The Economic or
Business Cycle
Measuring Economic Activity
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 (2012) 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.
• There can be times of negative growth i.e. GDP
decreases.
• 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)
It fluctuates as it grows

GDP exhibits business cycle movements. In the last 15 years it
has varied between plus 4% and minus 2%
Below we see the variations of growth of the economy over time
The yellow bars show negative growth – a recession, the economy is
shrinking,
The blue positive, growth – the economy is growing.
The Pacific Rim Growth
Growth rates vary between different countries.
Developing countries often have faster growth
rates than those found in Europe
Growth rates in Pacific
Rim countries
are around 4-6%.
China 8 or 9% is normal
In U.K. average is
around 2.5%.
Parts of the
Business Cycle
Boom
GDP
Downturn
(UK)
Recovery/Expansion
Recession
time
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 2008-10
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
Government and Economic Cycle
The government will attempt to control fluctuations
in economic growth
Aims to achieve growth at around trend level
In the past has used Fiscal and Monetary policy to
achieve this objective
In the last 10 years the focus has been on the use of
Interest Rates ( monetary policy) and Supply Side
policies to achieve constant growth.
Over the last 10 years the UK has been recession
free, though growth has been as low as 1.5%