Economics for Business: Business Circle - Term Paper Example

Economics for Business Definition of business circle Real business cycle theory is a of theories explored first by John Muth (1961), and associated most with Robert Lucas. The idea is to study business cycles with the assumption that they were driven entirely by technology shocks rather than by monetary shocks or changes in expectations. Shocks in government purchases are another kind of shock that can appear in a pure real business cycle (RBC Theory) model. (Real Business Cycle Theory: 2007) what is the Business Cycle Parkin and Bade's text "Economics" gives the following definition: The business cycle is the periodic but irregular up-and-down movements in economic activity, measured by fluctuations in real GDP and other macroeconomic variables. Parkin and Bade go on to explain: A business cycle is not a regular, predictable, or repeating phenomenon like the swing of the pendulum of a clock. Its timing is random and, to a large degress, unpredictable. A business cycle is identified as a sequence of four phases: 1. Contraction (A slowdown in the pace of economic activity) 2. Trough (The lower turning point of a business cycle, where a contraction turns into an expansion) 3. Expansion (A speedup in the pace of economic activity) 4. Peak (The upper turning of a business cycle) Take United Kindom for example,since 1980, before 1992, the British government has been beset with up to 10% inflation race. "inflation is rising and the current account of the balance of payments is moving into deficit."(Sloman, J. & Sutcliffe: 2001). Since 1992, because the government embarked on a massive programme of reform of labor market, putting up the labour productivity; the monetary policies to halt inflation have been successful, the British GDP was with an average annual growth rate of 2.5 percent. But at the same time, "In the expansion phase, growth is high and unemployment is falling."(Sloman, J. & Sutcliffe: 2001). See the following data for reference: 1972-92 1992-2004 GDP 1.68 0.86 Investment 3.95 2.19 Consumption 1.90 0.95 Fiscal expenditure 1.20 0.73 Export 2.86 2.13 Import 4.03 1.18 (Data from Luca Benati: 2006) In the United States, the National Bureau of Economic Research, an independent research institution, determines the official dates of peaks and troughs in U.S. business cycles. The following table shows the NBER monthly dates for peaks and troughs of U.S. business cycles since 1890.( Romer, Christina D: 1986) Business Cycle Peaks and Troughs in the United States 1890-1992 Peak Trough Peak Trough July 1890 May 1891 Aug. 1929 Mar. 1933 Jan. 1893 June 1894 May 1937 June 1938 Dec. 1895 June 1897 Feb. 1945 Oct. 1945 June 1899 Dec. 1900 Nov. 1948 Oct. 1949 Sep. 1902 Aug. 1904 July 1953 May 1954 May 1907 June 1908 Aug. 1957 Apr. 1958 Jan. 1910 Jan. 1912 Apr. 1960 Feb. 1961 Jan. 1913 Dec. 1914 Dec. 1969 Nov. 1970 Aug. 1918 Mar. 1919 Nov. 1973 Mar. 1975 Jan. 1920 July 1921 Jan. 1980 July 1980 May 1923 July 1924 July 1981 Nov. 1982 Oct. 1926 Nov. 1927 July 1990 Mar. 1991 Deflation and inflation were produced in economy. The phenomenon was similar to that in UK. During deflationary period, there exists a persistent decrease in the level of consumer prices or a persistent increase in the purchasing power of money because of a reduction in available currency and credit. This is the correspondence between different countries in the period of deflation. Reasons of business circles Why do the business circle occur First, because the economy is disturbed. If the spending used privately or publicly increases a lot, there can appear booms. "For example, if the government spends a lot of money to fight a war but does not raise taxes, the increased demand will cause not only an increase in the output of war materiel, but also an increase in the take-home pay of government plant workers. The output of all the goods and services that these workers want to buy with their wages will also increase. Similarly, a wave of optimism that causes consumers to spend more than usual and firms to build new factories will cause the economy to expand. Recessions or depressions can be caused by these same forces working in reverse. A substantial cut in government spending or a wave of pessimism among consumers and firms may cause the output of all types of goods to fall." Second, to attain the goal of the economic growth, the government will adopt some effective economic measures, introducing recessionary measures. The twists and turns in the economic policies and changes of governmental cycles will cause the changes of economic cycles. Case histories show that all nations face recurring periods of economic fluctuations. Third, the innovation causes the economy uo and down. The technical innovation is instrumental in improving the qualities of products, saving people much time and labour. The high tides or low tides of technical innovation and technological invention have an influence on economy. Fourth, the investment influences revenue and spending. Increased investment will undoubtedly expand employment opportunities and consumption demand and vice versa. They Influence each other, resulting in economic recession or expansion. Some effective policies to brake recession The Government's argument is that they must first aim to beat inflation. Some effective policies seem to reduce the amplitude and duration of recessions. For example, that monetary and fiscal policy needs to be implemented with precision, though it's a little bit difficult to do so. One should be sure about how much of a monetary or fiscal stimulus is needed to end a recession. The prevailing prosperity cannot last long. Then, as sure as fate, will come one of the worst periods of depression that this or any country has even seen. "While government policy may not have cured the business cycle, the effects of cycles on individuals in the United States and other industrialized countries almost surely have been lessened in recent decades. The advent of unemployment insurance and other social welfare programs means that recessions no longer wreak the havoc on individuals' standards of living that they once did." Reference List Gordon, Robert J., ed. The American Business Cycle: Continuity and Change. 1986. Luca Benati. UK Monetary regimes and macro economic stylized fact. Bank of England Working Paper No. 290, March. 2006 Real Business Cycle Theory. 2007. http://economics.about.com/od/economicsglossary/g/rbctheory.htm (accessed May 6, 2007) Romer, Christina D. Is the Stabilization of the Postwar Economy a Figment of the Data American Economic Review 76 (June 1986): 314-34. Sloman, J. & Sutcliffe, M (2001) Economics for Business, 2nd ed., Harlow: Pearson Education Read More