Downturn and recession in the business cycle

Gross domestic product (GDP) Gross Domestic Product (GDP) is the value of all the goods and services produced in an economy over a period of time. GDP is therefore a measure of economic activity.

Economic growth Economic growth occurs when there is an increase in GDP from one period of time to the next. If GDP falls, negative growth is occurring. The cyclical nature of economic activity is called the business cycle.

The business cycle

Downturn Characteristics:  Demand falls  Business confidence falls  Firms reduce investment  Firms reduce levels of output  Unemployment rises  Fewer business start-ups & more business closures

Recession A downturn can lead to a recession. A recession is defined as two successive quarters of negative economic growth Characteristics:  Low demand  Low business confidence  Low levels of production  High unemployment  Very little investment  Many business closures & very few start ups

Recession Possible government/Bank of England responses:  Reduce taxes and interest rates to stimulate demand  Increase government spending to stimulate demand

Recession strategies Reduce costs e.g. find cheaper suppliers, reduce the size of the workforce, cut unnecessary expenditure Stimulate demand e.g. reduce prices, increase promotional activity Postpone investment plans Reduce spare capacity e.g. by selling assets or stopping overtime

Recession strategies In contrast to the above, some firms will try to spend their way out of recession because:  New technology may help to reduce costs  Good deals are likely during recession  They may be in a better position to deal with increased demand during economic recovery