Business cycles and economic indicators

Is the economy strong or weak? The answer to that question will always depend upon the region of the country, the specific sector of the economy, and individual circumstances. The primary goals of government economic policy are to ensure stable prices, full employment, and economic growth. Most economies are subject to business cycles, which are characterized by fluctuations in the level of economic activity. These business cycles have occurred in the past and they will persist. They can be caused by changes in economic conditions, international events, political decisions, war, and changes in technology. Governments try to minimize these fluctuations by intervening before high unemployment or inflation endangers the economy. Information that can provide early detection of changes in the economy allows elected and appointed policymakers to take action. This information is gathered and analyzed by economists, business managers, and government officials who study unemployment rate, price level, stock market trends, interest rates, and many other statistics to measure activity in the economy as a whole. They rely on these economic indicators to tell them where the economy has been and where it seems to be heading. Although they know that economics is not a prices science, observers of the economy use these indicators to help them to make better decisions and more accurate predictions about the future. One of the most commonly discussed and a useful economic indicator is the gross domestic product (GDP).

 

THE GROSS DOMESTIC PRODUCT

The Gross Domestic Product (GDP) is the total market value of all final goods and services the economy produces in a single year. The GDP reveals much about the nation’s economic health. If GDP increases, people are producing more goods and services. If the GDP decreases, they are producing less. Economists as well as government officials, news, reporters, and business decision-makers pay attention to the GDP. And because GDP is mentioned so frequently in the news, it is necessary to review exactly what it includes and what is omits.

· The GDP includes only final goods. To avoid overstanding the GDP by counting the same item two or more times, only final goods are included.

· The GDP includes production only within the borders of the country. The GDP doesn’t include goods and services produced overseas, even by companies owned by the country or its citizens or firms. Products produced in the country by foreign firms are counted.

· Inflation can distort the significance of the growth in GDP. When prices are rising, as occurs during period of inflation, the GDP may increase even though the production of goods is unchanged. This is because The GDP is measured in terms of current prices.

To avoid these problems, economists adjust the GDP for changes in the price level. When this adjustment is made, the result is real GDP, or GDP expressed in constant currency. Constant currency reflects changes in the purchasing power of the currency from a base year. Economists use constant currency when comparing the nation’s gross domestic product in different years.

· Population changes. The GDP is like a huge pipethat contains everything produced in a year. The portion of this pipe available to every citizen on the size of GDP and the population that intends to consume that pie. Economists find it useful to use per capita GDP (GDP divided by the total population) to provide an additional assessment of economic performance.

· Quality changes. The GDP does not always show the changes in quality because only price is taken in account.

· Used goods are not included in the GDP. Only new goods are counted; used goods add nothing to the nation’s wealth.

· Harmful goods and services. Some goods and services included may be useless or even harmful. For example, cigarettes cause lung cancer and other serious ailments, but they are added to the GDP along with food, medicine, and other beneficial items.

· Nonmarket production. If you own a lawn and receive payment, your wages are included in the GDP, and your service is recognized as being part of the total country’s output. If you mow your own land, however, your work is not recognized by the GDP figures. The same is true for the family that decides to care the preschool children at home, rather than paying a daycare provider. The care of our own children is not included in the GDP.

UNEMPLOYMENT

Another indicator of economic activity divides the number of people looking for the work by the number of people in the labour force. Some economists criticize the government’s method of calculating unemployment because it fails to include “ discouraged workers ” in its data. “Discouraged workers” are those who have been without work for so long that they have simply quit looking. For this reason, critics say, real unemployment may be far more serious than government statistics show. Others believe that the unemployment rate overstates unemployment because it includes individuals who say they are unemployed, but they are not really motivated to find a job.

Types of Unemployment

The reasons people are unemployed vary depending upon their motivations, available employment, employment skills, their length of time in the labor force, and the general strength of the economy. Economists have defined these different types of unemployment:

· Frictional unemployment. Temporary, unavoidable unemployment is described as frictional unemployment. There are always some people who are out of work for completely unavoidable reasons. For example, it takes time for workers to find a new job after they have left their previous employer. Until they actually start working again, they will be counted in government data as “unemployed”. People entering the labor force for the first time, such as recent high school and college graduates, are considered to be unemployed until they find their first job.

· Seasonal unemployment. Seasonal employees are another category of workers. They spend a part of the year in voluntary employment. Waiters who earn their living at summer and winter resorts, for example, add to the unemployment statistics during the fall and spring months.

· Structural unemployment. When structural unemployment exists, there are jobs available, but individuals may not have the skills to fill those jobs. This mismatch between available jobs and existing skills results from technological and other changes in the economy.

· Cyclical unemployment. A downturn in the economy will cause cyclical unemployment, which is characterized by an economy-wide shortage of jobs. The recession phase of the business cycle is caused by declining demand for goods and services. That results in rising unemployment. Increases in business activity will eventually result in increasing employment.

Full Employment

Full employment does not mean the total elimination of unemployment. Frictional and structural unemployment are expected, and economists combine these two rates to derive what is described as the natural rate of unemployment. When the actual rate of unemployment equals the natural rate, the economy is said to be at full employment. Some economists believe that the natural of employment represents the highest rate of employment that can be sustained without inflation. In an economic sense, full employment does not mean that the entire labor force has job. For example, with a labor force about 125 million and a natural rate of unemployment at 4,5 percent, economists would proclaim full employment, even though 5,6 million people were out of work.

A CHANGING ECONOMY

Unlike most cycles, the business cycle is very irregular, and it is better to think of the ups and downs as economic frustration. These changes can be described in several ways, including peaks, recessions, troughs, and expansions.

Peak. At the peak of business cycle, the economy is booming. Business is normally producing at or net capacity, and those looking for work can generally find jobs. During peak times, business investment and consumer spending are at their highest level. However, because the economy is at or near full employment and the demand for goods and services is increasing, process are increasing too.

Recession is defined as two consecutive quarters (six months) of declining real GDP. After a period of “peak” business activity, consumers and businesses begin to reduce their spending levels. Businesses may lay off workers, reduce their purchases of raw materials, and reduce production because they have built up excess inventories. Some businesses may decide to continue to use old factories and equipment, rather than investing in new machines and buildings. Some businesses and consumers will even reduce spending because economists predict that business will be slowly down in the next few months. Whatever the reason, reductions in business and consumer spending mark the beginning of a recession. Since World War II, recessions have lasted between 6 and 18 months.

Trough. After a period of recession, the economy will reach its lowest point. Factories will be operating at less than capacity, and unemployment will reach high levels. Total output of goods and services continues to decline. Times are hard at the trough of the cycle; jobs are difficult to find, and many businesses fail. Prices of goods and services may remain stable or decrease in trough, because of weak demand.

Expansion. Market systems have a remarkable ability to rebound. After some time, the economy begins to recover. It enters the expansion phase of the business cycle. During an expansion, business and consumer spending begin to increase. Sensing that conditions are about to improve, businesses begin to increase production. Unemployment declines as additional workers are hired. This, in turn, leads to higher levels of consumer spending and still further expansion of employment, output, and consumption. To achieve the goals of full employment, stable prices, and economic growth, the government relies on two sets of strategies: fiscal and monetary policies.

(Based on: JA Economics)

 

III. Here is the transcript of VOA radio broadcast which illustrates the problems of economic stability. Translate this text and be ready for its discussion on the basis of active vocabulary, key terms quiz, review and discussion questions.