5.2. THE BUSINESS CYCLE
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This video is relevant for this section despite it saying that it is for AQA.
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Business cycles are the recurring fluctuations that occur in real GDP over time. The trend rate of growth is the long run average rate of growth in an economy over time. Persistent positive deviations from tend are known as boom period and persistent negative deviations from trend are busts/ down turns.
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The business cycle. It measures the changes in GDP against time. The orange line is the trend rate of economic growth. It is flat because the trend rate of growth will be the same each year.
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The business cycle can also be plotted with real GDP against time. The orange line is the trend rate. It is upwards sloping because the economy will be growing in size.
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A recession is where there are at least two successive quarters of negative economic growth in an economy. There are a range of indicators that can indicate the health of an economy rather than just looking at the growth rate. For example, we can have leading variables, which are variable that change just before another variable changes. The stock market is an example. If investors are worried about the state of the economy then stock prices will start to fall and this can have wider implications on the economy. Hence why central banks keep an eye on stock market activity. In August 2015 the stock market in China started to fall, as investors were worried about the health of the Chinese economy. This led to investors all around the world being concerned about the health of the global economy and what the future will bring. Stock markets in the US and the whole of Europe fell by around 5%. This has lead to the Federal Reserve (central bank of America) debating whether to delay the point where they would raise their interest rates. However, there are other reasons why the Fed are thinking about delaying the rise. Another type of variable is a lagging variable. This is where one variable changes (variable A) and this causes a causes a change to be observed in another variable (variable B). Here we would say that variable B is a lagging variable of variable A. An example would be unemployment with respect to consumption level. As consumption levels in an economy fall, less goods and services are demanded. This causes firms to build up their stocks. Firm do not know straight away that their sales are falling so continue to produce the good. Also, firms are often tied into contracts with employees and it takes a while for firm to make employees redundant. Hence, why unemployment lags consumption.