1. Growth of the Economy And Cyclical Instability

2. Content Economic or business cycle
The Nature and Causes of Fluctuations in economic activity
The trend rates of economic growth
The costs and benefits of economic growth
The use and limitations of national income as an indicator of changes in living standards

3. Economic Cycle
This shows the rate of economic growth compared to long term trend rates
The economic cycle shows differences over time between rapid economic growth (boom, recovery) and alternative periods where the economy is not growing or is declining in size (recession or contraction)
The measure used to assess the growth of the economy is the comparison of gross domestic product or GDP over time.

4. GDP - definition GDP – GROSS DOMESTIC PRODUCT
The Market value of all goods and services produced within the country.
(what we produce within the UK/output)

5. What is the Business Cycle?
Also known as the trade cycle
Most economies over time will see an trend of upward progression
Does not grow smoothly – fluctuate going through ups and downs know as the BUSINESS CYCLE
Output
Time

6. Stages of the Business Cycle
Boom – (peak) Fast economic growth
Consumer spending and investment high
Business will have high demand for goods/services
Increasing incomes (increasing competition for workers)
Profits high (high demand for resources = prices rise can lead to inflation)
Wages rising?
High output due to high demand
Steady economic growth
Business and consumer confidence high

7. Stages of the Business Cycle
Recession– (downturn/economic slow down)
Incomes start to fall
Output starts to fall
Possible fall in demand for products
Decline in profit
Lay off workers – unemployment
Consumer (save) and business confidence is low
Reduced investment

8. Stages of the Business Cycle
Slump– (depression)
High unemployment
Consumer confidence low
Investment low
Profits low
Closures
Any growth will be slow

9. Stages of the Business Cycle
Recovery (expansion/ upswing)
Income starts rise
Output increases
Spending and consumer confidence increases
More employment as a result

10. Causes of Economic Growth
Booms / dips in economic growth can occur due to a number of reasons:
Increase in aggregate demand caused by:
An increase in consumption – this may be caused by: a rise in income levels, an decrease in interest rates, house price inflation
A rise in the level of government spending
A balance of payments surplus

11. Cause of Economic Growth
2. Labour shortages – if there are shortages of workers in specific areas it means that the economy will not be able to utilise its resources efficiently and therefore economic growth will slow
3. Increase in demand for imports – this will worsen the balance of payments deficit

12. Demand and Supply side shocks
Supply side and demand side shocks can lead to instability in the economy
Shocks are unexpected events that influence the demand / supply in an economy
As the UK operates in a global market their economy is open to shocks from across the world

13. Demand Side Shocks These can include:
A significant rise or fall in exchange rates in short term
Changes in the rate of economic growth for countries that you trade a lot with
Changes in aggregate demand
A boom in capital expenditure e.g. in construction or ICT

14. Supply Side Shocks These affect the costs and prices of supply
These can include:
Technology
Natural disasters which impact the supply of particular goods e.g. crops
Political situations that influence the supply of particular products e.g. oil

15. Trend rate of economic growth
The trend rate of economic growth shows the rate of economic growth is the average rate of economic growth over a period of time
The trend rate of economic growth is influenced by a number of factors of supply side including:
Investment
Education
Training
Technological change

16. Influences on the trend rate of economic growth - Investment
Investment influences the trend rate of economic growth as higher levels of investment increase AD and expenditure within the economy
In addition investment expenditure means there are more capital goods for workers to use to produce consumer goods therefore increasing the level of output in the economy

17. Influences on the trend rate of economic growth – Education and Training
Education and training can increase the growth rate of the labour force in the economy
These can both increase the trend rate of growth in labour productivity in the UK therefore driving the level of economic growth

18. Influences on the trend rate of economic growth - technology
Changes in technology can reduce the costs of goods in the economy
If the costs of supplying products decreases then production possibility frontier will shift outwards

19. The Costs and Benefits of Economic Growth
There are costs and benefits that are associated with economic growth
Some costs are a result of externalities which occur due to economic growth
Economists focus on the idea of economic growth as being sustainable which means it can continue over the long term

20. The Costs of Economic Growth
Economic growth causes costs for the economy:
Inflation risks – either demand-pull or cost-push
The environment – as output increases negative externalities can increase e.g. pollution
Regional disparities or differences – Can lead to greater differences between rich and poor
Inequalities of income and wealth – these can

21. Benefits of Economic Growth
Economic growth has an accelerator effect on capital investment
Increases taxation for the government
Environmental benefits – if the economy is growing there is more money to invest in cleaner technologies thereby reducing pollution

22. The Benefits of Economic Growth
Economic growth has a number of benefits:
Improvement to living standards and lower rates of poverty – especially in developing countries
Falling levels of unemployment – Economic growth stimulates levels of employment

23. Sustainability of Economic Growth
The aim for most economies is sustainable economic growth
Factors of production are finite and more resources are being used at an increasing rate which means sustainability to economic growth is being questioned
Other renewable resources are being over used so this is decreasing the sustainability of economic growth
If economies are to keep growing at the same rate new ways of using resources and strategies to reduce waste and resource consumption need to be enforced

24. The Use and Limitations of National Income as an Indicator of Changes in Living Standards
Economic data:
GDP
GDP per capita
Disposable income
Working hours
GDP figures show the total amount of income generated in the economy over a year
GDP per capita looks at the income per person in the population
GDP per capita figures allow for comparison between countries
To compare figures they need to be converted into a common currency
To make relevant comparisons also need to look at the differences in the costs of goods and services between countries – purchasing power parity

25. GDP figures alone cant be the only indicator of economic well being
Limitations of National Income as an Indicator of Changes in Living Standards
GDP figures alone cant be the only indicator of economic well being
The black or shadow economy has a larger value in some countries than others and this will distort GDP figures by making them lower than they should be

26. Limitations of National Income as an Indicator of Changes in Living Standards
GDP figures can also be problematic as they fail to account for regional disparities in countries and inequalities in income and wealth
In addition GDP figures don’t offer any insight into quality of life – they could be used with working time figures to get a clearer view of a countries economy

27. Limitations of National Income as an Indicator of Changes in Living Standards
Home working figures are not included in the values and therefore GDP may not be truly representative
GDP could have grown due to an increase in consumption however if this is not matched by an increase in investment then it will lead to problems in the future as there are insufficient capital goods to produce consumer goods needed
Changes in life expectancy increase living standards but are not accounted for by GDP figures

28. Other measures
Other measures that can be used to compare standards of living can be used
These include purchasing power parity which compares the cost of living in different countries
Human development index
Human poverty index

29. Summary
The economic cycle shows the rate of economic growth over time in an economy
Boom periods are characterised by rapid levels of economic growth
A recession is a period where economic growth has declined
Changes in the rate of economic activity can be caused by factors that influence aggregate supply or increase the productive capacity of the economy
Fluctuations in economic activity are caused by demand and supply side
The trend rates of economic growth shows the average rate of growth in the economy over a period of time
Economic growth provides benefits including higher levels of employment and standards of living
Economic growth can also lead to costs including environmental damage and inflationary pressures
National income statistics can be used to compare the standard of living between countries
GDP figures can be crude indicators of economic growth and other factors should be considered