IBEconomicsHLRevision Notes3. Macroeconomics3.1 Measuring Economic Activity3.1.3 The Business Cycle

The Business Cycle (HL IB Economics)

Revision Note

Steve Vorster

Expertise

Economics & Business Subject Lead

The Business Cycle

  • A 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

  

2-5-3-trade-cycle-images_edexcel-al-economics

The Business Cycle illustrates the fluctuations of real GDP (actual growth) around long-term trend growth

Diagram Analysis

  • A positive output gap is identified as the growth of real GDP that is above the trend

  • A negative output gap is identified as the 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

The Characteristics of a Boom and Recession


Characteristics of a Recession


Characteristics of a Boom

  • A recession occurs when there are two or more consecutive quarters (6 months) 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

Exam Tip

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 (e.g. Lidl).

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 to what is was before the recession.

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    Steve Vorster

    Author: Steve Vorster

    Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.