How big is the UK economy?
 The UK economy is the 7th largest in the world, with an
annual GDP of around £1.35 trillion, or £1350 billion, or
£1,350,000,000,000.
 GDP means Gross Domestic Product, and this represents
the value of all things made and all services supplied in an
economy - all output.
 If we divided the value of the economy evenly amongst the
whole population, each person would receive around
£21,000. This division is called GDP per capita, and on this
calculation the UK is the 17th highest in the world. Some of
the poorest counties in the world have a GDP per capita of
less than £400!
The Business Cycle
 On average the UK economy grows by around 2.5% a year, this growth rate is
enough to double wealth in around 35 years. But the economy does not grow at
a steady rate. The chart below shows growth rates over the last 3 years. The
figures for 2008-9 are negative. During this period the economy shrunk in size
– output fell.
The business cycle
Boom
 The boom period, which can last for 2 or 3 years,
benefits most firms and consumers.
 Unemployment is low , consumer demand is
strong, profits for firms are high and there can be
a budget surplus for the government caused by
high tax revenues and lower expenditure on
Social Security.
 But high levels of demand can increase prices,
workers often demand higher wages, pushing up
firms’ costs.
Downturn
 Following a boom often comes a downturn – there is
less investment by firms—business owners and
managers become nervous about the future and start
to cut back.
 Higher inflation in a boom may have caused the Bank
of England to increase interest rates, so people are
spending less, unemployment starts to creep up.
 The economy may still be growing, but at a much
lower rate. In a boom the economy can grow by 4% in a
year, in downturn growth will slip to around 1%.
Recession
 Sometimes a downturn turns into a recession – the
economy starts to shrink in size.
 If we have a recession we can see rapidly increasing
unemployment, fast falling demand from consumers,
falling investment by firms and a decline in the levels
of inflation and interest rates.
 Between 2008 and the middle of 2010 we saw in the UK
the longest recession since the Second World War.
 Unemployment increased by over 1 million, and many
big firms like Borders and Woolworths went bust.
Recovery
 Hopefully the recession will soon turn into a recovery.
 Firms start to see business opportunities, the cost of
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borrowing can be low, so investment by firms will
start to increase.
New jobs are created so unemployment falls and
consumers start to spend again.
New firms start up and profits should begin to
increase.
Confidence grows, people are now much more willing
to spend money on big ticket items like cars.
Firms see their sales rising, so take on new workers.
Growth increases to 2% or more—much higher and
we will be back in a boom.