National Economies, Fluctuation, and Responses to Fluctuations
There has been an increase in research on economic fluctuations and growth. Every nation seeks to get the best from the economy. Hence, they will do everything to ensure a stable and sustainable economic growth. However, sometimes things don’t just happen as we expect. Chances of facing economic fluctuations are always present.
Over the years, significant developments have been recorded in national economies, as the major effect. The first and the biggest aspect of the reports that come out touch the global financial crisis, which prompt research on the reasons such crises happen. Secondly, researchers analyze the general decline in business dynamism and lackluster productivity. This factor has generated significant interest in the study of reasons for economic recessions. The third aspect touches on the increase in income and wealth inequity. The fourth aspect of economic recession research is concerned with what we have what we call “representative agent,” which seeks to resolve macroeconomic issues – which is a methodology of studying national economies.
But before going into such details, it is important to understand what fluctuations mean in economies. And this begins from a business cycle point of view.
What is the business cycle?
We can define a business cycle as a model that shows how a country’s GDP change over time. It is represented by different phases summaries as aggregate output surge and fall. A business cycle happens over time, and it can be used to show how much a nation has gained or lost in terms of economic growth. Every country must do a recount of its economy over a specified period. They then compare with different times in history, concluding on its progress.
In a typical business cycle, there are four phases that make it complete:
- The expansion
As you may already have, expansion happens when the countries, GDP is increasing. This can be measured through various metrics. For instance, a government may look at the rate of decrease in unemployment. It simply means the nation is having better times, hence an increase in an economy is possible. Also, when market ae booking with good supply and demand, we are likely to see an expansion.
Economic expansion can be described as being elastic. In other words, the economy of a country expands only up to a certain level. At the point, the output stops increase and starts decreasing. You will realize that economies at this point are at their best, yet stagnant. Markets will stop producing in excess as the rate of consumption reduces. On a graph, the peak will be represented by the highest point on the upward line.
Well, when expansions stop, expect everything to start falling. And in this case, recession follows the peak. It is the opposite of expansion, where everything begins to drop. There is an increase in unemployment, wages reduces, and commodity prices surge. During this phase, even the markets are slow on production since demand is probably low.
As stated above, economic growth is elastic. While it can expand to a particular state, it can also recess to a specific point. A trough is the opposite of a pick. It is the lowest point where the recession ends, and output starts surging.
These four aspects describe what fluctuation is all about. Economists can start evaluating the cycle from any cycle following the previous cycle. The information can be used to understand what laws should be implemented to deal with the current situation.
Missing links in the business cycle
Economists have discovered that there are often gaps in the business cycle – the output gap. This is basically the difference between actual out and possible output in the cycle. Potential productivity is what the nation anticipates in a scenario where all its resources are put into efficient use. Such output can be termed as the perfect output under perfect condition. And it is represented as a long-term growth trend. In other words, a nation views its potential output by measure all the aspects based on a long period.
But in many cases, a nation is never able specifically to hit the targeted output. It can either be less or more than the anticipated features. The difference that comes out makes the gap in the business cycle. When a business cycle is above the growth trend, such brings out positive growth. On the contrary, a business cycle curve below the direction indicates a recession in the economy.
In a case where the real output is beyond the expected output, it means aggregate demand has witnessed a faster growth than the supply. This causes an economy to overheat. As much as it seems, things are better in the markets; economists will tell you to get ready for a potential recession. This is because overheating means the output is happening at high levels that cannot be predicted. For instance, the rate of unemployment becomes lower than the natural rate. Considering the elastic nature of business growth, it will sooner or later reach a peak point, from where it will start dropping.
On the other hand, when the actual output is below the expected results, then aggregate demand/ supply has fallen beyond expectation. In this case, the rate of employment and output falls. A negative output gap means the rate of unemployment is higher than the normal rate. Luckily, this trend cannot continue forever, either. Sooner or later, the business cycle will reach a trough, where it is will start recovering.
Economic fluctuations are occurrences that cannot be fully controlled. Even though different governments try various methods to try and gap its impacts, it is only meant to cushion suppliers and consumers.
What causes fluctuations in national economies?
The economy is one of the major aspects of a developing nation. It is only through how economically stable a country is that it can be described as true development. And this is why world nations are depicted as first world, second world, and third world. It all depends on how stable they are economical.
But when it comes to booms and dips in economic growth, there are no categories. In any case, countries rely on exports, internal and external markets, and the rate of employment to determine their growth. This means the reasons that cause these upwards and downwards trends are the same.
