Nature and Causes of Fluctuations in Economic Activity
The economic cycle
All work and experience in developing courses (sometimes known as Commerce courses), where the rate of growth of income, production and spending fluctuates over a period of time. The length and volatility of each of these courses tends to change over time, partly because the structure of the economy develops. In many cases, the economy, we find that the relations between theory previously noted the different variables, for example between unemployment and inflation, and seems to have changed.This can make life difficult for policy-makers when they try to manage the economy and achieve its objectives. We tend to focus on what happened and is happening to the economy of the UK over recent years. But keep in mind that it can be applied to many of the ideas here and tested with many other countries who will be at different stages of economic development.
Short term economic growth for the UK
Shows the annual growth of real GDP in the United Kingdombetween 1986 and 2006 in the chart the next. The data showchanges in the percentage of annual gross national product at constant prices, in other words, figures have been adjusted to take account of changes in the general level of prices.
United Kingdom saw the participation of the recession in 1990-1992, during which more than three million people became unemployed. Since 1993, the United Kingdom has enjoyed over thirteen years of continuous growth. Years and was stronger during the current session in 1997 (3.3%) and 2000 when real GDP grew by about 4%. Taken as a whole, enjoyed the UK economy is currently the longest period of sustained growth for more than forty years, while other countries had experienced recession or very slow growth in the past few years, including the United States, Germany, France and Japan.
Theories of the Economic Cycle
In this section we consider some theories about the economic cycle and in particular, how can a country moves from one stage of the cycle to another. Models are often divided into two groups, the business cycle:
Local models for the session to try to explain in terms of the cyclical factors that lie within the economic system, suggesting that even if there were not shock the economy, there will be still differences in the growth of spending and income and production
External models of the cycle can start claiming that the cycles of shocks on the demand side or supply-side to the economic system. Will get back to the idea of shocks a little later
Local models for the session to try to explain in terms of the cyclical factors that lie within the economic system, suggesting that even if there were not shock the economy, there will be still differences in the growth of spending and income and production
External models of the cycle can start claiming that the cycles of shocks on the demand side or supply-side to the economic system. Will get back to the idea of shocks a little later
Endogenous models of the business cycle
The Stock Cycle
Consider the implications of such a fall in demand for consumer goods which in the beginning (in the first half of 1989) resulted in an increase in stocks of goods and raw materials held by the companies. Because a stock can be a burden on the financial resources of the company (must be stored somewhere, may be limited or product shelf life), acted in an unexpected rise in stockpiles of unsold goods as a signal to companies to cut production - leading to a reduction in the demand for intermediate products such as components. This process to remove the storage and then worked its way through the supply chain. Thus, for example, companies that provide raw materials and other supplies also suffered a decline in demand. The result was a decline in production and lay off workers. Throughout the year 1992.1991, and for most of 1993, companies in the UK economy, which seeks to reduce inventory levels due to weak demand and lower profits.One way to do this is to try to sell the unsold products at discounted prices, and this is what actually happened in the United Kingdom at the time, and the impact of being located in the rate of inflation.
Britain's economy began to emerge from recession in 1993 and promote the growth considerably in 1994, in part, on the back of a boom in exports abroad.
Theory tells us that when AD begins to pick up in the beginning of the decline in inventory levels and recovery, and this is a signal for companies to increase production to rebuild inventories and meet the increase in demand for consumer goods. Notice how, in the second half of 1994, inventory levels began to rise very strongly.Very act of increasing production to rebuild inventories to help make the economy away from its lowest level in a recession.
Britain's economy began to emerge from recession in 1993 and promote the growth considerably in 1994, in part, on the back of a boom in exports abroad.
Theory tells us that when AD begins to pick up in the beginning of the decline in inventory levels and recovery, and this is a signal for companies to increase production to rebuild inventories and meet the increase in demand for consumer goods. Notice how, in the second half of 1994, inventory levels began to rise very strongly.Very act of increasing production to rebuild inventories to help make the economy away from its lowest level in a recession.
Cycle stock is becoming less important in helping us to explain the economic cycle? Some economists believe that the answer is yes, because improvements in information technology have changed the nature and importance of the stock cycle in most developed countries. For example, reduced use of systems in place of "just in time" delivery of common stock in industries such as automotive engines and large-scale improvements in inventory control and the need for companies to maintain high levels of stocks of intermediate products. Now it is easier to provide the match changes in demand in the short term.
The inventory cycle is not out of context, but we need other theories to be able to explain the periodic fluctuations in the economy.
The inventory cycle is not out of context, but we need other theories to be able to explain the periodic fluctuations in the economy.
Different stages of the economic cycle
Economic Boom
Mutation occurs when GDP growth is much faster than the real direction of the growth rate of about 2.5% per year. In the boom phase, AD is high and businesses usually respond by increasing production and employment. May also chose to expand profit margins by raising prices, and this can lead to pay the costs of inflation and the withdrawal of the request. The main characteristics of the boom are as follows:
Is almost always driven by a surge in demand in the UK through consumer spending: higher aggregate demand. But can government spending, and an increase in capital investment and an increase in exports also add to the demand for goods and services. Exports may be boosted by rapid growth of world trade or a decline in the exchange rate.
Tightening of the labor market: An expansion of the economy should lead to increased employment and an increase in real income of the population in work. Can be measured in "tight labor market" in different ways, for example, the unemployment rate or the number of vacant posts unfilled. Surveys of the labor shortage also provide information about the balance between supply and demand in the labor market. If the labor shortage becomes severe, the risk is that inflation in wages will accelerate, leading to a rise in unit labor costs through nutrition to higher retail prices. Is to explore possible trade-off between unemployment and inflation in the later chapters on the Phillips curve and NAIRU and.
