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Business Cycles& the British Economy - What are business cycles?

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Business Cycles & the British Economy What are business cycles? Business cycles, economic cycles or trade cycles as they are sometimes called, are defined by the Longman Dictionary of Business English, as "a cycle in time during which trade moves from a state of high activity (boom, prosperity) through a running-down period (contraction, downsizing, recession, slump, downturn) to a state of low activity (depression, stagnation, trough), then upward again when business improves (expansion, recovery, revival) until there is a return to high activity once more. The whole cycle then begins again." (Adam 1982 p.138) But what does this actually mean? In Fig. 1 below you can see a theoretical business cycle, which shows the trending and actual output or aggregate demand, of a country, over time. Fig.1 Aggregate demand is the sum of Consumer spending (C), Government spending (G), Investment (I) and Exports (X) (minus Imports (Z)); represented as C + G + I + (X-Z); and is a major indicator in the financial stability of a country. As you can see in Fig.1 the trending output increases steadily year on year, whilst the actual output fluctuates around it. ...read more.


In hindsight it was the first shift in working patterns away from traditional industries and into the service sector. The recession was a result of a long economic slowdown for Britain, which had not grown as fast as other European or Far East countries in the post war years. Cheap imports from abroad, coupled with high inflation at home, strong Trade Unions demanding higher wages from employers, the second oil crisis in ten years and a "newly elected Conservative Government, grappling with difficulty with its new monetarist strategy" caused a fall in aggregate demand, a fall in productivity, a rise in unemployment and a fall in income. (Smith 1992 p.196) Fig.3 The recovery phase began in the middle of 1981 (Yr 2) and ran until 1984 (Yr 5) when the boom kicked in, this is shown in GDP by the steady growth rate year on year and the stagnating and falling unemployment. In 1989 (Yr 10) however the economy began to slow down and GDP fell, slowly at first and then more rapidly until 1991, as you can see, unemployment over the same period, rose at a similar rate. ...read more.


Conclusion Surely if we know what to look for in the economy we should be able to go some way to eradicating business cycles? The Conservative Government of the 1980's thought they had done it and congratulated Nigel Lawson for the achievement "He had, it was said, abolished the business cycle, a boast that Lawson was happy to live with until it proved woefully misplaced." (Smith 1992 p.196) And according to Arthur Okun in The Political Economy of Prosperity, "Recessions are generally considered to be fundamentally preventable, like airplane crashes and unlike hurricanes. But we have not banished airplane crashes from the land, and it is not clear that we have the wisdom or the ability to eliminate recessions. The danger has not disappeared. The forces that produce recurrent recessions are still in the wings, merely waiting for their cue." (Okun 1970) So if we are destined to live with business cycles it would be best that we learn to interpret them, analyse their causes and effects and project where they will strike again so that we can be ready for them. Ends Word Count: 2020 Paul Matthews 13/11/02 MK1003 TUE AM TL Folio 1/9 (m/f) ...read more.

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