Table of Contents
- 1. Definition of the Business Cycle
- 2. Three Key Economic Variables that Are Used to Characterize a Business Cycle
- 3. Main Characteristics of a Recession
- 4. According to the NBER, the Beginning and the End of the Recessions of (1981-1982) and (2007-2009)
- 5. Comparison of the Recession of 1981-1982 with the Recession of 2007-2009 with a Detailed Examination of Real GDP, Unemployment, and Inflation
- 6. Identification of a Major Difference between the 1981-1982 Recession and the 2007-2009 Recession
- 7. Comparison of Real GDP and the Number of Jobs Created Four Years into the Recovery Phase of Each Recession. Identification of the Strongest Recession
- Related Free Economics Essays
1. Definition of the Business Cycle
All socio-economic processes occur unevenly and are specified with unstable passing. Thus, changes, taking a place in the economy, result from economic fluctuations. Such fluctuations are called economic cycles that have phases and duration and are characterized by the frequency of their occurrence. Thus, an active economy appears. Depending on the influence pulses, it changes the vector of the economic behavior. The scientific points of view assume that the nature of these changes is predictable and factors are predefined. Another approach is based on the fact that cycles are random. The study of this phenomenon is an important aspect for the long-term planning of business activity since economic cycles relate to all business processes of both national and global economies.
Identifying composition of the holistic economic cycle, two major phases (recession and rising) and more detailed phases (boom, recession, crisis, and recovery) are considered. There are many interpretations of these stages, but the one thing remains constant in the characterization of the above components. This is the time interval between the same states of the economy: from the previous rise to the next rise or from the previous recession to the next recession (Mazurek and Mielcová 184). The rise as one of the essential phases of the cycle is determined by growth of macroeconomic indicators of the country’s income, demand for investment and consumption, and reduction of the unemployment rate to the acceptable level. At this stage, the economy begins to move away from the crisis processes and starts to develop and the gross domestic product (GDP) rises to the potentially possible level. A further logical step is the economic boom. This stage is characterized by high levels of employment, prices, full capacity utilization, relevant interest rates, reduced investments, etc. After great economic efforts have ended, the economy cannot stabilize quickly and goes into a recession to renew resources and improve overall efficiency indicators. At the same time, a decline brings reduction in the production and activity of business processes, reducing the actual level of GDP, prices, investment efficiency and causing losses of enterprises. The negative phenomena lead to stagnation, which is characterized by a comparative reduction of the actual level of GDP and employment. This is followed by the accumulation potential and increase of the production capacity, which is the stage when the economy is reviving again for new growth. In this way, the economy is formed by uninterrupted business cycles.
The phenomenon of the economic cycle is confirmed by existence of fluctuations of economic processes and their amplitudes. Duration of these cycles depends on the economic balance in the market, market conditions, investment, scientific and technological activities of enterprises, as well as innovations development. Therefore, the shortest cycle may last from 2 to 4 years and the largest – from 40 to 60 years. The criteria of the duration relate to indicators of both local and international levels.
Causes of the economic cycle create disharmony and disproportion between total cost and production volume, as well as a discrepancy between an aggregate demand and an aggregate supply. If aggregate demand increases above stable aggregate supply, then it sends the cycle to the recovery phase; and if aggregate supply changes while the aggregate demand is stable, the economy goes into a recession within a single cycle. Inverse conditions also lead to corresponding changes.
Business cycles are classified based on several characteristics due to different socio-economic circumstances and trends to overcome them. They may vary by duration, nature of actions, influencing factors, outcome indicators, etc. Highlighting the characteristics of the business cycle, it is possible to predict the trend and identify ways to reduce crises in order to stabilize the recovery phase.
2. Three Key Economic Variables that Are Used to Characterize a Business Cycle
Key indicators, which can determine the phase of the economic cycle, are GDP, inflation, and unemployment. They have been selected because of their ability to display the real phenomena and processes at a particular phase of the business cycle and then indicate the next phase. These indicators are also pro-cyclical and dynamic as they affect the business cycle by their value and at the same time appear as its result.
GDP is estimated as the total value of services and goods that are provided within the national economy per year. However, the origin of imported or domestic resources is not taken into account. Based on different approaches to the calculation of this value, GDP may include both total value of production costs (public procurement, net exports, consumption, investment) and the cost of economic income (profits, rents, salary, capital rate). In any case, it should be the same amount as income of one participant coincides with costs of another participant in economic relations. It should be noted that the use of GDP as the measure of the business cycle reflects changes in product prices. Therefore, real and nominal GDP measures are used. Real GDP is adjusted for the consumer price index. Thus, if there is a GDP decrease and undervalued purchasing power, such monetary policy does not allow businesses to sell products that will immediately make the market imbalanced.