High demand for imports and trade deficit on a larger scale: A common feature of the mutation is to increase demand for imports due to high marginal propensity to import among consumers.However, if export growth in the UK can match the boom in demand for imports, the trade deficit widening.
Impact on government finances: The economic prosperity and provides a "financial return" to the government because tax revenues will rise rapidly as more people in work and they earn more money and spending. Expansion of the economy and also helps to reduce government spending on social welfare payments.
Strong corporate profits and investment: The periodic increase usually leads to strong growth in profits and an increase in investment. Can be explained by the relationship between demand and planned investment by using the accelerator theory of investment.
League boost productivity: An expansion of the economy is good news for labor productivity because companies are stretching to meet the additional demand through the use of their resources more intensively the existing work and making the most of existing capacity more efficiently. Increase in productivity helps to keep unit labor costs under control. To use the current terminology - productivity growth tend to be loyal to the league - that is, it takes the speed even when the economy is strong, but can falter when demand weakens and production.
There is a risk of pick-up in inflation: You can withdraw all of the demand and cost push inflation happens if AD exceeds potential GDP over a long period. Was an excellent example of this boom in the late 1980s, which led to high rates of inflation and several years of very high interest rates. It is the job of monetary and fiscal policy to make sure that the improvement is not strong patrol out of control.
Is almost always driven by a surge in demand in the UK through consumer spending: higher aggregate demand. But can government spending, and an increase in capital investment and an increase in exports also add to the demand for goods and services. Exports may be boosted by rapid growth of world trade or a decline in the exchange rate.
Tightening of the labor market: An expansion of the economy should lead to increased employment and an increase in real income of the population in work. Can be measured in "tight labor market" in different ways, for example, the unemployment rate or the number of vacant posts unfilled. Surveys of the labor shortage also provide information about the balance between supply and demand in the labor market. If the labor shortage becomes severe, the risk is that inflation in wages will accelerate, leading to a rise in unit labor costs through nutrition to higher retail prices. Is to explore possible trade-off between unemployment and inflation in the later chapters on the Phillips curve and NAIRU and.
High demand for imports and trade deficit on a larger scale: A common feature of the mutation is to increase demand for imports due to high marginal propensity to import among consumers.However, if export growth in the UK can match the boom in demand for imports, the trade deficit widening.
Impact on government finances: The economic prosperity and provides a "financial return" to the government because tax revenues will rise rapidly as more people in work and they earn more money and spending. Expansion of the economy and also helps to reduce government spending on social welfare payments.
Strong corporate profits and investment: The periodic increase usually leads to strong growth in profits and an increase in investment. Can be explained by the relationship between demand and planned investment by using the accelerator theory of investment.
League boost productivity: An expansion of the economy is good news for labor productivity because companies are stretching to meet the additional demand through the use of their resources more intensively the existing work and making the most of existing capacity more efficiently. Increase in productivity helps to keep unit labor costs under control. To use the current terminology - productivity growth tend to be loyal to the league - that is, it takes the speed even when the economy is strong, but can falter when demand weakens and production.
There is a risk of pick-up in inflation: You can withdraw all of the demand and cost push inflation happens if AD exceeds potential GDP over a long period. Was an excellent example of this boom in the late 1980s, which led to high rates of inflation and several years of very high interest rates. It is the job of monetary and fiscal policy to make sure that the improvement is not strong patrol out of control.
As shown in the chart above, in the late 1980s, there was a sharp rise in the rate of inflation as a result of overheating of the economy during the mid-late 1980s. Then the economy went into recession, which helped to reduce inflation. Since the early 1990s, we have seen an appropriate mix of steady growth, low inflation and stable. In fact for almost all short-erosion phase during 2005, exceeding the growth rate of real GDP growth rate of consumer prices. In other words, there was improvement in the trade-off between economic growth and inflation.
Showing economic growth using an AD-AS framework
In the following diagram we see an outward shift in AD. Equilibrium national income rises from Y1 to Y2 and takes real national output closer to potential output (shown at level Yfc). If AD were to rise further beyond AD2, this risks creating excess demand (i.e. a positive output gap). At this stage of the business cycle, short run aggregate supply is drawn as inelastic and there is growing pressure on factor resources which might trigger an increase in commodity prices and wages putting upward pressure on inflation.
In the diagram below the outward shift of AD had taken the economy beyond potential GDP leading to a positive output gap measured by the distance AB. This may then cause higher wages and a rise in labour costs and also the prices of other factor inputs leading to an inward shift in SRAS. This takes the economy towards full-capacity output but with a higher price level (P3).
Economic Slowdown
Slowdown in real GDP occurs when the still expanding, but less frequently. If a country can achieve growth without falling intorecession, this is called "soft landing" while (maintaining the aviationanalogy) a state of outright recession coined the "hard landing"
Economic Recession
Recession means that the actual fall in real GDP, the decline in income, employment and profits. Technically a recession is a period of two quarters (ie six months) when the fall of real GDP. Alternative explanation of the recession is that it happens when the economy is operating with a constant level of real GDP below its potential and that the gap between real GDP and potential widening
We can see the output gap in the chart above. You can see the effects of the recession in 1990-1992? - This left the economy with a large negative output gap, and GNP, well below its potential capacity. The cause of recovery during the mid-1990s the gap and narrow the output to the United Kingdom by 1997 had reached the potential GDP. Since then, although there are periodic variations, and the output gap itself has been very small - ranging from +1% and -1% of GDP. This is one of the reasons that the British economy has managed to continue to grow its current phase.
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