Business Studies - External Influences - The Business Cycle

Revision notes on external influences and the business cycle for AS Business Studies.

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  • Created by: Emma Rudd
  • Created on: 25-03-08 16:29
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Business Angela Emma Rudd BMA
External influences
The Business Cycle
All countries suffer fluctuations in the level of activity within their economies. At
times spending, output and employment all rise during other periods the opposite is
true.
A nation's Gross Domestic Product (GDP) measures the value of a countries output
over a period of time. This figure is dependent upon the level of economic activity.
Rising economic activity will cause a higher level of GDP.
The business cycle describes the regular fluctuations in economic activity (and GDP)
occurring over time. It generally has 4 stages
1. Recovery or Upswing
2. Boom
3. Recession
4. Slump
Recovery or Upswing
As the economy recovers from a slump, production and employment both increase.
Consumers generally spend more as they are more confident in the security of their
employment. Businesses confidence begins to increase. Employees find jobs more
easily and wages may begin to rise
Boom
A boom follows with high levels of production and expenditure by firms, consumers
and the government. Skilled workers may become scarce and firms may offer higher
wages. Simultaneously, as the economy approaches maximum production, shortages
and bottlenecks occur as insufficient raw materials and components exist to meet
demand. Prices rise. The combination of rising wages and rising prices of raw
materials and components creates inflation. Inflation usually leads to the end of a
boom.
Recession
In a recession incomes and output start to fall. Rising prices of labour and materials
increase costs of production. This eats into a businesses profit. In circumstances
such as this, the UK government has raised interest rates to avoid inflation. Falling
profits and rising interest rates are likely to lead to delays in implementing plans to
invest in new factories and offices. The level of production in the economy may

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Business Angela Emma Rudd BMA
stand still or even fall and the amount of spare capacity rises. Some businesses fail
and the level of bankruptcies are also likely to rise.
Slump
A slump often, but not always, follows a recession. In some circumstances, an
economy may enter the upswing stage of a business cycle without moving through a
slump period. Governments may take action to encourage this by for example,
increasing their own spending or lowering interest rates.…read more

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Business Angela Emma Rudd BMA
Rate of inflation Firms face increasing
increases pressure to increase
Boom Bottlenecks in supply prices
of materials and Businesses seek
components alternative methods to
Some firms unable to increase output.…read more

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Business Angela Emma Rudd BMA
A boom may result in governments raising interest rates in an attempt to lower the
level of economic activity. Higher interest rates are likely to discourage investment
by businesses and spending by consumers. Reducing spending in this way can assist in
avoiding resources becoming too scarce as firms attempt to produce more than
available resource will allow.…read more

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