Year 11 Economics – Assessment Task 1 – Daniel Morris
Part 1 – Explain how the business cycle model represents the dynamic nature of the economy
Definition and Diagram of the Business Cycle
The business cycle shows the rise and fall of economic activity in an economy. The business cycle is generally measured using the rise and fall in gross domestic product (GDP). The business cycle is split into four main phases which are upswings, booms, downswings and recessions.
In the upswing phase of the business cycle, there is an increase in the levels of employment, spending, output and income. The economy has a steady flow of money circulating, which results in higher interest levels and tax collections. In turn, this then allows the government to increase spending on infrastructures and services so that the quality of life can rise.
In the boom phase of the business cycle, the economy and economic activity have reached a maximum level of growth. Price levels are inflated due to shortages in labour and resources. People will restructure and prepare for a decline in the economy, and the government will try to slow down economic activity to sustainable levels.
In the downswing phase of the business cycle, economic activity begins to slow down, which results in a fall of employment, spending, output and income. As a result of a slowdown in economic activity, there is less demand for labour which leads to greater levels of unemployment.
In the recession phase of the business cycle, the economy and economic activity have reached its minimum point, which is also called a trough. The government will lower interest rates to encourage spending in an attempt to increase economic activity. Due to a large supply of labour, unemployment continues to rise and businesses will try to sell unsold inventory by lowering prices.
Applying Model to Actual Economies
By applying the business cycle to the United States, we can tell that the United States’ economy is in the upswing phase because its employment rates have risen drastically in the last 10 years. Also the United States’ disposable income for households has a growth rate of 1.6% per annum. The interest rates in the United States were increased by 0.25 percentage points on the 20th of December 2018, which shows signs of a strong economy. Using these statistics and applying the business cycle, we are able to tell that the United States has a strong and growing economy, and is in an upswing phase.
By applying the business cycle to Australia, we can tell that its economy is in the upswing stage of the business cycle, however, the economy is about to reach a peak or boom followed by a downswing. The unemployment rates of Australia have decreased to 4.9% and the disposable income of households in Australia has a current growth rate of 1.7% per annum. The interest rates are at a record low of 1.5% to encourage spending so that...