The Trade cycle [2.5.3]

Question 1

What is an economic boom?

Answer 1

Boom occurs when real national output is rising at a rate faster than the trend - leading to a positive output gap.

Question 2

What is an economic recession?

Answer 2

Recession means a fall in the level of real national output, a period when growth is negative and there is a negative output gap.

Question 3

How will the economy perform in each stage of an economic cycle?

Answer 3

Boom - High level of GDP peak of economic cycle high productivity

Slowdown - rate of growth decelerates national output is still rising

Recession - 2 successive quarters of negative economic decline falling GDP

Recovery - A recovery occurs when real GDP pick up from the low point of a recession output gap shrinks

Question 4

What causes the trade cycle?

Answer 4

Momentum effect - positive economic growth leads to increased consumption, investment and asset prices

Interest rate changes - High interest rate leads to economic down turn

Technology - Improvements in tech may cause a boost in economic growth. A fall innovation may cause slower economic growth

Potential business cycle - Policies are implemented to create a boom before an election used to incentives

World economy - Recessions in other countries impact on export earning and investment

Question 5

What are the benefits of