Over
time an economy usually goes through periods of growth (booms) and busts
(recessions). This is called the
business cycle.
The
chart above tracks real GDP for the UK since 1955. There have been three main
economic recessions over the last thirty years (1974-75, 1980-81 and 1990-92)
but over the long run real output has increased on average by a little over
2% per year. There have only
been five full years of "technical recessionary conditions"
(negative economic growth) during this period. For most of the last fifty
years the economy has grown in size each year.
Real national output does not rise or fall at
a uniform rate. All countries experience fluctuations in their rate of
economic growth - some more volatile than others!
The British economy experiences regular trade or business cycles.
Annual and quarterly movements in real output are tracked to measure the
cyclical movement of the economy.
When Real GDP
is rising quickly the economy is said to be experiencing economic growth or
recovery. When real output falls or when the growth of output is below its
long run trend rate - then an economic recession exists. One full economic
cycle normally last between 6-10 years - but this is by no means guaranteed.
Notice
how the last recession came to an end in 1992 (in fact over the course of the
year there was barely any noticeable growth to speak of!). But since then the
economy has enjoyed one of the longest sustained expansions in output (and
employment) in the post war period. Can this continue? Can the British
economy manage at least a decade without experiencing another recession?
Benefits
And Costs Of Booms
The
British economy has enjoyed continuous growth of real national output since
the late autumn of 1992. Eight years of growth inevitably brings a range of
economic and social benefits - but there are also dangers and risks when an
economy rides a fast growth path.
MAIN
ADVANTAGES
Potential
customer base
During
periods of economic growth incomes will rise, therefore customers will want
to purchase more products. This
will be good news for firms.
Employment
Economic
growth stimulates higher employment since labour is a derived demand.
Not all industries will share in the growth of an economy.
Fiscal
dividends from economic growth
Growth
has a positive effect on Government finances - boosting tax revenues and
helping to reduce the budget deficit. More people in work, rising spending
and higher company profits all contribute to an increased flow of revenue to
the Treasury, allowing them to spend more money.
Growth
and Investment
Rising
demand and output encourages further investment by firms in new capital
machinery.
Business
Confidence
Sustained
economic growth should have a positive impact on company profits &
business confidence
Living
Standards
Growth
improves living standards and quality of life.
DISADVANTAGES
OF ECONOMIC GROWTH
Inflation
risk
If
the economy grows too quickly there is the danger of inflation as demand
races ahead of the ability of the economy to supply goods and services.
Producer then take advantage of this by raising prices for consumers.
Externalities
Fast
growth can create negative externalities (increased pollution and congestion)
which damages overall social welfare
Inequality
Not
all of the benefits of economic growth are evenly distributed. We can see a
rise in national output but also growing income and wealth inequality in
society. There will also be regional differences in the distribution of
rising income and spending.
Growth Of
Output By Sector
We
can also track the growth of production in specific sectors such as
manufacturing industry and service industries. The chart below shows the
annual growth of real output for four separate sectors.
Over the last
six years, the service sector has grown more quickly than manufacturing or
construction. Transport and Communication industries have enjoyed rapid
growth as has Business Services. In contrast the construction industry has
been in technical recession since the 4th quarter of 1998 and manufacturing
output also dipped in the 1st quarter of 1999.
It
is often said that the UK has a two-tier economy with the industrial sector
achieving slow growth of output whereas service industries have experienced
above trend growth of demand and production
It
is also possible to compare the rates of growth of the UK with other
countries.
Further
Reading
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