The Economic Cycle

AS EconomicsPowerPoint Briefings 2006PowerPoint Briefings 2006

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Mrs G

What is a business cycle?

Business Studies You MUST focus on the impact on

businesses!

Mrs G

Syllabus aims within Business Cycle…

You must be able to

• Identify the phases of the business cycle

• Identify the causes of Business cycle instability, (durables, stock levels and investment decisions),

• Explain the business implications,

eg business opportunities during upturn.

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Business Cycle & Long term trends…

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Business Cycle Phases..

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Key Concepts – G.D.P

• Gross Domestic Product:– The value of output of goods and services produced in the

country during one year– Includes all Primary, secondary and tertiary sectors– Can be viewed as being national income, national output

or aggregate demand (AD)

– GDP per capita – GDP divided by the population (GDP per head)

• All countries experience economic cycles with their G.D.P

Mrs G

The UK Economic Cycle

Annual percentage change in GDP at constant pricesGrowth of National Output for the UK

ar 4 quartersSource: Reuters EcoWin

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06

Per

cent

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

Can you spot the Slump?Boom?

Recovery?Decline?

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Causes of the Business cycle fluctuations

• Changes in business confidence

• Alternating periods of stocking & de-stocking

• Changes in the amount of spending on large consumer items

• Changes in govt policy

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The recession of the early 1990s

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Data on the last recession (1)

Annual percentage change in GDP at constant pricesGrowth of National Output for the UK

ar 4 quartersSource: Reuters EcoWin

Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q389 90 91 92 93 94

Per

cent

-3

-2

-1

0

1

2

3

4

5

Mrs G

Data on the last recession (2)

Percentage change from previous period, at Constant Prices

UK Household Consumption

Source: Reuters EcoWin

88 89 90 91 92 93

Per

cent

-2

-1

0

1

2

3

4

5

6

7

8

Mrs G

Data on the last recession (3)

Output Gap (Difference between actual and potential GDP), Unemployment - claimant count measureThe Output Gap and Unemployment in the UK

Output gap of the total economy Unemployment, Rate, Claimant count, SASource: Reuters EcoWin

Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q390 91 92 93

Per

cen

t

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

Unemployment

Output gap

Mrs G

Recession…

• In a recession what happens to

• Growth?• Consumer spending?• Employment?• Business confidence? • Would you INVEST or rationalise in a

downturn/slump?• Consumer confidence? • Would you spend, invest or borrow in a

downturn/slump?

Mrs G

Recession and businesses

• What would the impact be of a recession in the following businesses?

• Gym membership• Restaurants• Bakers• Tobacco companies• Construction firms• Car dealers• Jewellers• Vegetable market stalls

Are there any products that we would buy more

of in a recession?

Think back to elasticity and luxury/inferior

goods!

Mrs G

Business and a Boom!

• A boom occurs when national output is rising at a rate faster than the trend rate of growth…i.e. faster than Govt expects!

• It is characterised by HIGH consumer spending, high business confidence, investments and profits!

• There is a lot more output.

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In a boom, what happens to ….

• Growth?• Consumer spending?• Employment?• Business confidence? Would you INVEST

or rationalise in a Boom?• Consumer confidence? Would you spend,

invest or borrow in a boom?

Can you explain why?

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Boom – good or bad for business?

Good issues

• Easy to sell goods• Business grows• Take on new workers• More investment in

new technology• Business profits

Bad issues

• What if business it at maximum capacity?

• How easy is it to recruit new workers?

• If everyone is employed…what will this do to wages?

• Higher costs = inflation!

Mrs G

Business strategy to survive a recession

• What strategies would you use in each department?

• Marketing• Operations

Management?• Accounts• HRM

• Take one business that should be concerned with a recession and decide on a strategy to manage a recession….

• Gym • Jeweller• Clothing retailer• Restaurant• Local builder

Mrs G

The Need for Macroeconomic Stability

• Large fluctuations in output, employment and inflation add to uncertainty for businesses and consumers, and can reduce the economy's long-term growth potential

• Stability allows businesses, individuals and the Government to plan more effectively for the long term, improving the quality and quantity of investment in physical and human capital and helping to raise productivity– Adapted from the Budget Statement, April 2003

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Characteristics of an Economic Boom

• Strong and rising level of AD• Often driven by fast growth of consumption• Rising employment and real wages• High demand for imported goods & services• Government tax revenues will be rising

quickly• Company profits and investment increase• Increased utilisation rate of existing

resources• Danger of demand-pull and cost-push

inflation if the economy overheats

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Characteristics of an Economic Recession

• Declining aggregate demand for UK output • Contracting employment / rising

unemployment• Sharp fall in business confidence & profits • Decrease in fixed capital investment

spending• Reduced inflationary pressure• Falling demand for imports• Increased government borrowing • Lower interest rates from central bank

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Construction projects and the multiplier effect

• Major construction projects such as the new Terminal 5 building at Heathrow can have big multiplier effects– Thousands of people

are employed within the project

– Their incomes are re-injected into the local economy

– Companies supplying to the project will also increase their own spending

Mrs G

Quick Questions

• What stage of the business cycle do you think the UK Economy is in now?

• How is the business cycle measured?

• Why does Investment fluctuate more than consumption in the business cycle?

• What 2 ways might a business benefit from a recession?

Mrs G

HOMEWORK

• Read UNIT 62 p433 to 437.

• Collect a NEWS article on an economic issue – today is the BUDGET – find an issue in the news/paper about the budget & business/consumers!