Y1 18) The Economic Cycle (Business Cycle) - Stages, Characteristics and Causes

Summary

This 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.