A presentation on economic fluctuations
A presentation on economic fluctuations
Economic fluctuations represent a recurring problem for economists and financial policymakers. For example, if we were to dwell in the US, their real GDP grows by about 3.5% per year. But this long-term average hides the fact that the economic outputs of goods and services do not grow regularly. Economic growth is higher than others; sometimes, the economy loses its weight, and change starts to turn into something negative. These fluctuations in economic output are consequently related to fluctuations in employment. When the economy is going through a period of declining production and rising unemployment, we are dealing with the so-called recession.
Economists call this short-term fluctuation in output and employment business cycle. However, this term presupposes that economic changes are regular and precise; they are not. Recessions are as irregular as they are frequent. Sometimes they are close to each other, and sometimes they are entirely far apart. In 1982, just two years after the previous recession, the economy experienced another similar to the first.
At the end of the year, unemployment reached 10.8% – the highest level since the Great Depression of the 1930s (which we will address below).
These different events raise a series of other questions: What causes fluctuations in the short term? What model should be used to explain them?
Can economic policymakers avoid the recession?
If so, what kind of policies should be used?
Some of these questions will be answered in the treatment we will do later, both in the short and long term, the difference between short-term and long-term in a business cycle. Many macroeconomic researchers think that the difference between the short-term and the long-term is simply prices’ behaviour. In the long-run, costs are more flexible and can respond to changes in supply and demand. In the short run, prices are more stable in certain respects.
Because its price and behavior vary from short-term to long-term, different political and economic activities have other effects and scope.
To see how these two differ, we will consider changes in monetary policy. Suppose that, e.g. The Federal Reserve reduces the money supply to 5%. Referring to the classical model, to which most economists agree in describing the economy in the long run, the money supply will influence to bring about apparent consequences.
In the long run, a 5% reduction in supply will lower all prices (including a 5% reduction in nominal wages) while output, employment and other economic conditions remain unchanged. Thus changes, in the long run, do not cause fluctuations in output and employment.
In the short run, however, many prices do not respond to changes in monetary policy. A reduction in the money supply does not immediately cause the effect on firms to cut employee wages, that all markets increase the price of their goods, or to the point that all restaurants print new menus. Instead, there is a slight movement in most prices, which is why prices remain stable.
Facts and elements of the business cycle
One of the critical elements affected by economic fluctuations is employment. The business cycle is a phenomenon that you can follow by analyzing national income and explaining even a single unit that could be a market. If we observe, e.g. in the US during the 1970s, the unemployment rate versus the recession, we will see that the unemployment rate rises in the event of a downturn. For example, temporary work and the amount required by firms in the recession period increases significantly. In other words, when the economy suffers a drastic decline, employment is more challenging to secure.
What relationship can we expect between unemployment and real GDP?
As employees help with their work to produce goods and services, while the unemployed do not, expand unemployment rate should be in proportion to real GDP. This negative (inverse) relationship between unemployment and real GDP is called the Okun Law, a title taken from Arthur Okun, the first economist to study it.
Economic impacts on the realization of the business cycle
Many economists, especially those working in business and governance, are involved in economic fluctuations. Business economists are interested in their performance to come to their companies’ aid so that the plans brought to life change according to the existing economic environment.
While government policy economists are interested in their performance for two main reasons: First, the economic environment affects the government (e.g. how much is collected by taxation) Second, the government can influence the economy through its fiscal and monetary policies. Financial performance can, therefore, be considered as an input to the overall political-economic planning.
One way for economists to achieve their desired performance is to become familiar with economic indicators, which can be variable about the massive financial wall. Performance can vary in different parts, as economists share other options of thinking which hands are more achievable.
According to N. Gregory Mankiw, these influencers are:
1- Average weekly work of production employees.
A relatively long weekly work comes from the firm’s demand for employees for an extended stay at work, as the firm itself is experiencing a high demand for the product and interferes with the firm’s performance to increase production in the product to the future. Simultaneously, a short weekly work shows that the firm is experiencing a decline in its execution and is not interested in producing as it lacks demand for the product delivered.
2- Request for unemployment assistance.
The number of people making applications in the unemployment system is among the most frequent influences of economic conditions. Firms also fear layoffs as they have to deal with their pay later, and this causes excess production to be reversed.