2.5.3 - Trade (Business) Cycle

• The trade cycle:

  ● This is the periodic but irregular up and down movements in economic activity, measured by fluctuations in real GDP and other macroeconomic variables. Each business cycle is different, but they tend to have four main phases: boom, downturn, recession (slump) and recovery .
• The trade cycle:

  A) boom

  B) Recovery

  C) Recession

  D) Slump

  
• Characteristics of a boom:

  • High rates of economic growth
  • Near full capacity or positive output gaps
  • (Near) full employment
  • Demand-pull inflation
  • Consumers and firms have a lot of confidence, which leads to high rates of investment
  • Government budgets improve, due to higher tax revenues and less spending on welfare payments
• A recession is defined as negative economic growth over two consecutive quarters
• Characteristics of a recession:

  • Negative economic growth
  • Lots of spare capacity and negative output gaps
  • Demand-deficient unemployment
  • Low inflation rates
  • Government budgets worsen due to more spending on welfare payments and lower tax revenues
  • Less confidence amongst consumers and firms, which leads to less spending and investment
• The trade cycle has large impacts on individuals within the economy. During recessions, consumers will see lower incomes and living standards and firms will see lower revenues and profits