Thursday, 11 August 2011

The Trade Cycle (Macroeconomics)

In the economy, there are times in which people spend more and manufacturers produce more. There are also periods in which the opposite occurs.. telling us that the amount of economic activity fluctuates over time. Economic activity refers to the level of spending, production and employment in the economy at any given time. More economic activity normally means increased economic growth.

Economic activity is measured by GDP, which stands for Gross Domestic Product - the value of all goods and services produced within the economy in a given time period. The trade cycle describes the fluctuation in economic activity over time.

Here we have a diagram that maps out the fluctuation in economic activity. At the peak of the trade cycle there is high levels of demand and investment, pay increases, profits are high, increased house prices and strong inflationary pressures. 

In the recession period there is negative growth, meaning GDP is falling.. for two successful quarters (6 months). In this time there is normally falling demand, low investment, rising unemployment and a fall in profits and confidence. 

The slump is when the economy has hit the bottom of the trade cycle.. The only way is up after that (hopefully!). Here we have high unemployment, very low levels of demand and investment and low inflation. 

Finally, the recovery period. This is when the economy starts growing again - GDP rises again. We'd expect a rise in incomes, output and employment here. Also, there should be increases in demand and investment as the economy starts to grow again. 

One of the government macroeconomic goals is to achieve stable economic growth - meaning these fluctuations aren't desirable. Therefore the government takes measures to try and avoid the worst effects of the trade cycle - these are called counter-cyclical policies. They are: 
  • Changes in the tax levels.
  • Changes in public spending.
  • Interest rate changes. 

That is the lowdown on the trade cycle, hope it helps. Thanks for reading. 

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