Business Cycle

Introduction In macroeconomics, business cycle played an important role to show what a national economy is going; therefore, this essay will define what business cycle is and its characteristics. Besides, all of variables such as Real Gross Domestic Product (RGDP), inflation and unemployment rate and their behaviour in the business cycle will be also demonstrated in the second part.

The final part of this essay will analyse and compare the situation of Australian economy and USA economy in period of 10 years since 1998 based on the concept of “the business cycle”. In addition, this is the writer’s opinion about the business cycle relied on these above data about exhibit Australian and USA economy performance. WHAT IS THE BUSINESS CYCLE?

According to Burns (1946, p.3): “business cycle is a kind of fluctuation happened in aggregate economic activity of nations that organize their work mainly in business enterprises: a cycle consists of expansions occurring about the same time in many economic activities, followed by similarly general recessions, contractions and revivals which merge into the expansion phase of the next cycle; this sequence of changes is recurrent but not periodic…” Besides, business cycle could be easy to understand that this is periodic fluctuation in the level of GDP that are involved nominal GDP and real GDP (RGDP)

In the economic, business cycle played an important role to show the economy’s situation and where it is going. In addition, it is also express a magnitude of the peaks and troughs; and the duration of the cycle. Characteristics of Business Cycle There are four phases of the business cycle: 1. The upturn or rehabilitating phase: the economy starts to recover 2. The expansion phase: during this phase the economy is growth rapidly or we called this the booming time. 3. The peaking out: the economy is going down or even ceases 4. The recession or slump phase: there is no growth and a decline of output.

Trend in FN RGDP Actual RGDP Growth Boom Depression Recession RGDP, Inflations and Unemployment’s behaviour over business cycle 1. Real Gross Domestic Product (RGDP) _ Trend GDP is average growth rate of RGDP. In the long run, if the trend is upward it means the economic is growth _If RGDP is above full employment: +Aggregate demand (AD) gets over the full employment and causes to inflation AD > FN RGDP +The difference between levels of RGDP is greater than full employment (FN) and full employment real GDP (FN RGDP) is called inflationary gap +Inflationary gap could be increasing inflation.

-If RGDP is less than full employment: +Aggregate demand is so little AD < FN RGDP + The difference between levels of RGDP is less than full employment (FN) and full employment real GDP (FN RGDP) is called recessionary gap +Recessionary gap could be increasing unemployment Trend RGDP Actual RGDP Inflationary gap Full employment Recessionary gap (Hansen, 2008) 2. Inflation and Deflation ** Inflation: _ Inflation is a persistent increase in the price level and causes a decrease in the value of money and purchasing power _Inflation caused when: + Too much demand exists in the economy and costs are increase.

+ Resource owners raise the price to get more income ** Deflation: _ Deflation refers to a decline in the level of price. It occurs when the annual inflation rate falls below zero percent (a negative inflation rate), resulting in an increase in the real value of money. _Deflation due to the economics of scale, scope, speed and productivity increases _Excess capacity exists in many economies _Aggregate demand declines for an extended period (Hansen, 2008). 3. Unemployment: _The economic problem happened when people who have abilities to work but they cannot find the job _It caused by:

+The nature of changes in the structure of the economy (structural unemployment includes seasonal unemployment) + People leave a job to find a new one (frictional unemployment) +The level of demand in the economy is not sufficient to sustain full employment (cyclical unemployment) (Hansen, 2008). Australian Economy VS USA Economy Differently, a fiscal or financial year of each country is not the same. Normally, the financial year in Australia starts at 1 July of precious year and finish at 30 June of next year. In contrast, the financial year in US starts at 1 November of precious year and finish at 30 September of next year.

Therefore, the statistics of Australia and US was gathered at the end of financial year of each year since 1999. |Country | Australia statistics | USA statistics | | | | | |Year | | | | |Growth rate (%) |Inflation rate |Unemployment rate (%) |Growth rate (%)|Inflation rate |Unemployment rate (%) | | | |(%) | | |(%) | | |1999 |3. 8 | | |4. 8 |2. 6 |4. 2 | |2000 |3. 45 |3. 2 |6. 2 |4. 1 |3. 5 |3. 9 | |2001 |2. 08 |6 |6. 9 |0. 6 |2. 6 |5 | |2002 |4. 25 |2. 8 |6. 5 |2. 3 |1. 5 |5. 7 | |2003 |2. 95 |2. 7 |6. 1 |2. 9 |2. 3 |6. 1 | |2004 |3. 85 |2,5 |5. 5 |3. 1 |2. 5 |5. 4 | |2005 |2.

