Transcript Trade-cycle

The trade cycle
• Economies go through periods of fast growth, or
booms, and periods of slow growth or even falling
output, known as recessions
• Gordon Brown famously talked about not returning
to boom and bust
• "And we will never return to the old boom and bust.“
Budget Statement, 21 March 2007
The trade cycle (business cycle)
GDP
Growth
A Peak/
Boom
A Peak/ B Downturn
Boom
B Downturn
D Recovery
C Recession/depression/
trough/slump
Time
A Peak/
Boom
D Recovery
C (Recession)/depression/
trough/slump
Time
There are 4 stages to the trade cycle. The book labels A as peak or boom. This is fine for the cycle when looking at
growth rates (diagram on the left), but not so useful on the one on the right showing GDP, which is the diagram in
the book. Best therefore to label A as peak, and C as trough in both diagrams.
Do not use boom on the GDP diagram, since it is really when output is above trend (positive output gap) and is still
growing sharply. This means between D and A.
Do not use recession on the GDP diagram, since a recession is defined in the UK as 2 consecutive quarters of falling
GDP, so would be between B and C.
The Examiners will be “sympathetic” to a range of diagrams used to illustrate the trade cycle.
What happens in the different stages
Causes of the trade cycle
• Many different reasons why actual growth differs
from potential growth to give a trade cycle
• Some are theoretical and we won’t cover
• Generally think of demand-side shocks and supply
side shocks, but there may be a natural rhythm
despite what Gordon Brown stated
• A demand-side shock is any event which leads to a
significant change in aggregate demand
• A supply-side shock is any event or change which
has a significant impact on SRAS