases, government spending cuts, or financial market crashes.
Supply-side shocks may involve natural disasters, wars, or sudden increases in raw material prices or wages.
The unpredictability of shocks explains the occurrence of recessions and fluctuations in GDP, leading to the business cycle.
Transcripts
hi everyone the macro objective for
growth is for growth to be strong
sustained and sustainable if we were to
map that on a diagram it would look
something like this we have real GDP on
the y axis now and we're looking at
growth real GDP over time time on the x
axis and that line there represents
strong and sustained economic growth
continuous economic growth in a lovely
smooth upward sloping manner however
reality differs very much from this in
reality actual growth looks more like
this there are times where it increases
but also times where it falls and
increases and Falls and increases and
Falls
that's what actual growth really looks
like in an economy and we can label
these lines now so this squiggly one is
our actual growth line where is the
smooth upward sloping one is our trend
rate of growth so we can call that our
trend growth but we can also call that
our potential growth the two terms are
synonymous here's a trend growth
potential growth mean exactly the same
thing in this case so we can see that
actual growth is rising and then falling
and then rising again and then falling
it's not smooth an upward sloping as we
would like and that is the economic
cycle also known as the business cycle
fluctuations in GDP but what we can see
is that the actual growth line even
though it's fluctuating up and down up
and down over time it's still rising so
we're still getting increases and growth
over a given period of time just not
nice and smooth and consistent like we
would like we would hope for given our
objective of growth what we can also
show are the four different phases the
four different stages of the economic
cycle using this diagram so when actual
growth is at its peak we can call that a
boom
but that's when growth is rampant very
strong you can see greater than trend
that is a booming economy when growth
starts to fall from a boom we can call
that a slowdown or we can call it a
recession a recession is a technical
term in economics defined as two
successive quarters of negative growth
so break down the year into four
quarters
Reeta March April to June July to
September October to December to
successive quarters of negative growth
shrinking economy is defined as a
recession here okay so that's when
growth is falling is negative when we
hit the worst position from a recession
that's known as the trough so the lowest
points of the actual growth line is a
trough and then when things start to get
better in the economy that's a recovery
an economic recovery so there are the
four different stages of the economic
cycle we can also show on this diagram
is the concept of output gaps we've
learnt output gaps already and it's very
clear to see them on this diagram so an
actual growth is greater than our
potential growth so here for example we
have a positive output gap and when
actual growth is less than potential
growth so for example this territory we
have a negative output gap so now let's
see what the different characteristics
are of these various stages of the
economic cycle in a boom growth is going
to be rampant with actual growth likely
to be beyond potential growth with a
positive output gap in the economy and
with that firms are going to be
producing a lot you can imagine there
being high construction activity high
manufacturing activity firms are
producing a huge amount of goods and
services and selling them easily with
high profits to produce that output they
need to employ worker so unemployment is
likely to be very low consumer
confidence and business confidence will
be high because the economy is doing so
well that's going to drive consumer
spending and businesses is going to
drive them to invest in capital if
consumers are earning high they're going
to be sucking in inputs demanding goods
and services from abroad imports into
the country the government's going to be
doing well with higher tax revenues
coming in from income tax from
corporation tax from v80 from tariffs
all these revenues will be increasing
but there is likely to be the side
effect of demand pull inflation
especially if growth is occurring beyond
potential in a recession and in a trough
the economy's doing really badly
remember the definition of recession two
successive quarters of negative growth
so the economy's doing poorly we're
basically going to see the opposite of
what we get in a boom declining ad
actual growth is going to be lower
then potential growth that's a negative
output gap as the diagram clearly shows
and with that there is going to be
higher unemployment firms getting rid of
workers in order to maintain profit
margins less demand for labor because
there is less demand for goods and
services generally with that there's
going to be a sharp fall in consumer
confidence and in business confidence
