Economic Growth (GDP)

What does it do?

  • 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’

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

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

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

Factors influencing 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?