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Transcript
ECN 1200- Introductory Macroeconomics Lecture 2 Lecturer: Mr. Sydney Armstrong Business Cycles are recurrent fluctuations of economic activity or real GDP that occurs relative to the long-term growth trend of the economy. These cycles vary in duration and intensity however economists have identified four phases of a business cycle. Peak: At this point economic activity is at a temporary maximum. The economy is at the full employment level and real output is at or very close to the economy’s capacity. The price level is likely to rise during this phase. A peak is followed by a period of recession. Recession: A period of decline in an economy’s total output usually lasting at least six months and marked by contractions in many sectors of the economy. The price level shows little or no change but if the recession is long enough – turns into a depression- then prices will start to fall. A recession is followed by a trough. Trough: In this phase the recession or depression is at its lowest level, and can be short-lived or last very long. The trough is followed by the recovery or expansionary phase. Recovery (expansion): As the word suggests the economy is on the road to growth. In this phase output and employment start to rise, as a result the price level will start to rise. This phase will continue until it reaches the plateau or peak and a new cycle will begin. Potential growth (potential GDP) represents the maximum sustainable level of output that the economy can produce. When an economy is operating at its potential, there are high levels of utilization of the labour force and the capital stock. Potential output is determined by the economy’s productive capacity, which depends upon the inputs available (capital, labour, land, etc.) and the economy’s technological efficiency. By contrast actual growth (actual GDP) or growth that is realised, is subject to large business cycle swings if spending pattern change sharply. The circular flow model, describes the interactions between the two basic agents in an economy, consumers and producers. This model shows the flow of resources, products, income and revenues between these two basic economic agents. 1. The economy consists of two sectors: households 2. 3. 4. 5. 6. and firms. Households spend all of their income on goods and services or consumption. There is no saving. All output produced by firms is purchased by households through their expenditure There is no financial sector. There is no government sector. There is no overseas sector. The Basic Circular Flow Model Introduction of the Financial sector Savings =S Finance sector Investment = I Savings =S Taxes = T Finance sector Govt. sector Investment = I Govt. spending = G Savings =S Finance sector Investment = I Taxes = T Govt. sector Govt. spending = G Imports = M Overseas sector Exports = X S Withdraws T M Finance sector Govt. sector Overseas sector I G X Injections Injections: This is an exogenous addition to the income of firms and households that does not result from current production. Injections lead to an expansion of an economy’s income. The expansions that result from injections is compounded through the multiplier effect. Injections consist of three broad areas viz. investment, government spending and exports. (Putting back into the economy) Withdrawals: Any income that is not circulated currently in the circular flow of income and as such is not available for the purchasing of currently produced goods and services. Withdrawals help to contract the income of on an economy, and like injections its impact is exacerbated by the multiplier effect. Withdrawals consist of three broad categories viz. savings, taxation and imports. (Taking out of the economy)