Here are the major ones;
Increase in Aggregate demand
The world produces natural and humanmade resources for human consumptions. Demand means what humanity needs to survive. It is the opposite of supply – which produces the needs. Now, note that human wants are unlimited, while resources are limited. In this case, the scarcity becomes inevitable. There is no day the world will produce enough and sustain the condition. Sooner or later, demand will be growing above supply.
When people get a good job and earn good wages, they will want to buy more things to fulfill their desires. Hence, the markets will witness and increase in consumption. The same can be seen when the interest rates are reduced, or when house price inflates. In such cases, it is possible production will or will not increase. Either way, they will have a high impact on the general economy of the nation.
A surge in government spending can also cause aggregate demand to increase. When the government spends more than what it is getting from tax and institutions, if force aggregate demand high.
In addition, a balance of payments surplus will also affect the economy. This means there is a good supply, the prices are generally low, and the rate of unemployment has been reduced.
With development comes greater responsibilities. There are specific areas that will require a specialized professional. And if there is a shortage of these workers, it means the market will fail to utilize the available resources. This causes a slow rate of economic growth. Some companies invest heavily in training their staff so they can handle every process effectively.
Increase in imports
Exports cause a positive GDP for a nation. On the contrary, too many imports will cause a negative trend on the economy. It means the country is spending too much on buying raw material than what it is producing. And if there is no way of compensating for such losses, the economy will grow much slower.
Side shocks in demand/supply
It is very vital that a government tries to balance its country’s economy. This means they have to be careful about the parameter that measures economic growth. One such parameter is the supply-side and demand-side shocks, which can cause instability in the economy. For instance, the UK operates a global market, which means their economy can be affected by shocks from across the world.
Demand sides can include aspects like a major short-run rise/fall in the exchange rate. This will either make an economy to stabilize or shake. Another major threat that causes side shock changes in the economic growth of trade is the economy in the world super-powers. If they are doing well, you will also do well, and the opposite is also true.
Changes in aggregate demand can affect supply and the economy as well. And these are alterations that come abruptly and disappear.
A boom in capital expenditure on, for instance, the infrastructure or ICT, is also considered a demand shock. It can influence how the general economy behaves, causing either an increase or a decrease.
Supply-side shocks, on the other hand, affect the costs and price of supply. When there is an increase in the cost of raw materials, the manufacturer will be forced to either reduce production or increase the price of their products. Either way, it affects the economy significantly.
Then there is a natural disaster that may impact the supply of specific goods. For instance, when a pandemic may alter the supply of crops, which in turn raises the cost of food.
Another supply-side shock is a change in a political situation. As we all know, politics plays a vital role in the economy of a nation. Politics makes policies that may affect the supply of certain goods, like oil.
Rate of trends on economic growth
The finding the GDP, economists use the trend rate, which indicates the rate of economic growth as the average growth rate over a specified period. In other words, trend rates can be defined in the general terms of new discoveries and human civilization. And that is why it is influenced by the following factors:
- Investment. A higher level of investment increase AD and consumption. Hence, such in the economy is bound to grow much faster. A good investment expenditure also means there is plenty of raw material for producing consumer goods.
- Education/training. When a country invests more in education and training, they produce more labor force in the economy. It is important to have a professional who can handle a certain field of production.
- Technology. No one can deny that technology had become a significant influence on the growth and development of the modern world. It has made access to information easier. And since knowledge empowers people, they are able to make more informed decisions. Also, changes in technology can bring down the costs of goods in an economy. Low production costs lead to more production and increased consumption.
Note, economics is influenced by human and natural activities. This is why an economy student must be aware of how consumers and suppliers make decisions.
Currency fluctuations are a natural result of a floating exchange rate system. It is a common parameter of most major economies. When they say, for instance, that the dollar is more reliable than another currency, it means the economy that uses a dollar is much stronger. There are many fundamental and technical aspects of exchange rates that affect a currency in comparison to another. Such factors include relative supply and demand, economic situations, inflation, interest rates, and capital flows, among others. And since the factors change from time to time, currency values also change.
Under normal circumstance, currency levels and performances should be influenced by the economies they operate in. However, tables turn in many situations where not the state of a currency determines the performance of its overall economy.
Economic fluctuations are natural. It is, however, important for governments to have strategies that control its impacts, shielding producers, and consumers. By understanding the causal factors, we have discussed above, it is easier then, to know what to do when a situation arises. There is nothing much anyone can do about economic cycles.
Author: James Hamilton