The Business Cycle (CIE IGCSE Business)

• The business cycle describes the upturns and downturns in the level of a country’s economic activity (Gross Domestic Product or GDP) over time
• Economies do not experience consistent levels of growth over time

 Diagram: Business Cycle

• A recession occurs when an economy experiences two consecutive quarters (6 months) or more of negative GDP growth
  • Incomes and consumer demand fall, leading to reduced output
  • Consumer and business confidence tend to be low
  • Business profits fall and unemployment rises
    
    
• A slump is an extended period of negative GDP growth
  • Unemployment is likely to be high as a result of high levels of business failure
  • Significant declines in household incomes and business profits
  • Increased government spending on welfare benefits and infrastructure projects to inject demand into the economy may benefit some businesses
    
    
• The growth stage is a period of increasing rates of GDP growth
  
  • Disposable income levels rise and lead to increased demand for products
  • This drives an increase in production levels, which leads to a rise in employment levels
  • Businesses look to expand and increase profit
    
    
• A boom is a period of time when an economy experiences an extended period of increasing rates of GDP growth
  • Consumer incomes and business profits are high
  • Inflation is also high due to higher demand for goods and services
  • Unemployment levels are low and wages are high due to a shortage of skilled workers
    

• Levels of unemployment are closely linked to the business cycle

Unemployment and the Business Cycle

• Inflation is the sustained rise in prices in an economy over time
  • In most countries, a price index measures monthly changes in the prices of a range of goods and services and compares these changes to earlier periods
    
    
• After several decades of relatively low levels of inflation, much of Europe has recently experienced rapidly increasing inflation
  
  • In the UK, inflation reached a peak of more than 11% in 2022, driven largely by increased fuel costs
    
  • By late 2023, Eurozone inflation had returned to a relatively low level of 2.9%
     
• High or fluctuating levels of inflation can be problematic for businesses
   

Problems Caused by Rising or Fluctuating Inflation

• Increases in GDP are associated with growth and boom periods
  • Although inflation is likely to rise, increases in household incomes may cancel out higher costs
  • Recruiting and retaining workers may be challenging so businesses may seek to import labour from other countries
  • Interest rates are likely to be high but increased consumer confidence may mean that spending on expensive items remains buoyant
    
    
• A fall in GDP is associated with recession and slump periods
  • Despite low inflation, household incomes will be squeezed and discretionary spending will be closely monitored or reduced 
  • Governments may take steps to stimulate the economy, which could lead to better public services, infrastructure or tax benefits for businesses
  • Businesses could take advantage of low-cost borrowing due to low interest rates and invest for future business growth