and that means less consumer spending it
means less investment with that there's
gonna be less construction going on less
manufacturing sector activity taking
place and there's going to be a fall in
house prices all bad news all ban using
the economy firms though in order to try
and maintain profit margins to try and
maintain high revenues will be
destocking there won't be producing more
they'll be getting rid of their stocks
and trying to sell their stocks and also
they'll be discounting their prices
clear signs that the economy is
struggling and consumers are not
spending already mentioned the fall in
the house prices and construction
activity because of a falling consumer
confidence but also because of a fall in
investment so firms are not expanding
their factories they're not looking to
build skyscrapers we can expect a lower
demand pull inflation naturally as there
is lower demand lower ad in the economy
we can expect loose macro policy things
like lower interest rates things like
maybe higher government spending lower
taxation to try and stimulate the
economy and get ad up try and get out of
the trough get out of the recession but
also because incomes the lower low
demand for imports so essentially the
opposite of what we see in a boom
recovery is interesting when do
economists know when do people know when
the politicians know that the economy is
healing that the economy is getting
better what are the green shoots of
recovery well these are the key things
that we would witness in a recovery
consumer confidence recovering
increasing willingness to spend
especially on expensive items like
houses and cars who see a pickup in
those markets also businesses feeling
more confident and that means we can
expect more investment businesses
expanding a little bit more buying a new
machinery upgrading their machinery
looking to expand their factory that's a
good sign of recovery also an increase
in construction that comes again from
investment but also consumers spending
on renovating their houses expanding
their houses etc but also loose policies
still to try and prevent the economy
going back into recession so these are
some of the key characters
six are the four different phases of the
economic cycle what's maybe more
interesting though is why are there
fluctuations in actual growth well the
simple answer is shocks things can
happen in the economy then nobody can
foresee nobody can predict shocks and
that's why we don't get this lovely
smooth upward sloping growth line we get
this fluctuating actual growth line
shocks things happen in the economy
which are bad no one expects them and
those bad things can happen on the
demand side or they can happen on this
supply side when I say demand side I
mean shocks to aggregate demand factors
that end up reducing ad that nobody can
predict let's look at a few maybe a
sudden increase in interest rates that
suddenly happens no one expected that to
happen and bam recession is the end
result we see growth falling maybe we
see a sudden cut in government spending
right if that happened then BAM that can
take an economy into recession maybe a
sudden strengthening in the exchange
rate which means less net exports but
also maybe a sudden housing market crash
which massively affects consumption
maybe it's a sudden banking sector
crisis or financial market crash like we
saw in 2009 2010 which again can plummet
the economy into recession with less
consumption taking place less investment
taking place so we have a lot of these
demand side factors things that can
suddenly shock the economy what about
taxation rates higher income tax higher
corporation tax suddenly people couldn't
predict that happening again could shock
the economy into a recession but also we
can have shocks on the supply side maybe
shocks that affect LRS like natural
disasters like Wars but also we can see
shocks to SRS factors that can shift SRS
left that people could not predict for
example a sudden increase in the price
of raw materials for example a sudden
increase in wages for example a sudden
increase in business taxes like v80 or
for example a sudden weakening of the
exchange rate which makes imports of raw
materials more expensive those kind of
factors can shock the economy and drive
us into a recession but the key is that
they are shocks they can't be predicted
and when they happen BAM the economy
suffers it dies and that explains why we
get these recessions and why we get
fluctuations in GDP which cause
the economic cycle the business cycle to
occur so there you go that's the
economic cycle for you everything you
need to know fascinating stuff stay
tuned for the next video as we look at
the costs and benefits of growth see you
then guys
[Music]
تصفح المزيد من مقاطع الفيديو ذات الصلة
Macro: Unit 1.1 -- The Business Cycle
Introduction to Macroeconomics
Product Life Cycle (With Real World Examples) | Strategic Management | From A Business Professor
IGCSE Business studies 0450 - 6.1 - Economic Issues
Y1 2) Circular Flow of Income & Measures of GDP
What causes an economic recession? - Richard Coffin
5.0 / 5 (0 votes)