Economic Growth: The Economic Cycle (Edexcel IGCSE Economics)
The Economic (Business) Cycle
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2.1.1a
- The economic cycle describes the upturns and downturns in the level of a country’s economic activity (Gross Domestic Product or GDP) over time
- Economies do not experience consistent levels of growth over time
The economic cycle diagram shows periods of growth, boom, recession and slump in an economy
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A recession occurs when an economy experiences two consecutive quarters (6 months) or more of negative GDP growth
- Incomes and consumer demand fall, leading to reduced output
- Consumer and business confidence tend to be low
- Business profits fall and unemployment rises
- Deflation may set in
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A slump is an extended period of negative GDP growth
- Unemployment is likely to be high as a result of high levels of business failure
- Significant declines in household incomes and business profits
- Increased government spending on welfare benefits and infrastructure projects to inject demand into the economy may benefit some businesses
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The growth stage is a period of increasing rates of GDP growth
- Disposable income levels rise and lead to increased demand for products
- Inflation usually rises
- This drives an increase in production levels, which leads to a rise in employment levels
- Businesses look to expand and increase profit
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A boom is a period of time when an economy experiences an extended period of increasing rates of GDP growth
- Consumer incomes and business profits are high
- Inflation is also high due to higher demand for goods and services
- Unemployment levels are low and wages are high due to a shortage of skilled workers
The Impact of Economic Growth on Other Indicators
Spec point —
2.1.1a
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Economic growth is considered to be the main contributor to an improvement in the standards of living
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Due to the negative aspects of economic growth, there is much controversy about maintaining it as a central macroeconomic aim
- Instead, arguments for a focus on societal well-being are gaining traction
Impact of Economic Growth on Macroeconomic Objectives
| Macroeconomic Objectives | Impact |
|---|---|
| Employment | - Increasing economic growth rates leads to higher rates of employment - E.g Between 2013-2020, Poland's unemployment rate fell from 13% to below 4%. A positive correlation with its strong economic performance |
| Standard of living | - As employment rises, income increases, and households are better able to afford goods & services - The government receives more tax & may spend it on improving health and education - Tax revenue may be used to redistribute income, reducing inequality |
| Poverty | - E.g Poverty rates in South Korea declined from over 60% in the 1950s to less than 5% by the 2000s as a result of economic growth |
| Productive potential | - Economic growth occurs when there is an increase in the productive potential of an economy - This is demonstrated by an outward shift of the entire PPC - More consumer goods and more capital goods can now be produced using all of the available resources - This shift is caused by an increase in the quality or quantity of the available factors of production |
| Inflation | - Rising economic growth causes demand pull inflation and the purchasing power of people on fixed incomes may fall |
| The environment | - Environmental damage is caused by negative externalities of production and consumption increases - Resources are depleted more rapidly - There can be Improvements in the quality and quantity of environmentally friendly technologies |
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