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The Economic Cycle in Pictures Using images to reinforce the different stages of the economic cycle A: The number of new housing starts begins to fall D: Rising homelessness E: Rising demand for steel B: There are more unfilled job vacancies C: Increasing hours of overtime F: Long-term unemployment reaches new high J: Rising business class air revenues G: Car plants decide to reduce the number of shifts I: Home delivered pizza becomes more popular H: Consumers hit by delays in product delivery K: Share prices hit by rise in number of company profit warnings L: Rising lipstick sales M: Rising real income N. Government announces a fall in trade deficit due to decline in imports R: Imports of sewing machines rise P: Brick manufacturers report a rise in unsold stocks O: Supply of rented property exceeds demand Q: McDonald’s holds prices despite rise in costs U: More building skips start appearing on the streets S: Banks relax credit rules X: Oil refineries report a reduction in crude oil stocks V: Sales of milk chocolate start to decline T: The cost of shipping goods around the world starts to rise Y: More companies attempt to introduce wage freezes Z: Rising government spending W: Shops delivering lunchtime sandwiches to offices raise their prices because of strong demand The economic cycle in pictures Real GDP Time Output Gaps Output Gaps • Output Gap – The difference between the actual level of GDP and the productive potential of the economy • Positive Output Gap – When actual GDP is above the productive potential of the economy and it is in a boom. • Negative Output Gap – When actual GDP is below the productive potential of the economy. Production Possibility Frontier Output Gaps in the UK Negative Output Gap • This is also called a deflationary (or recessionary) gap. There will be unemployment, low growth and / or a fall in output. A negative output gap will typically cause low inflation or even deflation. Positive Output Gap • It will involve firms asking workers to overtime. • There will be inflationary pressures. It will also tend to cause a bigger current account deficit as consumers buy more imports due to domestic supply constraints. Source: AQA Econ2 June2009