Economic Variables of Business Cycle - Essay Example

? [FUNDAMENTAL OF MARKETING] Table of Contents Table of Contents 2 Business cycle 3 Three key economic variables that characterize a business cycle 3 Characteristics of Recession 4 According to the NBER, when did the recession of (1981-1982) and (2007-2009) begin and end? 5 Compare and contrast the recession of 1981-1982 with the recession of 2007-2009 6 Identify a major difference between the 1981-1982 recession and the 2007-2009 recession 7 What specific fiscal policies to help the economy recover from the recessions of 1981-1982 and 2007-2009 7 Compare and contrast Real GDP, Unemployment, Employment and Inflation of the 1981-1982 8 Works Cited 8 Business cycle Business cycle refers to fluctuations in the economic activity that occurs in a recurring manner. The business cycle occurs in five distinct stages, which include growth, peak, recession, trough, and recovery. Whenever the business cycle is at recession, the business general, economic performance is bad (Elwell 123). In fact, it results to adverse economic elements such as inflation, unemployment, losses to corporation, and decline in investment levels. On the other hand, period of growth and peak are desirable in that they are characterized by strong economic signals such as high employment levels, price stability, profitability of firms, and high investment levels. It is therefore, preferable that the economy operates on growth or peak season. Three key economic variables that characterize a business cycle Economists have unearthed three causes of a business cycle, which include employment, inflation, and interest rates. During trough or recession period, the interest rates are high, which means that the cost of acquiring capital for investing is business is high. This, therefore, implies that less people are taking up loans for investment. With investment levels low, the unemployment levels in the economy will go down. As such, trends continue to soar; the overall effect is that the economy may go into a trough. In order to revive the economy from such adverse trends, the government usually comes up with expansionary policies such as increasing public expenditure as well as reducing the rate of capital to encourage investment and reduce the unemployment rates. The other factor that characterizes the business cycle includes the issue of inflation. During the times of recession or trough, the economy is characterized by price volatility. The price of goods and services usually go up making life difficult for the majority of households. Whenever, the economy has high prices, the business cycle is affected negatively implying indirect relationship between inflation and business cycle. The other factor that affects business cycle is the issue of productivity. During peak and growth period since the economic cycle, the economy is always characterized by high productivity. Hamilton (119) says that it is important that government of the day and the management of various businesses put in place deliberate measures to ensure productivity through quality education and training, investment in infrastructure, and better government policies that encourage productivity. The good business environment in developed economies such as United States of America examines why their economy is rarely affected by adverse economic cycle such as recession and trough. Characteristics of Recession Economic pundits refer to recession as a period exceeding two quarters in which an economy is grappling with a negative trend in GDP. The major characteristic of recession is a reduction in investment spending. During periods of recession, the interest rates are always high which in turn results to increase in cost of capital (Smiley 221). Increase in cost of capital makes it very expensive to service loans hence less money is available for investment. The other critical characteristic of recession is high unemployment rate. During recession, the level of productivity in organizations is considerably reduced hence; the firms can no longer afford to pay its workers forcing retrenchment. For instance, the current recession that hit the globe in 2000-2009 resulted to several people losing their jobs. This is because the firms could not support them. Moreover, the purchasing power of customers dwindled significantly meaning that the firms could not realize economic profits hence they could not sustain their workforce. According to the NBER, when did the recession of (1981-1982) and (2007-2009) begin and end? According to the NBER, the recession of 2007-2009 began in December 2007 and ended in June 2009. This recession occurred for the longest period since the era of World war two. This recession can be divided into two parts the first art occurred in the period between December 2007 to around June 2008. During this first half, the recession was not very strong as the case was in the second phase. The decline in the gross domestic product and the upsurge in the rate of unemployment were not very high (Smiley 112). The greatest impact of this recession was felt in the second third quarter of 2008 through to the first quarter of 2009. After the first quarter of 2009, the global economy began to show expansionary signs. The