Business CyclesBusiness CyclesWhen a country is experiencing instability, governments would attempt to alter the current economic situations by implementing policies. Governments control fluctuations in economic activities through three policies when necessary; fiscal, monetary and supply-side policy. Fiscal and monetary policy alters the economy by creating changes in the aggregate demand. On the other hand, supply side policy changes the aggregate supply in the economy.
Fiscal policy stabilizes the economy via changes in government spending or tax. (Sullivan and Sheffrin, 2006) In a recession, an expansionary fiscal policy is most suitable to recover the economy from its slump. The government would increase government expenditure and decrease taxation to increase the GDP level.
With the aid of a diagram, an increase in government expenditure would increase the aggregate demand (AD), thus shifting the AD curve to the right (AD1). This would then increase the GDP level (yp). Similarly, a reduction tax would also increase AD, shifting the AD curve to the right. The increase would also result in an increase in the GDP level.
Diagram XXX Adapted from (Sullivan and Sheffrin, 2006)On the contrary, contractionary fiscal policy aims to stabilize the economy during a boom, when there is excessive economic growth, leading to “overheating”. (Sullivan and Sheffrin, 2006) The government would decrease government expenditure or increase tax rates to decrease the aggregate demand. When there is a decrease in government expenditure, AD would decrease thus shifting the AD curve to the left (AD1), causing a decrease in overall GDP level (yp). Correspondingly, an increase in tax would also decrease the average household income, thus leading to a fall in consumption spending. This causes a decrease in the aggregate demand. This is shown in the shift of the AD curve to the left, causing a decrease in GDP.
Diagram xxx Adapted from (Sullivan and Sheffrin, 2006)Monetary policy is also used as a tool for economy stabilization and fine-tuning purposes. Monetary policy affects the aggregate demand via changes in money supply. The tools available to control money supply are interest rates and government bonds. Similar to fiscal policy, there is also expansionary and contractionary monetary policy.
Expansionary monetary policy is to increase aggregate demand and GDP level. With the aid of diagram xxx, the government first reduces interest rates (r0 to r1) which will cause a shift in money supply curve, indicating increase in money supply. Concurrently, investments would also increase (I0 to I1), which leads to an increase in aggregate demand leading to output growth. (y0 to y1) Besides that, when government purchase bonds from the public, it will also increase the money supply, leading to the same effects, which are increase in investments and aggregate demand, finally leading to an output growth.
Diagram XXX Source: Sullivan and Sheffrin (2003)Diagram XXX Source: Sullivan and Sheffrin (2003)On the contrary, contractionary monetary policy is implemented by increasing interest rates and selling bonds. Government increase rates or sell bonds to the public, it decrease the money supply This will then lead to a fall in investments and aggregate demand, creating an overall drop in output growth.
For example, expansionary fiscal policy was implemented by the United States government during 2001 as the countrys economy was showing signs of slowing down and possibility of a recession. (Anon, 2001) The September 11th terrorist attacks in New York amplified the importance of fiscal policy to achieve economy recovery and stabilization. (Sullivan and Sheffrin, 2006)
In 2001, the US economy was experiencing a low in consumers confidence. Consumer spending reduced tremendously, which caused a sudden decrease in national output level. In relation, the national unemployment rate also soared immensely during the year. It is announced that the US economy has officially entered a recession in March 2001. (Anon, 2001) In September 2001, the terrorist attack on New Yorks world trade center caused a major downturn of the US economy. America suffered major loss of consumers confidence, which resulted in a sudden increase of unemployment rate in the country. BBC reported that the unemployment rate soared from “4.9% in September to 5.4% in October”. (Anon, 2001) On average, the US economy suffered an approximate
0.7 % increase in unemployment every month from 2003. (Anon, 2001)
5. Productivity and Productivity Trends
By 2007, consumer demand grew in a highly competitive industry, notably auto-parts and electric vehicles (APEVs). By September, consumer demand had increased by 15 percent, growing by 22 percent. By September 2008, consumer demand had grown by 18 percent, growing 9 percent through January.
As shown in the table below, the main economic factors that drove consumer demand, which primarily accounted for consumer price inflation, were:
Total inventories. The average monthly supply of product was the largest positive by far. (Anon, 2001)
By the end of 2009, consumer demand had grown by 14 percent. (Anon, 2001) It is said that in the last 25 years, consumer demand is growing about 11 percent and by 2010, the increase has been 12 percent (an average of 0.2 percent per year over the long run.) There was an increase in the average annual number of units of household land (as the chart shows) by more than 50 percent with one factor contributing to the increase in production. Of the 17 major types of industry that were responsible for increasing the demand of consumer goods worldwide, the only industry which contributed significantly to the overall increase in demand was manufacturing. And the increasing industry contribution of the industrial power industries to consumer needs has led to a significant reduction in the production output of consumer goods. The demand of manufacturing and other manufactured products was particularly high in 2008 compared to 2007. The demand for consumer goods increased only marginally from 2008 to 2009. However, the consumer demand for manufacturing goods increased at a similar rate. (Anon, 2001)
Because industry participation is usually seen as a negative, this can be seen as a reflection of the higher value of consumer goods. If a product’s market share rises and price of the product rises significantly, consumer market share has a positive effect on their price. Productive producers will have to increase their supply of an industry that contributes to increasing consumer demand. If the consumer has to produce more in order to produce more product, then it will be more expensive for a consumer to produce more. The same can be said regarding the total industry participation.
The number of household sector jobs increased substantially in 2008. This corresponds to the main growth of the growth of manufacturing and more and more job gains were recorded in the manufacturing sector. (Anon, 2001)
Because consumer demand was mainly driven by production of services by skilled workers, the rise in manufacturing output is reflected in the higher quality of services to be provided by the skilled workers. In other words, to maximize its profit, demand of the skilled workers who provide a high quality of services is expected in their respective sectors. (Anon, 2001)
With a rising consumer demand, the sector was not growing in any way at all – it was growing primarily in the energy sector and in