The business cycle
No economy grows steadily every year. Activity rises and falls in a pattern called the business cycle, with four stages: boom (high demand and rising output), recession (falling demand and output), slump (very low activity and high unemployment) and recovery (demand starts to rise again). A business must plan for these changes because they affect sales, costs and profit.
Key economic indicators
Gross domestic product (GDP) measures the total value of goods and services a country produces. When GDP rises, the economy is growing. Inflation is a sustained general rise in prices, which increases business costs such as wages and raw materials. Unemployment means people who want work cannot find it; high unemployment reduces consumer spending.
Example
During a recession a car maker sees demand fall. It may cut production, delay investment and reduce its workforce to control costs until recovery begins.
Government policy and interest rates
Governments aim for low inflation, low unemployment, economic growth and healthy trade. They use taxes and interest rates to influence the economy.
Key idea
A direct tax is paid straight to the government on income or profit, for example income tax and corporation tax. An indirect tax is added to spending, for example a goods and services tax on purchases.
When the central bank raises interest rates, borrowing becomes more expensive, so businesses cut back on loans and investment and consumers spend less. Lower interest rates encourage borrowing and spending, which usually helps sales.
Remember
- Recession = falling GDP and demand.
- Higher interest rates raise borrowing costs.
- Inflation pushes up business costs.