The Economic Cycle

What The Economic Cycle covers

The Economic Cycle is examined in Paper 2, Competing in the global economy, and in Paper 3, The economic environment and business. It covers the economic cycle: boom, slowdown, recession and recovery, implications of the economic cycle for firms, the circular flow of income, injections and withdrawals, aggregate demand and its components, aggregate supply, input costs and productivity, inflation, deflation and disinflation, price indices and the rate of inflation, real and nominal values, constant and current prices, demand-pull and cost-push inflation, the impact of inflation on firms and individuals, employment, underemployment and the measurement of unemployment, the causes of unemployment and the impact of unemployment on firms and individuals.

The 13 subtopics

Each one has its own page.

• The economic cycle: boom, slowdown, recession and recoveryThe economic cycle and its four phases, the trend rate of growth, the definition of recession, positive and negative output gaps, the features of a boom and a recession, government finances, depression, business confidence and the accelerator effect, persistent recessions, overheating, and slowdowns.Open →
• Implications of the economic cycle for firmsSales revenue in a recession and the firms least affected, inferior goods, capital goods against consumer goods, cash flow, how firms respond to a recession, keeping skilled workers and labour hoarding, costs and cash flow in a boom, investment and credit over the cycle, and luxury against discount retailers.Open →
• The circular flow of income, injections and withdrawalsThe circular flow of income between households and firms, why national income, output and expenditure are equal, withdrawals and injections, equilibrium, the marginal propensity to consume, the multiplier formula and calculating it and its effect, imports and the multiplier, and negative multiplier effects.Open →
• Aggregate demand and its componentsRecall questions on aggregate demand and its four components, why the curve slopes downwards, what counts as investment, and how confidence, interest rates and sterling move it.Open →
• Aggregate supply, input costs and productivityAggregate supply in the short and long run, input costs that shift short-run aggregate supply including oil prices, depreciation and national insurance, productivity against production, how productivity shifts long-run aggregate supply and allows non-inflationary wage rises, unit labour costs, and migration and other long-run factors.Open →
• Inflation, deflation and disinflationInflation, deflation and disinflation and telling them apart, why deflation is dangerous, benign against malign deflation, deflation and monetary policy, the deflationary spiral, hyperinflation, why central banks target positive inflation, self-fulfilling inflation expectations, and central bank credibility.Open →
• Price indices and the rate of inflationPrice indices and the Consumer Prices Index, the basket of goods and its weights, the Retail Prices Index, the Bank of England's target, calculating inflation from index values, the limitations of the index as a cost of living measure, core inflation, falling inflation with rising prices, base effects, and price collection.Open →
• Real and nominal values, constant and current pricesNominal and real values, current and constant prices, deriving real GDP from nominal GDP and calculating it, real wages when pay rises faster or slower than inflation, comparing revenue growth with inflation, the real return on savings and the real interest rate, deflating an income, and long-run GDP comparisons.Open →
• Demand-pull and cost-push inflationDemand-pull inflation, its causes and how it appears on an aggregate demand and supply diagram, full capacity, cost-push inflation, its causes and its diagram, stagflation, why cost-push is harder to control, the wage-price spiral, the monetarist view, using output data to tell the two apart, and combined pressures.Open →
• The impact of inflation on firms and individualsHow inflation creates uncertainty and affects investment, menu and shoe-leather costs, international competitiveness and floating exchange rates, how inflation can benefit a firm, confusing demand with inflation, fixed cash wages, fiscal drag, redistribution from savers to borrowers, anticipated against unanticipated inflation, and index-linking.Open →
• Employment, underemployment and the measurement of unemploymentWho counts as unemployed, the labour force and calculating the unemployment rate, economic inactivity, underemployment, the claimant count against the International Labour Organisation survey measure and how each is collected, their strengths and differences, international comparison, and the employment rate.Open →
• The causes of unemploymentStructural unemployment and structural change, occupational and geographical immobility of labour and how to reduce them, technological unemployment and automation, demand-deficient and cyclical unemployment, frictional, seasonal and real wage unemployment, hysteresis, and telling structural from cyclical unemployment.Open →
• The impact of unemployment on firms and individualsHow unemployment affects a firm's sales, recruitment and wage bargaining, why persistent unemployment harms firms, the cost to the public finances from two directions, opportunity cost to the economy, the effects of long-term unemployment and scarring, youth and regional unemployment, social costs, and rising costs as unemployment falls.Open →

What you need to know

Answer each one before you reveal it.

Take The Economic Cycle further

The same content, four other ways.

Commonly confused

Pairs that lose marks when they are blurred together.

• Deflation vs Disinflation

  Deflation: a sustained fall in the general price level, shown as a negative rate of inflation. Disinflation: a fall in the rate at which prices are rising, so the price level still goes up but more slowly.

• Injection vs Withdrawal

  Injection: spending entering the circular flow from outside it, namely investment, government spending and export earnings. Withdrawal: income received by households that is not passed back to domestic firms as spending, namely saving, taxation and spending on imports.

• Demand-pull inflation vs Cost-push inflation

  Demand-pull inflation: price rises caused by total spending growing faster than the output available, so prices and real output rise together. Cost-push inflation: price rises caused by firms' expenses of production increasing and being passed on, so prices rise while real output falls.

Questions from this topic

Each one with the model answer underneath.

1. 1

   What is the economic cycle?

   Model answer

   The economic cycle is the recurring pattern of fluctuations in real GDP around the underlying trend rate of growth over a period of years.

2. 2

   Name the four phases of the economic cycle.

   Model answer

   Boom, slowdown or downturn, recession or slump, and recovery.

3. 3

   What is the trend rate of growth?

   Model answer

   The trend rate of growth is the average rate at which an economy's productive capacity grows over the long run, around which actual output fluctuates.

4. 4

   How is a recession conventionally defined?

   Model answer

   A recession is two consecutive quarters of falling real GDP.

5. 5

   What is a positive output gap?

   Model answer

   A positive output gap exists when actual output is above the productive potential of the economy, so resources are being worked beyond their sustainable rate.

6. 6

   What is a negative output gap?

   Model answer

   A negative output gap exists when actual output is below productive potential, leaving spare capacity and unemployed resources.

What is inside Levo

Six ways to work the same material.

The Economic Cycle revision questions

What does The Economic Cycle cover in Edexcel A-Level Economics B?

13 subtopics: the economic cycle: boom, slowdown, recession and recovery, implications of the economic cycle for firms, the circular flow of income, injections and withdrawals, aggregate demand and its components, aggregate supply, input costs and productivity, inflation, deflation and disinflation, price indices and the rate of inflation, real and nominal values, constant and current prices, demand-pull and cost-push inflation, the impact of inflation on firms and individuals, employment, underemployment and the measurement of unemployment, the causes of unemployment and the impact of unemployment on firms and individuals. Each one has its own page with questions and model answers.

How is The Economic Cycle organised?

By the Edexcel 9EB0 specification, subtopic by subtopic, so it matches the order you are taught it in.