Nature and Causes of Fluctuations in Economic Activity

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 

Endogenous models of the business cycle

The Stock Cycle

The stock cycle helps to explain some of the changes in national output. To see this we will look at what happened the last time that the economy had a recession. In 1989-90 the rate of growth in the economy slowed right down at the end of what had been a very strong consumer boom.

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.

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. 

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. 

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. 

Competitition Policy

Competitition Policy

Competition policy covers the various ways in which the competition authorities of national governments, as well as the EU seeks to make markets work better and achieve a higher level of economic efficiency and economic welfare.

The Main Aims of Competition Policy

The goal of competition policy and encourage competition, and make markets work better and contribute to increased efficiency and competitiveness of the UK economy within the EU market and a single. Competition policy aims to ensure that: 

v  Consumers a wider choice in the markets of goods and services.

v  And technological innovation that enhances dynamic efficiency gains. 

v  Effective price competition between suppliers. 

v  Investigate allegations of anti-competitive behavior in markets that may have a negative impact on consumer welfare. 
There are four pillars of competition policy in the United Kingdom and the European Union: 

Antitrust & cartels:

This involves the elimination of agreements that seek to restrict competition (eg price-fixing agreements, or gangs), and violationscommitted by companies holding a dominant position in the market.

Market liberalisation:

Editing includes the introduction of new competition in previouslymonopolistic sectors such as power supplies, telecommunications, air transport and postal services with the new arrangements to retailers for cars within the single market.

State aid control:

Competition policy analyses examples of state aid measures by Member State governments to ensure that such measures do not artificially distort competition in the Single Market (e.g. the prohibition of a state grant designed to keep a loss-making firm in business even though it has no prospect of long-term recovery).

Merger control:

This involves the investigation of mergers and take paymentsbetween companies (such as a merger between two large groupsthat would lead them to dominate the market).

Anti-Trust Policy - Abuses of a Dominant Market Position

The company holds a dominant position if its economic power enables it to work inside the market without taking into account the reaction of its competitors or consumers, and intermediate or final. 

In assessing the strength of the company's economic market, the EU Commission is the market share and other factors such as whether there are competitors credibility, whether a company, ownership and control of the distribution network of its own, and whether he has a right of access environment for raw materials. We note here that the market share is not the sole determinant of economic power in the industry 

Held a dominant position is not wrong in itself, if it is the result of the effectiveness of the company's own ability to compete against other companies. But if the company is using this power to stifle competition, and this practice is considered anti-competitive. 

A recent example of that investigation and the long legal battle by the EU Commission in the alleged assault of the forces of the market by Microsoft. He accused Microsoft of continuing to abuse its monopoly in the software market. Claimed to investigators that Microsoft bundled with Windows Media Player, and damage to programs, unfair competition, such as RealPlayer networks, Real Madrid, "QuickTime and Apple Computer. The investigation continued and the outside is now more than eight years. In March 2004 the EU imposed a fine Microsoft € 497m March 2004 for alleged abuse of its dominant position in the driver and the server software market. in July 2006, and business Guardian Unlimited | The European Union fined Microsoft € 280mfurther a fine of $ 194m £ |. 

Anti-Competitive Practices:

Is defined as the best anti-competitive practices and strategiesdeliberately designed to reduce the degree of competition within the market. Can be taken such actions by a single company in isolationor a number of companies operating in the active or passivecomplicity. Since 1998 there have been many investigations in industries such as chemicals, banking, pharmaceuticals, airlines, beer, paper, plasterboard and preservatives, and computer games!

Examples of anti-competitive practices

vPredatory pricing funded through mutual support (and not all forms of price discrimination, anti-competitive though - much of it is just a real attempt to remain competitive in the market). Was an example of a claim of predatory pricing in 2005 when the accused Wal-Mart to use this strategy because they attempted to storm the German food market for retail sale. Wal-Mart is facing accusations that it was used on short-term predatory pricing for the development of small shop owners of the business. In July 2006, announced that Wal-Mart and had to withdraw from Germany, where it sold its stores to other work. 

vCreation of artificial barriers to entry:

Through advertising and marketing and brand proliferation which increase the costs of a new firm successfully entering a market

Price Fixing – The Office of Fair Trading

Competition law in the United Kingdom expressly prohibits the now almost any attempt to fix prices - for example, you can: 

v  Consistent with the prices of competitors, for example, you can not agree on a work list of the least price for the post 

v  Stock markets or limit production to raise prices 

v  The imposition of minimum prices at different stores, such as distributors 

v  Agree with your competitors what purchase price will offer your suppliers 

v  Cut prices below cost in order to force smaller or weaker competitor from the market 

v  The law does not only include formal agreements. It also includes other activities have an impact on price-fixing. For example, you should not discuss pricing plans with your competitors. If you then all "happen" to raise your prices, and you determine the price. 

Cartels and the law in the UK 

Cartels are a form particularly damaging to the anti-competitive behavior - to take action against them is one of the OFT's priorities. Under the Competition Act 1998 and Article 81 of the EU Treaty, cartels are prohibited. And can be fined any work found to be a member of the organization up to 10 per cent of its turnover in all parts of the world. In addition, the Corporation Act 2002 makes it a criminal offense for dishonest individuals to take part in the most serious types of cartels. Any person convicted of a crime to obtain the maximum prison sentence of five years and / or an unlimited fine. 

