1. Explanations of the Economic Cycle
A2 Economics Unit 4

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

3. 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.

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

5. % 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

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

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

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

9. The UK Bubble
However… % Interest Rate p.a

10. 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

11. 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’

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

13. Look Out Below

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