75 |2. 5 |5 |3. 1 |4. 7 |5 | |2006 |2. 85 |4 |4. 8 |2. 2 |2. 1 |4. 4 | |2007 |4. 00 |2. 1 | 4. 3 |2. 7 |2. 8 |4. 8 | |2008 |2. 35 |4. 5 |4. 2 |0 |4. 9 |6. 6 | | A half of 2009 |0. 40 |1. 5 |5. 8 |-3. 9 |-1. 4 |9. 4 | The Australian economy has experienced a short period of depression from 1999 to 2001 (due to a serious impact of Asian Financial Crisis) with a steady decrease in growth rate (minus 1. 72 %). However, based on the strong increase of domestic demand and terms of trade the Australian economy has led to a booming growth in 2002(4, 25 %) and repeats in 2007 (4 %).

However, to be influenced by Global Financial Crisis there was a serious downward trend in Australian RGDP that make Australia has fallen in strong recession since 2007 (minus 3. 6 %) and got the lowest rate of growth in recent 10 years in a quarter 2 of 2009 (0,4 %). As the statistics showed above, in two years 1999 and 2000 the USA economy has experienced a great booming with a high growth rate (4,8% in 1999 and 4,1 % in 2000). However, after this beautiful time, the USA economy had fallen suddenly to the depression in the next year 2001 (0. 6 %).

From 2001 to 2007, the USA economy was seems to be recovering but is so slow (annual average 2,7 %). Moreover, to be impacted seriously from Global Financial Crisis plus with the recent collapsing in the US credit market and banking systems have caused to a strong recession in the US economy. The GDP rate in quarter 2 of 2009 of US is negative 3. 9 %, the lowest ratio since Great Depression in 1930. Strong domestic demand and the level of price is rising has led to high inflationary pressures in Australia with highest rate of 6% in 2001 and tend to decrease in recent years. In quarter 2 of 2009, the inflation rate in Australia down to 1.

5 % and may fall further in the short term if the economy is better. By comparison, sharp rises in commodity prices, especially for oil and food, have added further to inflation rate recently in US (around 3-5 %). However, it is actually a good news for US’ goverment when the inflation rate in the middle of 2009 have been falling strongly with negative 1. 4%. The labour market has tighted in US, with the unemployment rate rising to a high of 9. 4% in a quarter 2 of 2009, the worst since 1983. The tight labour market in US has seen a low income in most of US residents. Australia had a similar experience, with the unemployment rate rising to 5.

8 % for a half of 2009. MY OPINION Through this analysis essay, I could see that there are a lot of fluctuations in both Australian and American economy. Although these fluctuations are not really same, but if we based on these above data, we will see that there are enough four phases in both country’s business cycles, just different on the period of time. Recently, Australia and USA economies was influenced strongly by Global Financial Crisis that started from US. The high rate of unemployment and a low rate of growth have caused to the collapse of the strongest economy US.

Australia has experienced the same recession but is not serious like USA. However, based on efforts of Australian and US’ goverments there is still some good information that signal about a recover of both economies such as lower inflation rate. Conclusion The essay presents the major important of the business cycle in showing up the situation of Australian and US’ economy. In addition, there is a clear explain about the behaviour of RGDP, inflation rate and unemployment rate that are happened in the nation’s business cycle, especially RGDP.

The useful example about the business cycle is analysed based on Australian and US’ statistics. Overall, both countries have experienced all those stages in the business cycle.

Bibliography

  • Australian Statistics, June 1998- June 2009,accessed 5th August, 2009, http://tradingeconomics. com
  • Burns, A. F & Mitchell W. C,1946, Measuring Business Cycle, National Bureau of economic Research, New York Hansen, JM 2008, Macroeconomics and the global economy, Plato Press, Melbourne.
  • USA Statisitcs, September 1998- June 2009,accessed 5th August, 2009, http://tradingeconomics. com.