economic growth & business cycle
TRANSCRIPT
Economic Growth & Business Cycle
Statements which you might have heard or read in newspaper
“British Rate Still at 0.5% As Growth Stays Slow”-New York Times
“Recession started in December 2007” –Reuters “China Forecasts 7.6% Economic Growth in 2013”-Wall
Street Journal “The Great Depression (1929-39) was the deepest and
longest- lasting economic downturn Did you ever wanted to know what does these
statements or the similar types of statements which you might have read or heard mean?
Reasons why does economies go through Business Cycles
It is unusual for economic growth to be achieved at steady, constant rate
Economies tends to grow at different rates These experiences a wide ranging fluctuations in
there trade, and production These experiences upturns and downturns in
real GDP and Economic activities
Business Cycle The Business Cycle is upwards and
downwards movement of the level of Real GDP
Upward movement refers to the expansion(Growth) in the level of economic activity,
Downward movement is the contraction(recession) in the level of economic activity,
Extremes of business cycle include boom/peak and depression
Its is usually drawn on a graph vertical axes of the graph is labelled with
Real GDP/Level of economic activity Horizontal axes is labelled with the time
period
A basic Illustration Of Business Cycles.
It has a cyclical nature One cycle looks concave or like a hill Trough is the minimum turning point of
the graph Maximum turning point is peak
The graph shows the typical business cycle of an economy
Shape and it’s Nature
Stages of Business Cycle
Peak
RecessionDepression
Growth/recovery
History of Business Cycle
The Great Depression of 1930
The Great Recession of 2008
GDP, Real GDP and GNP GDP(Gross Domestic product) is the value
goods and services produced in an economy over the period of one year
Real GDP(GDP Deflator) is when inflation is subtracted from GDP
GNP is GDP minus Net property income from abroad
What the fluctuations in GDP tells us about? A percentage increase in GDP compared to
previous years is economic growth A fall in GDP compared to previous years is
contraction or recession
Include only goods and services purchased by their final users,
Counts only the goods and services produced within the country's borders,
Exclude financial transactions and transfer payments,
Measures both output and income, which are equal.
Ways of Measuring GDP
If we assume that in an economy
All of the output produced within an economy is sold,
Whole of the income earned within an economy is spent.
Then we can conclude,National Income=National output=National
Expenditure The above makes up the circular flow of income
One person’s spending is another’s income
Realistic four-sector economies evolve more complexities……
Injections into the circular flow of income
1. Consumption by private individuals(C)
2. Government expenditure(G)
3. Investment(I)4. Imports (X)
Withdrawals from the circular flow of income
1. Saving2. Taxes3. Imports(M)
Circular flow of Income
The total demand for good and services in an economy, at different price levels, It always for a given time period
This is the demand for GDPAD curve slopes downwards
from left to right Components of the Aggregate
DemandAD=C+I+G+(X-M)
Definition of Aggregate Demand(AD)
Typical Aggregate Demand Curve
measures the volume of goods and services produced within the economy at a given price level
represents the ability of an economy to deliver goods and services to meet demand
It is initially more elastic as more factors are employed
At full employment level of resources it becomes perfectly inelastic as supply cannot be increased
At this point cost of the firms rises compete for resources and this leads to rising prices
Aggregate supply (AS)
Inflationary gap
Aggregate demand exceeds an economy's productive potential
We tend to see rising inflation and a worsening trade situation at these times
This situation occurs when the economy has been growing for some time leading to a build up of inflationary pressure as demand rises.
