Fluctuations in Economic Activity

Quick revise

Causes of Economic Growth

Booms / dips in economic growth can occur due to a number of reasons:

1. Increase in aggregate demand caused by:

  • An increase in consumption – this may be caused by: a rise in income levels, an decrease in interest rates, house price inflation
  • A rise in the level of government spending
  • A balance of payments surplus

2. Labour shortages

  • If there are shortages of workers in specific areas it means that the economy will not be able to utilise its resources efficiently and therefore economic growth will slow

3. Increase in demand for imports

  • This will worsen the balance of payments deficit
Demand & Supply Side Shocks

Supply side and demand side shocks can lead to instability in the economy. Shocks are unexpected events that influence the demand / supply in an economy. As the UK operates in a global market their economy is open to shocks from across the world.

Demand Side Shocks

These can include:

  • A significant rise or fall in exchange rates in short term
  • Changes in the rate of economic growth for countries that you trade a lot with
  • Changes in aggregate demand
  • A boom in capital expenditure e.g. in construction or ICT
Supply Side Shocks

These affect the costs and prices of supply

These can include:

  • Technology
  • Natural disasters which impact the supply of particular goods e.g. crops
  • Political situations that influence the supply of particular products e.g. oil

Trend rates in Economic Growth

The trend rate of economic growth shows the rate of economic growth is the average rate of economic growth over a period of time

The trend rate of economic growth is influenced by a number of factors of supply side including:

  • Investment
  • Education
  • Training
  • Technological change

Investment

Investment influences the trend rate of economic growth as higher levels of investment increase AD and expenditure within the economy

In addition investment expenditure means there are more capital goods for workers to use to produce consumer goods therefore increasing the level of output in the economy

Education & Training

Education and training can increase the growth rate of the labour force in the economy

These can both increase the trend rate of growth in labour productivity in the UK therefore driving the level of economic growth

Technology

Changes in technology can reduce the costs of goods in the economy

If the costs of supplying products decreases then production possibility frontier will shift outward