Reading 1 – CUILIFV,8,Ò, – Reading 1: WHAT CAUSES THE BUSINESS CYCLE? The business cycle or trade – Studocu

Reading 1:

WHA

T

CAUSES THE B

USINESS CYCLE?

The

business

cycle

or

trade

cycle

is

a

permanent

feature

of

market

economies:

GDP

alternately

gro

ws

and

contracts.

During

an

upturn

parts

of

the

economy

expand

to

the

point

where

they

are

working

at

full

capacity

,

so

that

production,

employment,

business

investments,

profits,

prices,

and

interest

rates

all

tend

to

rise.

A

long

period

of

expansion

is

called a

boom. But at some poin

t there will inevitably

be a

downturn The economy w

il

l hit

a

peak

and

start

to

contract

again,

the

demand

for

goods

and

services

will

decline

and

the

economy

will

begin

to

work

at

below

its

potential.

Investment,

output,

employment,

profits,

commodity

and share

prices,

and

interest rates

will

generally fal

l.

A

downturn that

lasts

more

than

s

ix

months

is

called

a

recession;

one

that

lasts

for

a

year

or

two

is

generally

called

a

depression

or

a

slump.

Eventually

the

economy

will

bottom out,

and

there

will

be

a

recovery

or an upturn.

The

most

probabl

e

cause

of

the

business

cycle

is

people’

s

spending

or

consumption

decisions,

which

in

t

urn

are

based

on

expectations

A

country’

s

output,

investment,

unemployment,

(6)

balance

of

payments,

and

so

on,

all

depend

on

millions

of

decisions

by

consumers

and

businesses

on

whether

to

spend,

borrow

or

sove

When

economic

times

are

good

or

when

people

feel

confident

about

the

future,

they

spend,

and

run

up

debts.

At

a

certain

point,

spending

has

to

slow

down

and

debts

have

to

be

paid.

If

interest

rates

unexpectedly

rise,

a

lot

of

people

find

themselves

paying

more

than

they

anticipated

on

their

mortgage

or

ren

t,

and

so

have

to

consume

less.

Similarly

,

if

people

are

worried

about

the

possibility

of

losing

their

jobs

in

the

near

future

they

tend

to

start

s

aving

money

and

consuming

less,

which

leads

to

a

fall

in

demand,

and

consequently

a

fall

in

production

and

employment.

Investment

is

closely

linked

to

consumption,

and

only

takes

place

when

dem

and

is

g

rowin

g.

As

s

oon

as

de

mand

s

tops

g

rowin

g,

inve

stmen

t

in

new

fac

torie

s,

mac

hines,

et

c.

f

alls

,

wh

ich

co

ntribu

tes

t

o

the

d

owntu

rn.

Bu

t

if

su

pply

ex

ceeds

dema

nd,

pric

es

sho

uld

fal

l,

and

enc

ourag

e

peop

le

to

star

t

buying

again.

Ev

entu

ally

the

ec

onomy

will

reach a trough or bottom out, and there will be a recovery or an upturn.

This

is

th

e

inter

nal

(

or

endo

genous

)

theo

ry

of

th

e

bus

iness

cycle

;

ther

e

are

al

so

ext

ernal

(or

exog

enous

)

theo

ries

,

w

hich

look

fo

r

c

auses

out

side

e

conom

ic

act

ivity

,

such

as

scie

ntifi

c

adva

nces

,

natu

ral

d

isaste

rs,

e

lectio

ns

or

pol

itica

l

sho

cks,

d

emogr

aphic

cha

nges,

and

so

on

.

The

e

conom

ist

Jose

ph

Sch

umpete

r

b

eliev

ed

th

at

the

b

usines

s

cy

cle

is

ca

used

b

y

maj

or

tec

hnolog

ical

i

nven

tions

(e.g.

the

s

team

engin

e,

rai

lways

,

autom

obile

s,

ele

ctri

city

,