Deflationary Gap Deflationary gap prevails when ag gregate demand
(AD) is less than aggregate supply (AS) at full employment level of output
Deflationary gap depicts unemployment situa tion attributable to the fact that at full employment level of output, AD <AS
Measured as the difference between AD and AS at full employment
Deflationary gap, and the resultant conditions of unemployment and sluggish economic activity, will persist until a higher level of aggregate demand consistent with full employment is achieved
To Encourage Economic Growth Keep low levels of Inflation To increase the balance of Payments surplus Reduce the levels of unemployment
Four Government Economic Aims
Inflation Refers to the persistent rise in the
general price level of goods and services
Too much money chasing too few goods
Loss of purchasing power of the unit of money
Government aims keep the low or mild levels of inflation
Unemployment Occurs when people are without work
and actively seeking work Unemployment rate is a measure of
the prevalence of unemployment it is calculated as a percentage by
dividing the number of unemployed individuals
Government always tries to lower the Unemployment
Balance of payments Accounting record of all monetary
transactions between a country and the rest of the world
These transactions include payments for the country's exports and imports of goods, services, financial capital, and financial transfers
If the difference between exports and imports is negative then there is BOP deficit
If the difference between exports and imports is positive then there is BOP surplus
Governments usually aims for BOP surplus
Economic growth Increase in the long-term productive
potential of an economy Increase in the value of GDP compared to
previous yearsMeasured by percentage rate of increase
in GDPValue of GDP/population is GDP per capita Increase in GDP per capita is intensive
growth
Demand Side Causes Increase in
Aggregate Demand due to
1. Increased wages2. Increased
government spending
3. Fall in value of currency
4. Rising house prices
Supply side causes Increase in
Aggregate Supply1. Expanding
productive capacity
2. Discovering new natural resources
3. Technological improvements
4. Increase in labour productivity
Causes of Economic Growth
Due to economic growth national output expands
National income increasesCost of production are lowerProfits(𝞹) of all the firms increasesBusiness confidence level risesEmployment level rises in an economyAggregate Demand for goods and services
increases Interest rates are lowers so, Investments in an economy increasesBalance of surplus is increased
Growth Phase of Business Cycle
Potential benefits gained by Economies achieving Growth
Costs of Growth to the Economies
Improvements in living standards
Negative Externalities
Increase in Employment level
Growth that leads to environmental damage
Greater business confidence
Rise in General Price level
Balance of payment Surplus
The depletion of the global resource base
Higher profits of the firms producing goods & services
Impact of global warming
Technical Advancements
Widening of inequalities of income distribution
Growth Rates over the 50 years of United States
Pakistan’s GDP Growth Rates over the last 10 years
Growth to boom
Multiplier Effect 1. It is the number of times a rise in national income
exceeds the rise in injections of demand that caused it
2. It works on the mechanism that one person’s income is another’s expenditure
3. This can lead to a bigger eventual effect on output and employment
4. It shift’s the Aggregate Demand curve to the right hand side
5. Formula of Multiplier
How does the multiplier works ?
Consider a foreign firm invest £300 in the UK by opening up a new plant of a factory in the UK
This may set off a chain reaction of increases in expenditures
Firms which produce capital goods and construction firm will see an increased incomes and profits
If the Marginal propensity of consume is 3/5Then firms and their employees will spends 3/5
of their income which will lead to an increase of £180 in the national income. This is the first round of spending
Affects of Multiplier on aggregate demand
BOOM An economic boom is a period characterized by an
increase in output and rapid economic growth. A period of significant output within a population. The period is marked by;1. productivity increases2. sales increases,3. wage increases and4. rising demand.
http://www.businessdictionary.com/definition/economic-boom.html#ixzz2so61riBw
Consumer confidence
High demand Output level Investment
Features of Boom
Full Employment level
Profits Business
failure
Features of Boom
During the boom confidence of consumers is high.
Consumer confidence:
HIGH DEMAND:
As the consumer confidence and spending is high during the boom so the demand of production is high.
OUTPUT LEVEL:
Because of the high consumer confidence, high spending and high demand, business have to produce more items to satisfy the demand of consumers, so the output level is high.
Investment:
As the demand of production is high during boom so the business need more capital to produce more items, so the investments and the demand of the bank loan is high, during the boom.
During the boom, because of the high demand of production, business has needed more employs for the purpose of increasing production level so the employment level is high during the boom.
As the everything are high during the boom so the profits are high during the boom.
BUSINESS FAILURE:
As the everything relating to business is beneficial for the business, so during the boom there is very less chances to any business failure.
