Economic Growth: The Economic Cycle (Edexcel IGCSE Economics)

The Economic (Business) Cycle

• 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

• 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

• 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

• 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

• 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

• Economic growth is considered to be the main contributor to an improvement in the standards of living

• 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