EC1000 – BUSINESS & THE ECONOMIC

ENVIRONMENT

SEMESTER 1- 2002

RISHMA DATTANI

SUNDEEP SINGH CHAHAL

Introduction into Business Cycles

Business Cycles

Business cycles are numerous changes in the level of business and economic activity over time. This business activity is measured by measures of Real Income specifically Real GDP (Gross Domestic Product). Quite often these cycles occur because spending in the economy (as measured by RGDP) differs from the ability of the economy to produce goods and services. A long-lasting period of growth in spending that exceeds the growth rate in output will lead to tight factor markets. The economy may change into a period of recession simply because the current rate of spending cannot continue.

An Example of a Business Cycle:

Source:

Business Link

These cycles occur at regular intervals in a market economy as the rate of real economic growth exceeds the growth in the prospective of the economy to produce goods and services. Recessions may also occur or be long lasting as consumers and producers become more negative about future economic events. This lack of enthusiasm may lead to a decline in both consumption and investment spending resulting in an increase in record levels.

A History of Business Cycles 

Since World War II, most business cycles would last 3-5 years peak-to-peak. The average duration of an expansion was 44.8 months and the average duration of a recession has been 11 months. As a comparison, the Great Depression that saw a decline in economic activity between 1929 and 1933, lasted 43 months peak-to-trough.

Overview of Britain’s Economy

Britain’s economy is once more in crisis, but crises more serious than those, which have occurred in the past. Failing output, rising unemployment, collapsing investment, a trade deficit chasm all following an inflationary surge, demonstrate the widespread failure of government economic policies during the 1980’s. Far from being solved, Britain’s economic problems have worsened.

Recessions during the 1980’s

This section of my assessment activity investigates the main points that caused a recession during the 1980’s.  

Inflation During the 80’s

During the 1980’s the government’s use of harsh policies to control a double-digit inflation of 13.4% during 1979 and then 18% in 1980 you can see this change in the Appendix 1.1. Inflation in the UK was mainly due to the fact that people where spending a lot due to the fact that the unemployment was low and more people where working. During 1980 the oil prices where high and also other household products. At the start of the 1980 there was a major recession, the government used different policies to overcome this recession. You can see the changes in Appendix 1.1 and 1.3.

The Fisher Hypothesis says that:

               

                   ‘‘Higher inflation should be accompanied by higher interest rates’’

Source: Bruce R Jewell-The UK Economy                                    

Mrs Thatcher during 1980- Thatcherism

When Mrs Thatcher’s first conservative government took office in 1979 radical changes in economic policy and performance were promised. There was to be full-blown monetarism, the rejection of much government interpretation in the tuning of customer demand. The market was to be given its head, with no more social contracts between government and trade unions. Inflation was to be brought down by monetarist techniques, there was to be tax cuts and public expenditure to be cut also. They also decided that home ownership should be promoted.      

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By the time Mrs Thatcher had won her third consecutive election victory in mid-June 1987, she had been Prime Minister eight years, party leader twelve years, and had given her name to an instantly recognizable political phenomenon known as Thatcherism (Thatcher experiment). The Thatcher experiment continued through 1979-1990s, the idea of this experiment was to gradually reduce monetary growth, and hence the rate of inflation over a period of time.  

 

Taxation

When Mrs Thatcher took office, her apparently favourite monetarist economist was predicting, that among other things such as unemployment would fall to a large extent. In ...

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