INFLATION
Although everything in the boom is beneficially for the economy of any country, but the negative
point of boom is
A constant increase in the level of consumer prices or a constant decrease in the purchasing power of money, caused
by an increase in available currency and credit beyond the proportion of available goods and services.
http://www.answers.com/topic/inflation#ixzz2soGzcvnC
Cost-push inflation is due to wage increases that cause businesses to raise prices to cover higher labor costs, which leads to demand for still higher wages (the wage-price spiral),
Demand-pull inflation results from increasing consumer demand financed by easier availability of credit;
Monetary inflation caused by the expansion in money supply (due to printing of more money by a government to cover its deficits).
SHORT SUMMARY OF B OOM’S FEATURES:
Industrial Production High
Sales Increase
Profits High
Investment High
Employment Increase
S H O R T S U M M A RY O F B O O M ’ S F E AT U R E S :
Bank Loan High Demand
Interest Rate High
Business Failure Zero
Wage High
Cost of Production Increases
Recession phase of Business
Cycle
Downward trend in Business cycle Decline in real GDP Production Employment Fall in trade Falling Incomes Lower prices Business pessimism Falling Business Confidence Lower interest rates and cheaper bank
loans Opportunities for capital investment due
to lower interest rates
Features
CAUSES OF RECESSION Due to Highest level of Demand pull
inflation and high interest rates: 1. Aggregate Demand falls2. Which leads to low levels of
production3. Squeezing profits 4. Redundancies 5. Reverse multiplier effect 6. Trade surplus turning to deficit
And Ultimately booming situation turns into a recession…..
Global Recession of 2008An on-going marked global economic
decline that begun in December 2007crisis started with a financial liquidity crisis
at the interbank lending market and US housing bubble burst
During the Great Recession:1. Jobs were Lost2. Unemployment and underemployment 3. The Job shortage4. Falling incomes , rising poverty 5. Other fallouts
Depression Phase of the Business Cycle
Recession
Depression Prices start rising Wages decrease Demand decreases Production of goods hampered Liquify of stocks Production decreases Labour unemployed
Depression sets in..
DEPRESSION PHASE
Definition of Depression:Periods labeled with depression are marked
by a substantial and sustained shortfall of the ability to purchase goods relative to the amount that could be produced using current resources and technology.
Another proposed definition:Depression is the phase in which there is :A decline in real GDP exceeding 10%,orA recession lasting 2 years or more.
Depression is : Prolonged economic downturn Begins with two consecutive quarters of
negative GNP growth… Bottom phase of BUSINESS CYCLE, and Its length vary depending upon economic
conditions…
FEATURES OF DEPRESSION Fall in volume of output and trade Fall in income and rise in unemployment Decline in consumption and demand Fall in interest rates Deflation Contraction of bank credit Fall in MEC (Marginal efficiency of capital)
and investment
DEPRESSION ---- FROM HISTORY
In history we see A big depression in the world !
That is THE GREAT DEPRESSION 1930’s
GREAT DEPRESSION IS : Best known depression… Started with WALL STREET CRASH OF 1929… Between 1929 and 1933, GNP of US
decreased by 33%, While the rate of unemployment increased to
25% (industrial unemployment alone rising to 35% approx.…)
MAIN CAUSES : Loose money policies of Federal Reserve
during latter 1920’s… Misallocation of capital.. Based on Easy and Inexpensive credit..
GREAT DEPRESSION
After a decade of prosperity US was thrown into despair on….