There have been many examples of the allegations and investigations into price-fixing and other forms of collusion in the UK and European markets in recent years. They provide all the evidence of how the attention of competition authorities in both the UK and the European Union in promoting the use of their powers under the laws of the new competition to investigate possible cases of price fixing or anti-competitive behavior. 

House of Fraser and Oakley – price fixing for sunglasses

Board of Directors of Fraser store group is facing accusations that it colluded with Oakley to fix the price sunglasses, which sell for between 50 £ and £ 200 a pair. After investigating for two years, has been published by the Office of Fair Trading (OFT) an interim report claiming that both the House of Fraser and Oakley had violated the Competition Act in 2002. Both companies now have the opportunity to make submissions to the OFT in the defense of their position. 
It is believed that the OFT between November 2001 and March 2004, provided the Oakley House of Fraser with sunglasses on the condition that the store sold in less than the minimum Oakley suggested selling price. Has instigated the investigation after complaints from rival retailers and complaints from some customers. Results, if confirmed, OFT has the power to fine companies up to ten per cent of its turnover.

Dual pricing – Sony versus the internet retailers

UK Office of Fair Trading is investigating allegations of possibleprice discrimination illegal on the part of Sony's global electronics giant. Some complain that online retailers that Sony is the discrimination against them by providing the lowest (low) retail prices for the establishment of the high street, making online retailers to pay more of their supplies from many of the best-sellingSony products.
According to the complaint from the Interactive Media in RetailGroup (IMRG) and was their claim that the work of dual pricing as astrategic anti-competitive harm consumer interests. Dual pricing is the mechanism of the recently introduced electronic consumer goods manufacturers whereby traders to pay more for goods ifsold on the Internet.
IMRG claimed that there is no economic justification for dual pricing and the defense that it costs more to run the "brick andmortar" retail trade compared with the online business bothirrelevant and open to dispute. In a press release they claim that
Sony has been in the newspapers as one of the manufacturers thatare being discussed, but others, including Panasonic, Sharp,Hitachi and Philips may also be of dual pricing tactics to consider.

Price fixing in the dairy industry

Office of Fair Trading is investigating claims that some of those involved in the UK higher dairy processing companies in determining the price agreement. Dairy Crest and Robert Wiseman, and the United Kingdom are two of the top three dairy processors are under the microscope and Arla Foods may also be part of a wider range of investigation, which focuses on the decision of the dairy processors to increase in conjunction price of milk paid to farmers in the UK. But this investigation is very fierce criticism from fans farming industry who believe that unless effective steps are taken to raise the prices and incomes flowing to milk producers, the industry itself could collapse with the loss of thousands of jobs. 

Market Liberalization

The main principle of competition policy in the European Union is that the best interests of consumers through the introduction of competition in markets where there is monopoly power. In many cases, the monopolies in the industry, for example, transport, energy and telecommunications. In these sectors, it is necessary to distinguish between infrastructure and services provided directly to consumers using this infrastructure.

While it is often difficult to identify a second, and infrastructure, competing, for reasons linked to investment costs and economic efficiency (ie the arguments of natural monopoly is linked to the economies of scale and high efficiency wide minimum), it is possible and desirable to create competitive conditions in the condition of respect for the services.

The European Commission has developed the concept of separating infrastructure from commercial activities. Infrastructure and thus a means of competition. While the right to exclusive ownership may continue with respect to infrastructure (telephone, electricity, for example, or supply of gas and electricity for households and individual business), monopolists must grant access to companies wishing to compete with them with regard to services offered on their networks (and there are good examplesmarkets include telephone calls or supply of electricity and gas).

State Aid in Markets

Argument for state aid to be given control of private sector companies and the State by the Government is a member by giving certain firms or products preferential treatment at the expense of other companies or products, state aid disrupts normalcompetitive forces. According to the Competition Commission in the EU, none of the beneficiaries of state aid and their competitorsin the long term prosperity. In most cases, government support to achieve is to delay the restructuring is inevitable without the help ofthe recipient actually to return to the cost and the ability to non-pricecompetition. Companies can not be subsidized to compete with those receiving public support in the run up to the end of thedifficulties, resulting in a loss of competitiveness and jeopardize the jobs of their employees.

Under the current rules of the European state aid, and can save a company once. However, it is necessary to approve anyrestructuring aid provided by the national government as part of theplan is viable and coherent to restore the company in the long term.And usually allows the government assistance, which aims topromote research and development, and regional economic development and promotion of small enterprises.

Economic arguments for not approving a merger:

Under what circumstances might the EU Competition Authorities block a merger/takeover or insist on some form of redress before permitting it to proceed?

 Monopoly power: 

Mergers and acquisitions, the creation of market dominance, and are exploiting consumers and the misallocation of resources if there are barriers to enter the competition in the market, leading to failure and loss of economic welfare. In fact, there are always barriers tocompetition in the markets, especially in industries where sunk costsare high.

Mixed evidence on benefits of mergers: 

The evidence is mixed as to whether mergers improve companies' performance, either in terms of profitability, or cost savings – indeed many of the claims for increased efficiency and economies of scale made prior to a merger or a takeover prove to be exaggerated with the benefit of hindsight.

Employment effects

Mergers and acquisitions are almost always lead to a rationalizationas part of the process of reducing costs but may be at the expense of the function (the possibility of structural unemployment), and a smaller number of ports / choice for consumers (and this is a matterof equity)