Economic Activity
GROSS DOMESTIC PRODUCT
Gross Domestic Product (GDP) is the monetary value of all finished goods and services made within a country during a specific period (quarterly/yearly). GDP measures the country’s output and provides a snapshot of a country’s economy. It is used to estimate the size of an economy and its growth rate.
GROSS: Value of the final goods and services
DOMESTIC: Withing a country’s border - Australia
PRODUCT: Output of final products, completed transformation - not used in further production.
Only finished or final goods are used to estimate a country’s GDP. A final good is at the end of the production line ready to be consumed by either business, government or consumers.
Governments aim to continuously improve our economic conditions above 3-4% growth. However, this normally does not occur, there are periods of expansion (growth) and contraction. An expanding economy is when GDP is increasing, whilst a contracting economy is when GDP is decreasing.
Economic Cycle
Define
The Economic Cycle refers to fluctuation of the level of economic activity between periods of expansion (growth) and contraction (downturn).
Describe
Factors such as GDP, interest rates, levels of employment and consumer spending can help to determine the current stage of the economic cycle. Each stage in the economic cycle is characterised by high or low levels of the economic indicators such as inflation, interest rates and availability of labour.
Explain
Economic growth refers to an increase in a country’s economic activities over time. It is measured by the change in total output of the economy per year, known as the Gross Domestic Product (GDP). Higher rates of economic growth suggest that the economy is more prosperous and therefore the average person is earning more income. The pattern of fluctuations in economic growth is known as the Economic Cycle.
Discuss
Economic Recovery — Peak - Boom
During a recovery, the level of economic activity rises with customers spending, business investment and earning. At the peak economic activity is at its highest level. With consumers spending, business investment and earnings. At the peak economic activity is at its highest level. Unemployment will be low whilst consumers and business confidence levels will be high. As businesses earn higher levels of profit, people are likely to receive pay rises. When the economic recovery is rapid, growth above expected rates is referred to as a boom.
Economic Downturn
A series of economic downturns is referred to as a recession. Downturns occur when there is a fall in GDP for two consecutive quarters (or over 6 months). Features of a recession include a decline in demand for goods and services, lower investment, falling sales and rising unemployment. Businesses that suffer most from economic downturns are those with a small range of products/services that cater for peoples wants.
The trough refers to the bottom of a recession and the last stage of an economic downturn. This is when unemployment is at its highest and consumer spending is very low. Businesses suffer from poor cash flow and many will have already closed down due to poor liquidity (insufficient cash coming in to cover expenses). Consumers have little confidence in the economy as workers suffer from lack of job security.
Economic Recovery
Recovery or expansion occurs when the level of GDP starts to rise again, after experiencing a slump. As businesses start increasing production levels, more employees are requires decreasing unemployment. As workers feel more secure in their jobs, consumer spending increases.
Increasing Production
Production increases an businesses improve efficiency in the production process (better use of resources). This can be achieved by enhancing the quality of the factors of production (land, labour, capital). Businesses can implement new equipment or systems of processes, increase training and education for employees for a more skilled workforce and source alternative raw materials.
Influence on Consumer Spending
EXPANDING
During an economic expansion, (increasing economic activity) consumers feel confident due to higher levels of employment, possible wage growth and optimistic about their future. This consumer confidence leads to higher levels of spending. Consumers are more likely to purchase more luxury items and invest in major consumers decisions, even if it means going into debt.
CONTRACTION
During an economic contraction (decreasing economic activity) consumers become worried about their jobs. Workers may have their hours reduced or even lose their jobs through layoffs and redundancy. As consumer lose confidence in the economy they reduce their spending. Consumers are more likely to purchase budget items and focus on needs rather than wants. Any major consumers decision will consider price rather than up to date features (basic models). They will repair major household items rather than purchase brand new.
Influence in Business (SME) Spending
EXPANDING
During economic expansion (increasing economic activity) businesses experience a growth in sales and consumer demand. With higher cash flow businesses are more likely to increase their spending. Business can increase prices due to the higher demand, which leads to increased profit margins. This will allow businesses to invest in innovation to improve efficiency and product features/range. They will also increase capital investment (e.g. plant and machinery) to increase production to keep up with growth consumer demand.
CONTRACTION
During an economic contraction (decreasing economic activity) consumers become worried about their jobs. Workers may have their hours reduced or even lose their jobs through layoffs and redundancy. As consumer lose confidence in the economy, they reduce their spending. Consumers are more likely to purchase budget items and focus on needs rather than wants. Any major consumers decision will consider price rather than up to date features (basic models). They will repair major household items rather than purchase brand new.