THE ECONOMIC CYCLE

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What is a business cycle?
Business Studies You MUST focus on the impact on
businesses!
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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

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The UK Economic Cycle
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)
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Data on the last recession (2)
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Data on the last recession (3)
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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?

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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!
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Business and a Boom!

• A boom occurs when national output is rising at a
  rate faster than the trend rate of growthi.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 employedwhat will this do to
  wages?
• Higher costs inflation!

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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

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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

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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?

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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!