Black Tuesday October 29,1929
Period: 1929 – early 1940’s
There are five steps that defines THE GREAT DEPRESSION :
Stock market crashed The dust bowls Riding the rails Roosevelt and the New Deal The end of great depression
THE STOCK MARKET Stock prices plummeted Panic struck Masses of stock sellers No buyers for stock Surest way to become rich
became the PATH OF BANKRUPTCY…
Withdrawal of money from banks…
Decreased spending by consumers
Businesses closed Unemployment of workers
THE DUST BOWL Great plains were hit hard by DROUGHT,And horrendous DUST STORMSFarmers without crops Debt on small farmersFamilies of farmers were homeless and
unemployed
RIDING THE RAILS Unemployed travelling for JOBS Vacancy only for some unemployed Jobless people lived in SHANTYTOWN(known as
HOOVERVILLES) Okies and Arkies in CALIFORNIA
ROOSEVELT AND THE NEW DEAL Blames on President HERBERT HOOVER Hoovervilles Hoover Blankets Hoover Flags Hoover Wagons New President FRANKLIN D.ROOSEVELT Programs – New Deal AAA (Agricultural Adjustment
Administration) CCC (Civilian Conservation Crops) WPA (Work Progress Administration)
THE END OF GREAT DEPRESSION
New Deals of Roosevelt Entrance in World War II Crops were grown to send food to overseas Factories started Men were trained to become soldiers…
Adverse Social ,Economic And Political Effects Of Recession & DepressionGDP declines.Unemployment.mental healthCrimesSuicides Consumer spending might go down.Competition could get fierce.Unpredictable business.Falling Standard of LivingBankruptciesPolitical unpopularity
The Other Side Of Recession Or Depression……..
Capital assets become cheaper which opens up the opportunities for Investment
Demand for the firms producing Inferior goods increases
Improved relationships between employers and employees
Closure of Inefficient factories or departments of a firm
Due to Low inflation increase in demand for exports
Type of Producers
Period of Economic Growth
Period of Recession
Producers of luxury goods and services-e.g. cars
• Increase in range of goods and services
• Raise prices to increase profit margins
• Promote exclusivity and style• Increase output
• May not reduce prices for fear of damaging long-term image
• Credit terms to improve affordability
• Offer promotions• Widen product range with lower-
priced models
Producers of normal goods and services-e.g. tinned food
• Add extra value to product-better ingredients/improved packaging
• Brand image may attract exclusive tag
• Do nothing-sales not much affected anyway
• Lower prices • Promotions • Do nothing-sales not much
affected anyway.
Producers of inferior goods and services-e.g. very cheap clothing
• Attempt to move product upmarket
• Add extra value to the product- e.g. higher quality
• More exclusive or better designed products
• promote good value and low prices
• Free consumer tastes • Increase range of distribution
Strategies a business could adopt during the different phases of business cycle
Fiscal Policy Fiscal policy is the use of government revenue
collection (taxation) and expenditure (spending) to influence the economy
Expansionary fiscal policy The expansionary fiscal policy involves the
government attempting to increase aggregate demand, the two main instruments the government use to achieve this is government spending and taxation.
Contractionary fiscal policyContractionary fiscal policy is a government
policy of reducing spending and raising taxes
Policies To Overcome Recession And Depression
Expansionary Fiscal Policy :
Increase in government spending's
Decrease in taxation
Increases aggregate demand and result in
Economic growth
Contractionary Fiscal Policy :
Decrease in government spending's
Increase in taxation
Decreases aggregate
demand and result in lowering the
rates of economic growth
Monetary Policy Process by which the monetary authority of a
country controls the supply of moneyExpansionary monetary policyContractionary monetary policy is a form of
economic policy used to fight inflation which involves decreasing the money supply in order to increase the cost of borrowing which in turn decreases GDP and dampens inflation
Contractionary Monetary Policy Expansionary monetary policy is an increase
in the quantity of money in circulation, with corresponding reductions in interest rates, for the expressed purpose of stimulating the economy to correct or prevent a business-cycle contraction and to address the problem of unemployment.
Expansionary Monetary Policy :
Increase in supply of money
Decrease in interest rate
Contractionary Monetary Policy :
Decrease in money supply
Increase in Interest rate
Trade policies which a Government could use to Avoid
Recession/DepressionProtectionist PolicyProtectionism is the economic policy of
restraining trade between states through methods ;
1. tariffs on imported goods2. restrictive quotas3. Subsidies 4. Custom duties 5. Embargoes
Exchange Control Policy The way an authority manages its currency in relation to other currencies and the foreign exchange market through its managed exchange rate systems
Both of the above policies boost the trading activities within the economy by exporting more and importing lesser quantities
Which ultimately results in flows of income into the economy contributing to the national income