The Business Cycle (Cambridge (CIE) O Level Business Studies)

The main Stages of the Business Cycle

• The business 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

 Diagram: business cycle

• 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

• 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

  • 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 on Business of Changes in Employment Levels

• Levels of unemployment are closely linked to the business cycle

Unemployment and the Business Cycle

The Impact on Business of Changes in Inflation

• Inflation is the sustained rise in prices in an economy over time

  • In most countries, a price index measures monthly changes in the prices of a range of goods and services and compares these changes to earlier periods

• After several decades of relatively low levels of inflation, much of Europe has recently experienced rapidly increasing inflation

  • In the UK, inflation reached a peak of more than 11% in 2022, driven largely by increased fuel costs

  • By late 2023, Eurozone inflation had returned to a relatively low level of 2.9%

• High or fluctuating levels of inflation can be problematic for businesses

Problems Caused by Rising or Fluctuating Inflation

The Impact on Business of Changes in Gross Domestic Product (GDP)

• Increases in GDP are associated with growth and boom periods

  • Although inflation is likely to rise, increases in household incomes may cancel out higher costs

  • Recruiting and retaining workers may be challenging so businesses may seek to import labour from other countries

  • Interest rates are likely to be high but increased consumer confidence may mean that spending on expensive items remains buoyant

• A fall in GDP is associated with recession and slump periods

  • Despite low inflation, household incomes will be squeezed and discretionary spending will be closely monitored or reduced 

  • Governments may take steps to stimulate the economy, which could lead to better public services, infrastructure or tax benefits for businesses

  • Businesses could take advantage of low-cost borrowing due to low interest rates and invest for future business growth