Economic Growth (GDP)

What does GDP?

• It measures the value of all economic activity

• Includes consumer spending, business investment and government spending

• The economy is growing if GDP is rising; the economy is contracting if GDP falls

• % Change in GDP is known as the rate of Economic Growth

What is the ‘Business Cycle’?

• The sequence of slump, recovery, boom and recession

• The regular pattern of ‘ups and downs’ in the economy

• Measured by changes in the GDP from one quarter to the next

  • This is sometimes called the ‘Economic Cycle’

What is the typical shape of the business cycle?

1. Boom

2. Recession

3. Slump

4. Recovery

5. Boom

What is a boom?

A period characterised by high levels of consumer demand, business confidence, profits and investment at the same time as rising costs, increasing prices and full capacity

What is the recession?

It is a significant decline in real economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale and retail sales

What is the slump?

It is a prolonged period of declining GDP - very weak consumer spending and business investment; many business failures; rapidly rising unemployment; prices may start falling (deflation)

What is the recovery?

When real national output picks up from the trough reached at the low point of the recession

What are causes of the business cycle?

• Changes in general Business Confidence: affects investment levels, particularly in Fixed Assets

• Stock or Inventory Building during a "Boom" period followed by DE-Stocking when confidence subsides

• Irregular pattern of expenditure on consumer durables

• Levels of Confidence in the Financial and Banking sectors

• Geopolitical events that interrupt the Business Cycle: eg. Wars, Pandemics, changes in political regimes

What is business confidence?

• A vital influence on whether companies invest and adopt policies aligned with growth

• Optimism is contagious

• If individual companies believe their market will continue to expand the decisions to invest and develop new products will appear more rational and less risky

• Governments aim to encourage positive news about the economy in order to support business confidence

What are factors which influences economic growth?

• Exploit natural resources

• Availability of highly-skilled workforce: education and training as a national resource

• Increasing Investment in new capital equipment and advanced technology

• How competitive is a country's economy compared to other nations?

• Government Policies that promote investment, skills, and technology

What are the key points for business decision making if economic growth is happening?

• Impact on Sales: Income levels are rising. Price Elasticity and Income Elasticity of Demand need to be considered here. Does the Product Portfolio need to be wider?

• Impact on Corporate Profits: Is there scope for Price increases?

• Impact on Investment levels: New plant, new premises. But remember that in times of growth, resources may become more expensive

• Impact on Employment: Can the existing workforce cope with extra demand? Are there short-term and longer-term?