The employment rate indicates such socio-economic situation when the working-age population is out of work or cannot find it with the potential to occupy it. It is also the discrepancy between the number of people wanting to find a job and the number of these jobs according to their qualifications and profile. The employment rate indicates the value of the human resources for the economy in this phase of the cycle. In a state of crisis, employment decreases as companies are not able to afford the cost of wages/salaries and social security of workers due to negative circumstances. Besides, they cannot commit any effective actions to save the labor efforts due to the discharge of the staff. Accordingly, in terms of the general economic growth, when production capacity enhances, the economy needs the human resources to be involved into the enterprises’ performance, which stimulates growth of employment. Moreover, economic recovery may be present at high rates of inflation as continued development of the technical and technological progress displaces workers from their jobs.
The inflation index is used to characterize the dynamics of prices for products and services. They may proportionally be greater than the level of salaries and wages of the population, depriving the market of demand. Money circulating in the country begins to lose its value. Thus, the economy may go into a recession, facing crisis situations.
In addition to these variables characterizing the economic cycle, there is a developed system of specific indicators, which are ahead of, coincide with, or follow phases of the economic cycle. Since the cycles sequentially pass one after the other, these indicators may relate to any group, but their place is determined by economic trends.
3. Main Characteristics of a Recession
No matter what negative effects and consequences a recession entails, it is an important integral part of the full business cycle. This phase is a kind of preparation for the reboot of the socio-economic system after the maximum peak in the economic activity. In this phase, production volumes are reduced and the amount of GDP is reduced to zero or has a negative rate of growth. Due to the reduction of production capacity, companies tend to reduce their investment activity because of their lower profits. There is an imbalance between increases of total expenditure and total income, which leads to problems in the market. The aggregate supply exceeds the aggregate demand and leads to the accumulation of goods stocks. Inflation rates are rising as goods and services are sold at higher prices. This, in turn, comes along with an insufficient level of salaries/wages. The emerging necessity of economic resources saving to maintain the business solvency results in the release of personnel and job cuts as the company is not able to manage the entire staff under particular adverse circumstances. Some businesses cannot even survive during such crisis and go bankrupt. This explains the rise of unemployment in the phase of this business cycle of national and/or global economy. The decline in living standards and wages/salaries also takes place during this specific period of time.
Recession may be recognized officially in the presence of these processes for over three consecutive months. Reasons for the recession in each country are different, but a downturn in one country leads to the recession in another one. Therefore, a local recession could affect the global economic recession cycle. If occurrence of the recession has affected military operations and caused unpredictable changes in the market, including the increase in prices of natural resources, this phase of the economic cycle may be very dangerous for all participants of economic relations. In addition, it should be noted that due to the complexity of its nature, it is difficult to regulate further development of such recession. Other circumstances, under which the economy is undergoing a natural decline, include a rapid increase in the amount of debt, a reducing level of quotation of shares, imbalance of the economy, rising commodity prices, a large number of risky mortgages, general activities of speculators in the capital market, etc. These circumstances inevitably lead to the crisis of the economy and negatively affect the quality of life. Different types of the recession are characterized by the state of the economy that has reduced demand for products due to the lack of consumer confidence, inertia of business, and/or insufficiently active investment activity.
Upon the occurrence of a recession, it is necessary to understand that this is a logical continuation of the economic cycle, which has occurred due to shortcomings in the level of the socio-economic system. Risk management of the government and impact of the state on the current situation should provide a softening effect on the economic downturn.
4. According to the NBER, the Beginning and the End of the Recessions of (1981-1982) and (2007-2009)
Recessions that occurred in 1981-1982 and 2007-2009 had a great importance for both the US and the world as a whole. According to official data of the NBER, the first recession of a downturn was noticed immediately after the peak of the economy in July 1981 and lasted until November 1982, which lasted 16 months in total. This is 10 months longer than the previous recession.
Another long-term slowdown of economic relations lasted 18 months from December 2007 to June 2009. The previous decline in the economic cycle lasted almost halftime of this particular one.
Analytical sources note that it was the longest recession since the World War II. Such a phenomenon with the average duration of six months has been regular in the history of the economic development of a country. However, there was a strong tendency of the first signs of its appearance in the early spring or fall. Factors that influence development of the recession involve changes in agricultural production, oil prices, and the degree of the global economic stability. Development of international relations affected causes, depth, duration, and consequences of the last two recessions in the US economic cycle.
5. Comparison of the Recession of 1981-1982 with the Recession of 2007-2009 with a Detailed Examination of Real GDP, Unemployment, and Inflation
The 1981-1982 recession in the US economy was triggered by a series of events that took place in the international arena and brought the crisis into the country. Among the tools that had a direct influence on the development of this phase was the monetary policy relating to processes of deflation in the country. Moreover, a significant impact on the US economy was exerted by the revolution in Iran, which increased the price of oil and oil products. Studies indicate that significant dependence of the country’s economy on oil leads to recessions. Thus, the price increase for at least 10% during several quarters can cause recession in the economy. Nevertheless, general disapproval was caused by the approach of R. Reagan and the Republican Party to the management of the economy, which led to the decrease of efficiency of the country’s monetary policy.
