The Business Cycle

The business cycle describes the regular fluctuations in economic activity (and GDP) occurring over time

1.  Recovery or upswing - as the economy recovers form a slump, production and employment both increase. Firms begin to utilize idle resources, as business confidence increases, firms may invest in further fixed assets (e.g. factories) and employees find jobs more easily and wages increase.

2.  Boom - A boom follows with high levels of production and expenditure by firms, consumers and the government.  However, some sectors of the economy suffering during a boom period. Skilled workers become scarce and as the economy approaches maximum production shortages arise as insufficient raw materials and components exist to meet the demands.

3.  Downswing - incomes and outputs start to fall. rising prices of labour and materials increase costs of production.  In circumstances such as this, the UK government has raised interest rates to avoid inflation.  The level of productivity  in the economy may stagnate or even fall and the amount of spare capacities rise, some businesses fail and the level of bankruptcies are likely to rise.

4.  Slump - often follows a downswing, a slump sees production at its lowest, unemployment is high and increasing numbers of firms suffer insolvency.

GDP - gross domestic product - measures the value of a country's output over a period of time.  GDPmis dependent on the level of economic activity. Rising economic activity will cause a higher level of GDP.