explicit features that marked the 2007-2009 recession included low consumption levels, low investment levels, decline in productivity, and the highest increase in employment level since the post-war period. On the other hand, the 1981-1982 recession began in January 1981 and ended in the second quarter of 1982. The major cause of this recession was the high inflation rate. The high inflation rate was occasioned by the fact that the Federal Reserve was unable to come up strongly to reduce the rate of interest to rejuvenate economic performance. It is interesting to take note that the federal government was not reluctant to act on the current recession of 2007-2009. When the 2007-2008 recession began the government was quick to act, the first point of action was the reduction of short-term rates of interest. The reason for such a move was to encourage investment, which would in turn lead to increase productivity hence recovery of the economy from the slump. Compare and contrast the recession of 1981-1982 with the recession of 2007-2009 There exist several similarities and contrasting features of the 1981-1982 recession and the 2007-2009 recession. The similarities and the differences can be illuminated in terms of real GDP, Inflation and unemployment. The unemployment rates in the two recessions showed similar characteristics. In both the 2007-2009 recession and the 1981-1982 recessions the rate of unemployment stood above 10%. In the 2007-2009, the recession rate stood at 10.1% while in the 1981-1982 the unemployment level stood at 10% (Watkins 112). With regard to consumption and investment, the last recession was much deeper as compared to the 1981-1982 recession. Investments fell by up to 10 percent in the current inflation as opposed to the 5.2 decline in investment recorded in 1981-1982. The inflation rates in the 1981-1982 inflation were quite higher as compared to the current inflation rate experienced in the 2007-2009 recession (Watkins 112). The reason for this trend is that the government acted first in the last recession by bringing down the interest rates of short-term financial obligations. Such a move encouraged investment, which in turn leads to high employment levels and productivity. The overall effect of such a move is that the economy will start to show recovery signs. The reason for such a move was to encourage investment, which would in turn lead to increase productivity hence, recovery of the economy from the slump. In the 1981-1982 recession, the Real GDP declined by 3.2% while in the current 2007-2009 recession, the real GDP declined by 4.3% (Watkins 112). Identify a major difference between the 1981-1982 recession and the 2007-2009 recession There exist striking difference between the 1981-1982 recession and the 2007-2009 recession. The first difference is in the approach. In the current 2007-2008 recession, the government a speedy move to revive the economy from slum by reducing the interest rates in short-term loans almost to zero. On the other hand, in the 1981-1982 recession, the federal government was reluctant to reduce the interest in a bid to revive the economy. The other notable difference is in the recession. In the 1981-1982 recession, the rate of inflation was very high and stood at 4.2% while in the 1981 recession, the inflation rate at 2.5 percent (Watkins 112). What specific fiscal policies to help the economy recover from the recessions of 1981-1982 and 2007-2009 In the wake of the two recessions, the government through Congress came up with a raft of policies to try to address the situation. In the 1981-1982 recession, the government major policy strategy was to contact money supply as a way of fighting inflation (Watkins 112). This policy was not effective because it only resulted to reduction of employment. The current policy that were used to tackle 2007-2009 recession is an expansionary approach. The government has reduced interest rates, in case public expenditure, and encourage investment to reduce the unemployment levels in the economy. Compare and contrast Real GDP, Unemployment, Employment and Inflation of the 1981-1982 The recovery strategy used to tackle the current 2007-2009 recession and put in on the path of recovery is effective. After the first quarter of 2009, the economy began to show signs of recovery with employment rates reducing from 5% to 2.9% (Watkins 112). On the other, hand, the real GDP has been showing steady rise, and the average real GDP growth rate currently stands at 7%. Moreover, the inflation has also reduced significantly, and currently the inflation rate stands at 3.1% (Watkins 112). On the other hand, the recovery plans for the 1981-1982 were not very effective because the government adopted contractionary policies yet the economy needs expansionary policies. Works Cited Elwell, Craig K. Double-dip Recession: Previous Experience and Current Prospect.Washington, DC: Congressional Research Service, Library of Congress, 2011. Print. Hamilton, James. Oil and the Macroeconomy Since World War II. New Jersey: John Wiley and Sons. 2002. Print. Smiley, Gene. Rethinking the Great Depression. Chicago: I.R. Dee, 2002. Print. Watkins, T H. The Great Depression: America in the 1930s. Boston: Little, Brown, 1993. Print. Read More