Unit 10 The Business Cycle.ppt

Unit 10 The Business Cycle 10-1 What is business cycle Business cycle refers to more or less regular swings or wave-like fluctuations in the pace of a countrys economic growth, well above and well below the long-term trend in the growth rate of total production; the ups and downs of overall business activity, as evidenced by surges and declines in GNP and GDP, unemployment rates, and the general price level; the boom-and-bust pattern of recession (or depression) and recovery. BOOM: A period of fast economic growth. Output is high due to increased demand, unemployment is low. Business confidence may be high leading to increased investment. Consumer confidence may lead to extra spending. SLUMP: A period when output slows down due to a reduction in demand. Confidence may begin to suffer. RECESSION: A period where economic growth slows down and the level of output may actually decrease. Unemployment is likely to increase. Firms may lose confidence and reduce investment. Individuals may save rather than spend. RECOVERY: A period when the economy moves between recession and a boom. WHAT HAPPENS IN A BOOM? - Businesses produce more goods- Businesses invest in more machinery- Consumers spend more money. There is a FEELGOOD FACTOR- Less money is spent by the Government on unemployment benefits- More money is collected by the Government in income tax and VAT- Prices tend to increase due to extra demand WHAT HAPPENS IN A RECESSION? - Businesses cut back on production- Some businesses may go bankrupt- Consumers spend less money. Fall in FEELGOOD FACTOR- Individuals may lose their jobs- More money is spent by the Govt on unemployment benefits- Less money is collected by the Govt in income tax and VAT- Prices start to fall 10-2 Economic theory and business cycles Economic theories on business cycles What causes business cycles has been one of the hottest and longest running theoretical debates in political economy. There is a fair amount of agreement on wh