Economic booms and recessions are two different phases of the economy, which form a boom and bust cycle when they occur alternatively and repeatedly. Let us figure out some major points of distinction between the two:
Table of Contents
Economic Boom Definition
An economic boom is one of the phases in the economic cycle that signifies the period of rapid acceleration in the gross domestic product (GDP) of a nation. The country witnesses an upswing in economic activities, i.e., a sharp surge in output, employment, and income levels.
It is the phase where the businesses produce goods or services at their optimal levels. Moreover, the economy experiences a rise in consumer spending, consumption level, asset prices, interest rates, and profits, making everyone better off. Although short-lived, such an economic boost results in a higher inflation rate and the creation of an economic bubble over the period, which would eventually bust.
Key Takeaways
- An economic boom refers to the part of the economic cycle when businesses and the economy witness an expansion that is greater than the expected long-run economic growth rate.
- It is evident through the rise in production and consumption of goods and services, the surge in consumer spending, high asset prices, higher business profits and household incomes, and increasing employment rates.
- Such an economic phase is temporary and emerges from expansionary fiscal and monetary policy interventions, and it extends for a medium or long term.
- However, an economic boost increases the risk of bubble formation due to rising inflation rates.
Economic Boom Explained
An economic boom refers to a temporary phase where the economy expands at a faster pace than its long-run economic growth rate. During such a period, consumer, household, and business confidence increases. The government and the central bank often relax fiscal and monetary policy implications to improve the economic condition and ensure long-run growth.
While such a boost in economic and business activities can persist for a medium or long-term period, it is identified through its following features:
- At this time, the businesses function at their total capacity or even higher;
- The real GDP rises more than the expected economic growth rate in the long term;
- The businesses produce more goods and services to fulfill a gap in the demand and supply;
- Consumers and households increase their spending on the purchase of goods and services while keeping less money in savings and investments;
- The employment rate rises due to more job openings;
- The cost-push inflation and demand-pull inflation rates rise.
- The prices of housing and other assets like stocks accelerate due to rapid economic growth;
- The nation's income level and business profitability surge;
- The interest rates on borrowing also increase.
Although a period of economic growth brings a lot of hope for developing and underdeveloped nations, it usually forms an economic bubble that is bound to bust if the government doesn't take corrective measures. Also, it makes people spend more and save or invest less, which may lead to their unsecured financial future. Moreover, it makes houses and other real estate unaffordable for the middle class and poor people.
History
The 1920s economic boom in the U.S. witnessed the nation becoming a leading economic power using its vast natural resources and a large immigrant workforce. It was during World War I that the U.S. economy experienced an expansion when American banks offered loans to Europe and businesses that were exporting essential goods.
This post-war economic boom was seen after a short economic downturn in the U.S. It was in the 1920s that there was rapid economic growth driven by the growth of the electricity and automotive industries. The nation's economic growth spurred when there was an enormous demand for electricity, and businesses had to engage in mass production. Further, the innovative approach of Henry Ford in the automotive industry resulted in the production and demand of affordable cars, which led to more job creation and accelerated economic development. Later, the introduction of hire purchases, credit systems, and other credit options for making consumer goods accessible to a broader customer base increased consumption. Moreover, the new retail models, such as chain stores and catalog shopping, also fueled consumer spending, all contributing to the economic boom in the U.S.
Causes
The economic boom is a result of the various fiscal or monetary policy decisions taken by the government or the central bank to expand the money supply in the market. Given below are some of its common triggers:
- Expansionary Fiscal Policy: The government's lenient fiscal measures, like reduced taxes, can leave more disposable income in the hands of consumers and businesses. Thus, it will lead to higher aggregate demand, consumer spending, and business growth.
- Expansionary Monetary Policy: When central banks lower the interest rates on borrowings, businesses start taking more loans for investment, and consumers increase their spending. Thus, the aggregate demand for commodities and services will automatically surge.
- Surge In Asset Prices: As asset prices in the housing and stock markets show an upswing, people assume they have a lot of wealth and the power to mortgage and remortgage such assets. Consumers start buying more of these assets at higher prices. However, this increases the possibility of irrational exuberance when assets are overvalued.
- Rise In Confidence Level: When the market shows a positive movement, the investors, consumers, and businesses become more confident. Hence, they tend to borrow more for investment and spending.
