GDP is the measure upon which we value every single product and service that is available to us. If GDP is going down, then that means the economy is shrinking, which in turn creates falling house prices and job cuts. If GDP is rising, then that means the economy is expanding, which creates more wealth and more new jobs. A limitation with GDP is that it gives us information about what has already happened, and is not good for finding information about the road ahead.
The business cycle is the sequence of a slump, recovery, boom and recession. It is the regular patterns of up and downs in the economy. We record this in a cyclical movement of economic growth categorised by recovery, boom, recession and slump. It is measured by changes in GDP from one quarter to the next.
Unemployment varies with the level of economic activity. In early 2004 there was plenty of employment in the UK, so employment figures were low. Now in 2011 there are fewer jobs and high unemployment. Employers were reporting skill shortages in a number of areas. One cause of unemployment may be downswings in the trade cycle i.e. periods of recession. People also argue that new technology generates new products, new services and therefore new jobs. Fewer workers may be required in some production processes where specific tasks are taken over, but rising productivity boosts incomes and the demand for new jobs in the economy as a whole.
The Importance of Stability
There are basic economic factors in terms of economic growth, and the problems it faces. There are problems no matter where in the world we live. Decisions have to be made on how the types of goods and services are to be produced. Is farming and agriculture a good market, or is the money in housing and education? Consideration also has to be taken into account, such as how these goods and services should be produced. By people (labour intensive), or hi-tech methods that cost a lot of money to run. And finally, who should get the goods and/or services that the business produces? Does everyone get an equal share?
The ways in which a business chooses to answer these questions will dictate the economy in which we live. If the economy produces a fairly constant output in terms of goods and services, then provided the prices of those goods and services are affordable to those who use them, then we will have a stable economy.
The problems occur however when the economy becomes unstable, when goods and services are in short supply, or that the prices become so high that people can no longer afford them. The fact that unemployment is rising can mean that the production and supply of goods begins to decrease and the amount of money to purchase the goods available decreases too, mostly to do with the reduction in wages.
Therefore instability in the economy can lead to a huge shortage of goods and services. In countries of extreme poverty this could even mean food and medicines. The loss of jobs and income is also a factor, so if there were goods and services people could not afford to buy them.
Stability is determined by consumer confidence. If consumers are not confident, then the economy develops a slump. Yet when consumers are confident, the economy grows.
A rate that is charged or paid for the use of money.
During this period, interest rates tend to fall during the months of recession to stimulate the economy by offering cheap rates at which to borrow money. People are therefore encouraged to spend money rather than save, as saving will give them a poor return on their money, and so that the economy will grow.
In times of growth, interest rates tend to rise thus encouraging people to save money rather than spend. Because the interest rate is higher, then people get more for their money if they choose to save.
Represents the general increase in prices. Inflation is a sustained increase in the average price level of a country. The rate of inflation is measured by the annual percentage change in the level of prices. For example a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at an interest rate for deferring the use of funds and instead lending it to the borrower. Interest rates are normally expressed as a percentage of the principal for a period of one year.