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Business economic - Essay Example

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i) Recession refers to represents a contraction in the business cycle resulting in decline in economy activity. It can be represented as a fall in GDP which comprises of Consumption, Investment, Government Expenditure and Net Exports (GDP(Y) = C+I+G+NX) (Michl, 2002)…
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Download file to see previous pages Thus, a double-dip recession occurs when the GDP rises to positive levels (the recovery period) followed by negative levels (another recession) (Quiggin, 2010). It is often referred to as the “W-shaped” recession (Quiggin, 2010). One of the most prominent double-dip recessions took place in the 1980’s in the United States (Appendix 1) (Quiggin, 2010). Two recessions occurred in the 1980’s in the United States. Initially, the economy shrunk by 8%, then grew at 8% after which the economy dipped into the second recession due to the Federal Reserve’s policy to raise interest rates to curb inflation (Quiggin, 2010). Following that, the economy re-entered into growth for the rest of the years (Quiggin, 2010). Although, there are no definite characteristics that define a recession, there are a few symptoms that are generally agreed by economists. First is the inverted yield curve model which was determined by Jonathan H. Wright which uses 10 year yield of Treasury Securities as an input (LaBonte et al., 2010). Second, is the change in unemployment rate over a three month period (LaBonte et al., 2010). Third, lower prices of assets including real estate and financial assets as well as large personal and corporate debts (LaBonte et al., 2010). ii) The contraction in Ireland’s economy was of particular significance at a time when other Euro nations were showing positive growth rates. This fall in Ireland’s GDP is attributed firstly, according to Author of the Bulletin, Dr. Dan McLaughlin, Group Chief Economist, Bank of Ireland, to the drastic fall in capital spending. Although capital spending decreased by 11%, on average, throughout the rest of the developed world; in Ireland it fell by a drastic 30% along with a 34% decline in building and construction activity (McLaughlin, 2010). The share of construction in general, and house-building in particular now accounts for only 2.5% of Ireland’s GDP, compared to 12% in 2005 (McLaughlin, 2010). Secondly, consumption expenditure also saw a decline throughout the Western regime by 1.1%, due to reduced employment and falling growth in wages (McLaughlin, 2010). In the case of Ireland, employment slashed by 8% along with decline in wages which partially contributes to the fall in real consumer purchase power of Ireland (McLaughlin, 2010). A significant trend emerged at this point; that of higher savings. Although real disposable income dipped in Ireland, it was accompanied by a rise in the marginal propensity to save, leading to a higher savings ratio (McLaughlin, 2010). At the same time, Ireland’s exports fell by much more than that of its Euro competitors, implying that Net Exports also declined. Thus, to sum up; since all the components of GDP including consumption, investment and government expenditure along with net exports fell, GDP was bound to decline. iii) A Keynesian style stimulus package is a policy measure used by policymakers and institutions that involves stimulating one or more of the components that make up aggregate demand in an attempt to increase employment, income and output of an economy (Tool & Samuels, 1989). This approach is consistent with the Keynesian theory that negative output gap can lead to a bottleneck in the economy; a situation it finds difficult to escape. The paradox of thrift comes into force whereby loss of valuable consumer and investor confidence combined with high propensity to save exacerbates the recession (Meltzer, 1988). If such is the situation, ...Download file to see next pagesRead More
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