Year 11 Economics – Assessment Task 1 – Daniel Morris
Part 1 – Explain how the business cycle model represents the dynamic nature of the economy
Definition and Diagram of the Business Cycle
Business Cycle
The business cycle shows the rise and fall of economic activity in an economy. The business cycle is generally measured using the rise and fall in gross domestic product (GDP). The business cycle is split into four main phases which are upswings, booms, downswings and recessions.
Upswing Phase
In the upswing phase of the business cycle, there is an increase in the levels of employment, spending, output and income. The economy has a steady flow of money circulating, which results in higher interest levels and tax collections. In turn, this then allows the government to increase spending on infrastructures and services so that the quality of life can rise.
Boom Phase
In the boom phase of the business cycle, the economy and economic activity have reached a maximum level of growth. Price levels are inflated due to shortages in labour and resources. People will restructure and prepare for a decline in the economy, and the government will try to slow down economic activity to sustainable levels.
Downswing Phase
In the downswing phase of the business cycle, economic activity begins to slow down, which results in a fall of employment, spending, output and income. As a result of a slowdown in economic activity, there is less demand for labour which leads to greater levels of unemployment.
Recession Phase
In the recession phase of the business cycle, the economy and economic activity have reached its minimum point, which is also called a trough. The government will lower interest rates to encourage spending in an attempt to increase economic activity. Due to a large supply of labour, unemployment continues to rise and businesses will try to sell unsold inventory by lowering prices.
Applying Model to Actual Economies
United States
By applying the business cycle to the United States, we can tell that the United States’ economy is in the upswing phase because its employment rates have risen drastically in the last 10 years. Also the United States’ disposable income for households has a growth rate of 1.6% per annum. The interest rates in the United States were increased by 0.25 percentage points on the 20th of December 2018, which shows signs of a strong economy. Using these statistics and applying the business cycle, we are able to tell that the United States has a strong and growing economy, and is in an upswing phase.
Australia
By applying the business cycle to Australia, we can tell that its economy is in the upswing stage of the business cycle, however, the economy is about to reach a peak or boom followed by a downswing. The unemployment rates of Australia have decreased to 4.9% and the disposable income of households in Australia has a current growth rate of 1.7% per annum. The interest rates are at a record low of 1.5% to encourage spending so that Australia’s economy doesn’t fall into a downswing. The real GDP of Australia is still growing at an annual growth rate of 2.3% for 2019, however, that is down from 3.03% from 2018. These statistics show that Australia’s economy is in an upswing phase, however, it is edging towards a boom and then followed by the downswing phase.
Part 2 - With Reference to recent developments in the global economy discuss how the business cycle model can be used to explain the changing fortunes of the Australian economy and ONE Asian economy
Australia
Current Stage
The Australian economy is currently experiencing the upswing stage of the business cycle model. We are able to identify that the Australian economy is in an upswing stage due to a number of statistics and indicators. The Australian economy currently has an economic growth rate of 2.3% per annum, this means that the Australian economy is increasing the amount of production and are spending more. This is an indicator that an economy is experiencing an upswing in the business cycle as it shows the economy is growing and improving. Another indicator that the Australian economy is in an upswing phase is that tax collections increase, which has been shown through the Australian economy’s current account deficit, decreasing AUD$3.582 billion to AUD$7.203 billion. This has occurred due to the mining industry having increased profits which is then taxed, the money that was taxed is now given to the government who then use that money to pay off debt. As a result of this increased revenue, the economy is forecasted to be in a surplus by the end of the next financial year, which then gives the government more money to spend on infrastructures and services. This then creates job opportunities and spending throughout the economy. This is backed by a decrease in unemployment in the economy, with the current unemployment rates falling to 4.9% which is another indicator that the economy is currently in the upswing stage of the business cycle. Also, the business investment levels increased by 1.3% in the December quarter which creates more job opportunities and increases productivity. This then generates more money, which creates a healthy cash flow in the economy. Overall, the Australian economy is currently in the upswing phase in the business cycle and this is shown in an increase of economic activity such as spending, employment, income and output.
