The Trade Cycle

What is the trade cycle? 

The trade cycle is a graph depicting the recurrent swings in real GDP. 

The official textbook definition is; ‘a phenomenon whereby GDP fluctuates around its underlying trend, following a regular pattern’

What does it look like?

Below I have drawn a simplistic version of one.

 

 

Screen shot 2010-03-25 at 18.32.36

 

 

 

 

 

 

 

 

Photo by Komilla Chadha. Please bare in mind there is a mistake – ‘Recessio’ is supposed to say ‘Recession’

What do these key terms mean?

 Peak/Boom; 

 These are typically interchangeable but there is a subtle difference between the two.

 Peak is short-term period when the economy is doing well above its potential and is to some extent over heating as adverse impacts like inflation begin to kick in. Boom is generally used to describe a more prolonged and sustainable growth of the economy. GDP is at a sustainable 2%. But keep in mind peaks can last longer than booms. They both occur at the same place of the graph but the level of growth would usually split the two.

 Recession;

It is when there is two consecutive quarters of negative growth in an economy. 

The recession why is can be used for the falling limb of the graph and the trough is because sometimes there may a few quarters of negative growth before reaching an all time low (slump as it is sometimes called) and picking up again. Or it could be positive but getting low on the limb before it reaches two quarters of negative growth on the trough. Thats why a recession can happen at either place.

Slump and trough are other words used for the lowest points on graphs.

 Recovery/Expansion;

This is the point where economic growth starts to pick up before reaching the highest point which may be in the form of a peak or a boom.

Effects of the trade cycle on government macroeconomic objectives (without government intervention)  

Objective

Peak

Boom

Recession/Trough/Slump

Recovery/expansion

Economic growth

Extremely high [over heating]

High but sustainable (preferably at 2.0%)

Negative growth and while falling probably very low

Beginning to rise (low positive growth)

Inflation

Very High Inflation

High Inflation

Falling/low inflation

Increasing inflation

Employment

Almost full employment

Almost full employment

Unemployment rises to its maximum level

Unemployment falls but isn’t as low as it should be

Balance of Payments (for UK)

Big increase in imports

Increase in imports

Due to decreased demand imports will fall

Number of imports start to rise 

 

 

 

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