One of the main causes of the recession in the United States in 2007-2009 concerned troubles with prices for accommodations and mortgage. Its growth attracted the real estate market and its participants. The financial crisis contributed to the development of the economic downturn. It bound financial and investment activities of business and households intending to buy cars and houses. Furthermore, ordinary consumers and businesses were taken as hostages of circumstances.
Unemployment occurred in all economic sectors. Since recovery of 1980, this figure rose above 7.5%, but in September of 1982 it was 10.8 %, which was significantly higher than after the postwar period. The peak of the recession came at the end of December 1982 when the unemployment rate reached the level of 10.8% (Caggiano, Castelnuovo, and Groshenny 79). This figure continues to be one of the highest figures since the Great Depression until modern times. The most critical data indicators were observed in West Virginia, Michigan, Mississippi, and Alabama. Due to the fall in output, the number of jobs decreased by almost 3 million. It was the highest unemployment rate in the postwar period (Sum and McLaughlin). Development of the US recession was not helped even by the President’s plan to reduce taxes.
The recession of 2007-2009 brought an increase in the unemployment rate to 4.5% (from 5.0% in December of 2007 to 9.5% in June of 2009), but its growth continued after the official end of the recession and the unemployment rate reached the 10.1% level in October 2009 (Mulligan). The increase of unemployment rate occurred in the first six months of the economic downturn. This meant that the time was very flexible in responding to economic changes in the country.
On average, recession of 1981-1982 increased the rate of inflation to 3.6% that was 0.7% higher than the average post-war level. The inflation reached a level of 13.5% in the period of recession. Interest rates on federal funds increased to 20% in June 1982, which was 9% more than in 1979. The increase in the rates of capital made the usage of loans for accommodations and cars difficult. Throughout the phase, the GDP indicator was falling steadily. For the duration of this recession, the GDP rate fell to 3.7%. It was a weak attempt to boost manufacturing activity. The decline occurred in such important areas as steel, automobile, and construction industries.
Changes in the GDP dynamics during the second long recession resulted in a stronger decline of the coefficient by 4.1%. In Europe, the GDP contraction occurred within 0.5-1% range. Reduction of production was characterized by the same rates.
6. Identification of a Major Difference between the 1981-1982 Recession and the 2007-2009 Recession
The main feature of the two recessions concerns the fact that the country’s economy could not gain benefits from its growth in the long-term perspective. In the first case, there was dependence on primary resource supply and high prices; in the second case, failures in the financial and credit policies and in the real estate market were observed. The first recession was associated with the oil shock. The second recession was deeper in terms of its consequences and duration, especially when taking into account close international connections between the US and other countries. Therefore, the financial crisis that swept the major partner began in other countries as well. Therefore, the financial downturn had a bigger scale in case of the second recession.
7. Comparison of Real GDP and the Number of Jobs Created Four Years into the Recovery Phase of Each Recession. Identification of the Strongest Recession
The recovery, which came after each of the described above recessions, is characterized with a high rate of GDP and the level of employment Time spent on the process of economic recovery differs in both cases. The beginning of the recovery from the recession of 1981-1982 started in November 1982. It took 5 months to achieve the decrease of the unemployment level within the country. However, scientists consider this recovery as the strongest one. By the end of 1983, the GDP growth reached the 6.2% level, which is higher than the next protracted recovery had. However, 4 years after the recession, the recovery did not provide the increase of employment and the rate only decreased by 2% (Iqbal and Vitner 23).
The phase of the recovery from the recession of 2007-2009 began in June 2009, but the recovery period with an increase of employment lasted 12 months. This increase was the result of the protracted deep crisis and serious structural distortions of both national and global economies. Real GDP grew by 2.98%. However, the rate of the recovery from recession proved to be very weak, indicating a weak recovery of employment. For instance, the employment rate was 0.3% lower than after the previous recovery.
As the first recession lasted 16 months and the second continued for 18 months, there is only a slight difference in the duration, but there are some issues relating to the depth of implications and close financial connections between the countries of the entire world. As modern researches define, the labor market of the USA is more dynamic and flexible than in Europe and problems with a rapid recovery of the optimal level of employment should be solved with crucial confidence measures (Pontusson and Raess 15-16). However, the situation relating to financial losses, economic losses, and total destabilization has not allowed creating a beneficial basis for a more rapid recovery.
Thus, business cycles that have occurred during the history of the country and the world economy both in theory and in practice have happened due to various factors. Recession as the one of the phases of the business cycle is characterized by negative events, which later influence the duration of recovery. Seriousness and depth of a recession are determined by the possibility of a rapid economic expansion.