‘15 days of Economics’

Day 11: What on Earth is an Economic Cycle?

The Economic Cycle is represented by a line graph with the variables: Time and Real GDP. In the cycle, a booms occur where growth increases at a rapid rate. When growth falls, a recession occurs when there are 2 successive quarters of negative growth. This is represented on the graph by a downwards gradient from recessions and upwards gradient from booms.

When the economy begins to repair, this is called a recovery and the growth returns to the trend trajectory. When actual growth is greater than the trend growth, there is a positive output gap. However, when the actual growth is less than the trend growth, there is a negative output gap.

Boom: Growth faster than trend, high profits, low unemployment, high consumer and business confidence, high demand and imports, rising tax revenues and inflation.

Recession: Declining actual growth, high unemployment, sharp falls in confidence and investment, de-stocking and discounting, fall in housing prices and construction, lower inflation, loose policy and low demands for imports.

Recovery: Rising consumer confidence, Higher housing prices, rising business confidence, higher investment, increase in construction and loose policy.

These economic statuses are triggered by shocks in supply and demand from the government side or banking side. Even wars are natural disasters effect these shocks.