Examples
The economic boom is essential for the development of a country, but the government needs to look at its dark side as well. Let us understand the need for such an economic boost through the following examples:
Example #1
Suppose a nation is struggling with poverty, unemployment, and considerable reliance upon the import of goods and services to fulfill domestic needs. The government, therefore, imposed expansionary fiscal policies like lower tax rates, and the central bank also decreased the interest rates to improve the economic condition. Over the next 5 years, the country saw a significant economic boom, with the GDP rising by 4.5% every year. The local businesses have increased their capital investments, and the consumers have also surged their spending on locally produced goods and services. At the same time, the employment rate has also increased in the country.
Example #2
In an August 2024 article, a group of researchers emphasized the concerns about Russia's economic future despite recent growth figures that show the wartime economic boom in the country. The team of researchers from Yale, Wharton, and the Carnegie Endowment institutions suggest that Russia's apparent economic strength is accounted for by its unsustainable military spending, which has adversely affected the private sector. While the government has increased the military expenditure, there is a parallel labor shortage in other industries. This has increased the cost of labor, i.e., wages, and resulted in inflation, which further forced the central bank to surge the interest rates to 18%.
The Russian government's inclination towards higher military production while ignoring the other economic areas is resulting in a dis-balance in the economic structure. This has further resulted in a budget deficit and high household debt while decreasing the export revenue of oil and gas. Such measures could potentially result in the nation's economic dawn, blocking its economic growth in the long run.
Effects
The national or global economic boom has a significant impact on investors, consumers, businesses, and the overall economy. These outcomes can be favorable or unfavorable and can be distinguished into the following two broad categories:
#1 - Micro-Level Impacts
The economic growth can affect the individuals, households, and businesses in the following ways:
- Many businesses will see a sharp rise in their production, expand their operations, and make higher supernormal profits.
- The individuals and households would witness an upswing in their incomes, resulting in a lower absolute poverty rate.
- There is a possible surge in the prices of assets like stocks, houses, and other real estate. However, this could also make buying or renting property unaffordable for some people.
- The labor market experiences a rise in jobs resulting from a higher level of output.
- However, a higher level of production to meet the rising demand for goods or services may also negatively impact the environment due to more waste, water pollution, and other emissions.
#2 - Macro-Level Impacts
The overall economy experiences a boost in the short run. However, such economic growth can also have some side effects in the long run, as discussed below:
- The consumption level and consumer spending surge in the nation since people have more disposable income.
- The higher consumption level can lead to a positive accelerator effect, where businesses start producing more goods and services to fulfill the rising demand, thus increasing their capital investment.
- Companies have more job openings to fulfill their human resource requirements, which further reduces unemployment and uplifts the employment rate in the nation.
- The economy witnesses fast-paced growth, while the government's tax revenue (both direct and indirect) increases due to accelerated economic activities and rising GDP.
- However, it can even propel the risk of a potential trade deficit if such an economic boost triggers a higher demand for imported goods and services.
- Further, it may lead to demand-pull or cost-push inflation due to the optimal supply of goods and services and a positive output gap.
Economic Boom vs Economic Recession
Basis | Economic Boom | Economic Recession |
---|---|---|
1. Definition | Definition: The phase where the economy expands at a higher speed than the long-run economic growth rate. | Definition: The phase where the economy expands at a higher speed than the long-run economic growth rate. |
2. Causes | Expansionary monetary and fiscal policies. | Expansionary monetary and fiscal policies. |
3. Economic Growth | The economy witnesses fast-paced growth. | The economy witnesses fast-paced growth. |
4. Investment | Greater capital investment for business expansion, technology, research, etc. | Greater capital investment for business expansion, technology, research, etc. |
5. Consumption and Consumer Spending | Increases due to more disposable income with individuals and householders. | Increases due to more disposable income with individuals and householders. |
6. Confidence | A higher level of confidence is shown by investors, consumers, and businesses in the market. | A higher level of confidence is shown by investors, consumers, and businesses in the market. |
7. Asset Prices | Prices of stocks, houses, and other assets tend to show an uptrend. | Prices of stocks, houses, and other assets tend to show an uptrend. |
8. Employment | The companies increase their hiring, and the employment rate surges. | The companies increase their hiring, and the employment rate surges. |
9. Inflation | High | High |
10. Policy Measures Taken | Contractionary fiscal and monetary policies are imposed to control the rising inflation rates. | Contractionary fiscal and monetary policies are imposed to control the rising inflation rates. |