Section 6
6.1 The Business/ Trade Cycle
An economy will not always go through an economic growth; there
is usually a cycle, as shown below.
Growth– when GDP is rising, unemployment is falling and there are
higher living standards in the country. Businesses will look to
expand and produce more and will earn high pro ts.
Boom– when GDP is at its highest and there is too much spending,
causing in ation to rapidly rise. Business costs will rise and rms
will become worried about how they are going to stay pro table in
the near future.
Recession– when GDP starts to fall due of high prices, as demand
and spending falls. Firms will cut back production to stay pro table
and unemployment may rise as a result.
Slump– when GDP is so low that prices start to fall (de ation) and
unemployment will reach very high levels. Many businesses will
close down as they cannot survive the very low demand level. The
economy will suffer.
fl fi fl fi fifi
,(When the government takes measures to increase demand and
spending in the economy to take it from a slump to growth, it is
called as the ‘recovery’ period). The cycle repeats.
Economic Objectives
Here, we’ll look at the different economic objectives a government
might have and how their absence/negligence will affect the
economy as well as businesses.
• Maintain economic growth: economic growth occurs when a
country’s Gross Domestic Product (GDP) increase i.e. more
goods and services are produced than in the previous year.
This will increase the country’s incomes and achieve greater
living standards.
Effects of reducing GDP (recession):
• As output falls, fewer workers will be needed by rms, so
unemployment will rise
• As goods and services that can be consumed by the
people falls, the standard of living in the economy will
also fall
• Achieve price stability: in ation is the increase in average
prices of goods and services over time. (Note that, in ation, in
the real world, always exists. It is natural for prices to increase
as the years go by. In the case there is a fall in the price level,
it is called a de ation) Maintaining a low in ation will help the
economy to develop and grow better.
Effects of high in ation:
• As cost of living will have risen and peoples’ real
incomes (the value of income) will have fallen (when
prices increase and incomes haven’t, the income will buy
lesser goods and services- the purchasing power will fall).
fl fl fl fl fi fl
, • Prices of domestic goods will rise as opposed to foreign
goods in the market. The country’s exports will become
less competitive in the international market. Domestic
workers may lose their jobs if their products and rms
don’t do well.
• When prices rise, demand will fall and all costs will rise
(as wages, material costs, overheads will all rise)-
causing pro ts to fall. Thus, they will be unwilling to
expand and produce more in the future.
• The living standards (quality of life) in the country may fall
when costs of living rise.
• Reduce unemployment: unemployment exists when people
who are willing and able to work cannot nd a job. A low
unemployment means high output, incomes, living standards
etc.
Effects of high unemployment:
• Unemployed people do not produce anything and so, the
total output/GDP in the country will fall. This will in turn,
lead to a fall in economic growth.
• Unemployed people receive no incomes, thus income
inequality can rise in the economy and living standards
will fall. It also means that businesses will face low
demand due to low incomes.
• The government pays out unemployment bene ts to the
unemployed and this will rise during high unemployment
and government will not enough money left over to spend
on other services like education and health.
• Maintain balance of payments stability: this records the
difference between a country’s exports (goods and services
sold from the country to another) and imports (goods and
services bought in by the country from another country). The
exports and imports needs to equal each other, thus balanced.
Effect of a disequilibrium in the balance of payments:
• If the imports of a country exceed its exports, it will cause
depreciation in the exchange rate– the value of the
fi fi fi fi
6.1 The Business/ Trade Cycle
An economy will not always go through an economic growth; there
is usually a cycle, as shown below.
Growth– when GDP is rising, unemployment is falling and there are
higher living standards in the country. Businesses will look to
expand and produce more and will earn high pro ts.
Boom– when GDP is at its highest and there is too much spending,
causing in ation to rapidly rise. Business costs will rise and rms
will become worried about how they are going to stay pro table in
the near future.
Recession– when GDP starts to fall due of high prices, as demand
and spending falls. Firms will cut back production to stay pro table
and unemployment may rise as a result.
Slump– when GDP is so low that prices start to fall (de ation) and
unemployment will reach very high levels. Many businesses will
close down as they cannot survive the very low demand level. The
economy will suffer.
fl fi fl fi fifi
,(When the government takes measures to increase demand and
spending in the economy to take it from a slump to growth, it is
called as the ‘recovery’ period). The cycle repeats.
Economic Objectives
Here, we’ll look at the different economic objectives a government
might have and how their absence/negligence will affect the
economy as well as businesses.
• Maintain economic growth: economic growth occurs when a
country’s Gross Domestic Product (GDP) increase i.e. more
goods and services are produced than in the previous year.
This will increase the country’s incomes and achieve greater
living standards.
Effects of reducing GDP (recession):
• As output falls, fewer workers will be needed by rms, so
unemployment will rise
• As goods and services that can be consumed by the
people falls, the standard of living in the economy will
also fall
• Achieve price stability: in ation is the increase in average
prices of goods and services over time. (Note that, in ation, in
the real world, always exists. It is natural for prices to increase
as the years go by. In the case there is a fall in the price level,
it is called a de ation) Maintaining a low in ation will help the
economy to develop and grow better.
Effects of high in ation:
• As cost of living will have risen and peoples’ real
incomes (the value of income) will have fallen (when
prices increase and incomes haven’t, the income will buy
lesser goods and services- the purchasing power will fall).
fl fl fl fl fi fl
, • Prices of domestic goods will rise as opposed to foreign
goods in the market. The country’s exports will become
less competitive in the international market. Domestic
workers may lose their jobs if their products and rms
don’t do well.
• When prices rise, demand will fall and all costs will rise
(as wages, material costs, overheads will all rise)-
causing pro ts to fall. Thus, they will be unwilling to
expand and produce more in the future.
• The living standards (quality of life) in the country may fall
when costs of living rise.
• Reduce unemployment: unemployment exists when people
who are willing and able to work cannot nd a job. A low
unemployment means high output, incomes, living standards
etc.
Effects of high unemployment:
• Unemployed people do not produce anything and so, the
total output/GDP in the country will fall. This will in turn,
lead to a fall in economic growth.
• Unemployed people receive no incomes, thus income
inequality can rise in the economy and living standards
will fall. It also means that businesses will face low
demand due to low incomes.
• The government pays out unemployment bene ts to the
unemployed and this will rise during high unemployment
and government will not enough money left over to spend
on other services like education and health.
• Maintain balance of payments stability: this records the
difference between a country’s exports (goods and services
sold from the country to another) and imports (goods and
services bought in by the country from another country). The
exports and imports needs to equal each other, thus balanced.
Effect of a disequilibrium in the balance of payments:
• If the imports of a country exceed its exports, it will cause
depreciation in the exchange rate– the value of the
fi fi fi fi
