Explanations of the Economic Cycle

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Presentation transcript:

Explanations of the Economic Cycle A2 Economics Unit 4

Aims and Objectives Aim: Understand explanations of the economic cycle Describe different explanations of economic cycle Analyse speculative bubbles in UK and World Economy

Speculative Bubbles Rapid economic growth can lead to a rapid rise in asset prices, as people seek to buy these assets, such as housing. Causing a speculative bubble. When people realise asset prices have risen above their real values, they tend to sell them in an attempt to make profit before its too late! Bubble bursts, destroying consumer and business confidence. http://news.bbc.co.uk/1/hi/programmes/newsnight/9677271.stm

The UK Bubble Source: M Young (2010) UK Household Sector Spending: the Significance of Household’s Accumulation of Assets and Liabilities

% of annual disposable income Financial Liabilities UK Household Debt September 1988 September 2008 £ billions % of liabilities % of annual disposable income Financial Liabilities 311.2 100.0 109.5 1568.3 174.8 Secured Debt 213.7 68.9 75.2 1182.7 75.4 131.8 Unsecured Debt 97.5 31.1 34.4 385.6 24.6 43.0 Secured Debt: Property acts as collateral for the debt, which can be used to pay off the debt if necessary. Unsecured Debt: No property is needed as collateral. Usually used to fund purchase of small items. Source: M Young (2010) UK Household Sector Spending: the Significance of Household’s Accumulation of Assets and Liabilities

The UK Bubble Source: M Young (2010) UK Household Sector Spending: the Significance of Household’s Accumulation of Assets and Liabilities

The UK Bubble Source: M Young (2010) UK Household Sector Spending: the Significance of Household’s Accumulation of Assets and Liabilities

The UK Bubble Source: M Young (2010) UK Household Sector Spending: the Significance of Household’s Accumulation of Assets and Liabilities

The UK Bubble However…. http://www.bbc.co.uk/news/business-17048916 http://www.bbc.co.uk/news/business-16409369 http://www.bbc.co.uk/news/business-15226513 360% Interest Rate p.a

Political Cycles Political parties, may try to engineer a boom Gordon Brown selling off gold! Once election over government may then deflate AD to avoid demand pull inflation. Government Failure

Inventory Changes Can cause recessions. Stocks of un-finished goods build up when firms are too optimistic about demand for their products. Knock on effect is that they are forced to cut production by more than the original fall in demand. ‘De-stocking’

Outside Shocks Demand shocks and Supply Shocks Storm damage from hurricane Katrina in New Orleans affected both demand and supply.

Look Out Below http://www.economist.com/blogs/dailychart/2011/11/global-house-prices

Exam Question Exam Question June 2011 Context 1 Questions 1,2,3