2.5.3 Trade(business) cycle

• Business cycle


  The stage of economic growth that the economy is in
• Business cycle


  1. Periods of booms and busts

  2. Real output increases during recovery stage

  3. Real output falls during recessions

  4. Governments may increase spending to stimulate economy during recessions

  5. Governments may reduce spending during periods of economic growth
• 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
• 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