Future Stage
The next stage of the business cycle that the Australian economy will experience is the boom phase. An indicator that the Australian economy is heading towards the boom phase is that although business investment increased in the last quarter it had decreased in the previous three quarters, which shows us that the overall trend for last year is that business investment is slowing down, which is an indicator that we are reaching a peak. In the last quarter despite an overall increase in business investment, there was a decrease in investment for mining and manufacturing. This is a concern as the mining and manufacturing industry is the main source of tax revenue for the government and without this revenue, the government will have to slow down its spending. Another indicator that the economy is moving towards a boom phase is that the interest rate is at its lowest point ever at 1.5%, which shows that the economy is slowing down in spending and the government is trying to turn that around by encouraging spending to boost economic activity. Another indicator is the economic growth rate has dropped from 2.7% to 2.3%, which shows the economy is still growing but at a slower rate due to economic activity also slowing down. Also, the Reserve Bank of Australia has recently cut its growth forecast for the economy from 3.5% to 3% for the year showing a slowdown in the Australian economy. Overall, the next stage of the business cycle that the Australian economy will experience is the boom phase, which is shown through a slowdown in economic activity.
South Korea
Current Stage
The South Korean economy is currently experiencing the upswing phase of the business cycle, this is shown through a number of indicators. The South Korean economy currently has a 3.1% economic growth rate in this quarter which has increased from 2% in the previous quarter, this shows that the economic activity has risen showing a positive change in the economy of South Korea. Another indicator that the South Korean economy is in the upswing stage of the business cycle is that their current account surplus has risen to USD2.77 billion from USD2.64 billion, this is largely as a result of increased tax revenue. The increase in tax revenue is caused by an increase in economic activity, which enables more money to flow around the economy (which can then be taxed by the government) as well as an increase in interest rates. The interest rate has been increased by 0.25 percentage points to 1.75% from 1.5%, this is as a result of the economy doing well and the government wanting to bring down economic activity to a sustainable level. As a result of the increase in interest rates and account surplus, the South Korean government has more money to spend on infrastructure and services, which creates jobs in the economy. This is backed by a decrease in the unemployment level, which fell from 4.4% to 3.7%, which is a strong indicator that the economy is in an upswing phase. Overall, the South Korean economy is in the upswing stage of the business cycle and this is shown through indicators such as increased employment, income and spending.
Future Stage
The next stage of the business cycle that the South Korean economy will experience is the boom phase. An indicator that the economy will next experience the boom phase is that the economy grew at 2.7% in 2018, which is the slowest growth the economy has had in six years, which shows that economic activity in South Korea is beginning to slow down. An indicator that the economy is reaching a boom is that its exports are falling, this is because South Korea’s exports to China have fallen by 14% last year, which is the fastest fall in two years. With China being South Korea’s main export, it is a clear indication that economic activity will begin to slow down and South Korea are heading towards a boom.
For and Against Using the Business Cycle to Suggest the Next Stage
Pros
One reason to use the business cycle model to suggest the next stage an economy will experience is that it has been proven to work. The business cycle model was made in 1819 and since then has been used by most of the top economists around the world to predict what will happen next to an economy. Top economists have used this business cycle to predict what is going to happen to other countries around the world to then stop this from negatively impacting their own country. Overall, one reason to use the business cycle to suggest the next stage an economy will experience is that it has been around for centuries and has been proven repeatedly that it works.
Another reason to use the business cycle to suggest the next stage an economy will experience is that it has a high degree of accuracy. The business cycle model measures how economic indicators affect the real GDP of an economy. By using these indicators and the GDP we can easily and accurately tell how an economy is doing and then make a prediction on how the economy should perform for the future. Overall, one reason to use a business cycle model to suggest the next stage an economy will experience is that it has a high degree of accuracy, which then enables you to make an educated prediction on what will occur next.
Cons
One reason against using the business cycle model to suggest the next stage an economy will experience is that it uses historical data. The information used in the business cycle model is taken monthly and this data takes time to analyse, which means that it doesn’t tell you what stage you are in or where the economy has headed until you are in the phase. This means that economists and governments are trying to fix and predict the economy on old data. Overall, one reason to not use the business cycle to predict the next stage an economy will experience is that the data used is old and isn’t up to date, which isn’t helpful in predicting the future.
Another reason against using the business cycle to predict what stage an economy will experience is that it doesn’t show future unexpected static and shock effects. Since the business cycle model uses historical data it cannot show you future unexpected changes that would affect the real GDP. This includes a change in consumer behaviour and war, which could make a prediction completely wrong. Overall, one reason not to use the business cycle to predict the next stage an economy will experience is that the model doesn’t take into account future static and shock effects.
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