The Business Cycle & Policy Response in France - Coursework Example

? The Business Cycle & Policy Response in France Business cycles are periods of growth and decline in an economy. There exists four stages in a business cycle namely; contraction, trough, expansion, and peak (About.com, 2010:1). Using the GDP growth rates, economists are able to track the stages in a business cycle. In the report, we shall focus on the .economy of France we will study the GDP of France in the past 20 years and use the data to determine the economic state of the country. We also analyse the data and use it to explain the business cycle of the country represented by the data. The analysis will also cover a considerable government response to the economic problem that the country is facing. The figure above represents the France GDP annual growth rate between 1990 and 2000, in the 1990s, the Gulf war and the reunification of Germany brought about a recession in Europe, although the German reunification in a way stimulated the European economy. According to the France minister of foreign youth affairs the employment policy of the end of 1990s contributed to a strong employment performance in France and this narrowed the unemployment gap (2007:3). In 2000, France growth was close to 3%, its unemployment fell twice, and when compared to Europe it was a 1.5-percentage decline for France versus 0.7-percentage in Europe. The introduction of the single currency marked the period of strong growth. From this, we conclude that, in the last twenty years, it is evident that the periods of falling unemployment always coincided with periods of strong economic growths (French Ministry of youth affairs, 2007:4). A fall in a country's GDP relates to contraction in the economy, when the country does not show any improvement in the GDP it may result in an economy recession. Reasons may be due to inflation, or massive unemployment in the country, a rise in the GDP conforms to an expansion, stability of a country s currency, a peak relates to a continuous rise in the country’s GDP (Trading Economics.com, 2005:4). All forces of supply and demand affect business cycle. The availability of capital does boost a healthy expansion a rise in the price of assets at this point leads to inflation, the stock market then rectifies this by creating fear and contraction(About.com, 2001:1). A rise in GDP signals an expansion in the business cycle whereas a fall in the GDP signals a contraction. Reports show that the GDP of France expanded 1.6%in the second quarter of 2011. Historically France annual GDP growth was1.9% its highest observed in 1988 at 4.9%, a record low was -3.90% in march 2009. Judging the country's state at this point of the cycle, it will be right to say France’s economy is in contraction. We look at France in 2009, where its GDP shrank by 1.2% in the first quarter, however, this was counteracted by a 3% in the third quarter, another fall was recorded 1.5% in the final quarter. The recession observed when we experienced two quarters of negative growth. In 2008 president, Nicholas Sarkozy gave a speech in Toulon he thought that there was the need to rethink the entire world’s financial system in connection to the economic crisis that the world faced. The president stated that what France was facing at that time was an economic recession and that it was a long-term problem. According to the latest data the French economy contracted, a 0.3% in the 2nd quarter in the year 2008, from the previous data economists concluded that the two quarters recorded negative growths. These data raised fears of a further recession in the economy. This recession resulted in the rise in unemployment and a struggle in households to try to beat the recession (France 24, 2008:1). We further look at the fiscal policy and how it functions in stabilizing the economic fluctuation. How this is a solution to the recession problem? According to Weil, fiscal policy involves utilising of government expenditure and taxation to influence the economy, these policies affect the tax rate, interest rates and government spending in an effort to control the economy but let us first consider its responsiveness to the business cycle. It is evident that fiscal policy responds more counter cyclically in OECD countries, we are aware that France is a member of OECD countries. Studies show that government expenditure are much more responsive than taxes. Among expenditures, subsidies and transfers proved to be the most counter-cyclic in OECD countries, this suggests that the social welfare system in OECD countries acts as automatic stabilisers (Fatas and Ilian, 2001a:2). Studies show that fiscal policy responds more to negative GDP growth than for positive GDP growth rates; this means fiscal policy responds much more strongly in recessions than in booms. A positive response to the business cycle will prove this method effective, making the government a stabilizer of economic fluctuation. Over economic fluctuation, this implies that budget deficits can grow over the business cycle. In stabilizing the economy, the government functions as a stabilizer of economic fluctuation (Barrow, 1989:30). Another approach is if the government reduces taxes or increases transfer for payments, households’ disposable income, the rise in income will in turn raise aggregate demand. Barrow observes that at times when the government incurs a deficit it settles some of its expenses by issuing bonds (1989:35). France in the effort of trying to beat the recession, president Sarkozy ordered a stop on taxation, what does this imply? A stop on taxation will somehow influence purchases that in turn influence the demand. This explains the circular flow model where the government in this case controls the flow of goods and services, money through taxes, interest rates and government expenditure. In conclusion, France’s economic recession is a problem that is solvable with the right policies and approaches. In 2009, the France government concentrated on controlling the public deficit and debt to avoid its rise to uncontrollable proportions. This they achieved by adopting an economic stimulus package. France also needs to define specific measures to control spending in all levels of government they need to streamline tax expenditures. A reasonable target would be strengthening fiscal responsibility of the region and local authorities. Let us consider a fiscal expansion, in the case of France problem, this will raise interest rates and attract some private investments. In an open economy, this policy influences exchange rates and trade balance. An increase in the rates of interests because of government borrowing attracts foreign capital this in turn affects the GDP positively (international Monetary Fund, 2009:2). Bibliography About.com, 2010. Business cycle. [Online]. Available: http://useconomy.about.com/ud/grossdomesticproduct/f/Recession.htm [21 October 2011]. Barrow, R. 1989.The Ricardian Approach of Budget Deficit. Journal of Economic Perspectives, 3(2): 37-54. Fatas, A., & Ilian, M. 2001a. Government Size and Automatic Stabilizers; International & Intranational Evidence. Journal of International Economics, 55(1): 3-28. Fatas, A., and Ilian, M. 2001b. Fiscal Policy & Business Cycles: An Empirical Investigation. Monedo y Credito, 34(6): 212. French Ministry of Foreign Affairs. 2007. French Economy over the last Half-Century. [Online]. Available: www.ambafrance-au.org/spip.php? [21 October 2011] Global Finance. 2000 France GDP Data & Country Report. [Online]. Available: http://www.gfmag.om/gdp-data-country-reports/272-france-gdp- country-report.html [21 October 2011]. Luis, M., & Frederique, S. 2004. Growth in France: 1950-2030.The innovation change, 6: 1-5, Fall. Trading Economics.com. 2005. France GDP annual growth rate at 1.60% .[Online]. Available: http://www.tradingeconomics ,com/france/gdp-growth-annual [21 October 2011] Vrijer D. E. and Yontcheva B.2009. France: Less Severe Recession but Tepid Recovery. [Online]. Available: http://www.imf.org/external/pubs/ft/survey/so/2009/car073109a.htm [21 October 2011] Read More