trade-business-cycle

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Trade (Business) Cycle

A trade (business) cycle refers to the changes in real GDP that occur in an economy over time
- This is the actual growth
The real GDP will fluctuate above and below the long-term trend rate of growth
There are four recognisable points in the cycle
- Peak/boom; slowdown/downturn; recession, recovery

Graph illustrating real GDP over time, showing trend growth, actual growth, positive and negative output gaps, boom, slowdown, recession, and recovery. — **A Trade Cycle Diagram that illustrates the fluctuations of real GDP (actual growth) around long-term trend growth**

Diagram analysis

A positive output gap is identified as growth of real GDP that is above the trend
A negative output gap is identified as growth of GDP that is below the trend
There is often a natural flow through the different stages from boom to slowdown to recession to recovery
This flow of real GDP can be moderated by government intervention
- E.g. increasing taxes in a boom period or increasing spending in a recession

A Table Explaining the Characteristics of a Boom and Recession

Characteristics of a Recession	Characteristics of a Boom
Two consecutive quarters (6 months) or more of negative economic growth	Increasing/high rates of economic growth
Increasing/high unemployment	Decreasing unemployment and increasing job vacancies
Increasing negative output gap and spare production capacity	Reduction of negative output gap or creation of a positive gap. Spare capacity is reduced or eliminated
Low confidence for firms/households	High confidence and more risky decisions taken
Low inflation	Increasing rate of inflation – usually demand pull
Increase in government expenditure perhaps leading to a great budget deficit	An improvement in the government budget as tax revenues rise and expenditure falls

Examiner Tips and Tricks

You will often be examined on the characteristics of the trade cycle. Remember to demonstrate critical thinking around the assumptions of the model. For example, some firms may thrive during a recession as consumers switch to purchasing inferior goods (Poundland, Aldi, Lidl, Primark).

Additionally, the components of aggregate demand do not rise/fall at the same rate. For example, during recovery, consumption may increase well ahead of investment by firms.

An economy may also experience some fundamental restructuring during a prolonged recession, and the composition of real GDP growth may be significantly different from what it was before the recession.

Economics_A-level_Edexcel

trade-business-cycle