Short Commentary or Analysis on the Most Recent Economic Commentaries or Economic Reports

¶ … Economic Commentaries or Economic Reports

Business Cycle

The position of economics has changed remarkably over the last 40 years and one can see that many theories that were applicable earlier are not applicable today. Business cycle was one of the fundamental concepts of macroeconomics which deals with the economics of nations, but is redundant today as the differences between countries have practically disappeared. The situation of the world had been bi-polar earlier -- England and France, West and Germany, United States and Soviet Union. There is only one leader of the world today, United States. The economics of the world runs as per the command of the country, and old laws are not valid any more.

Thesis Statement:

Science is not a matter of observation and then saying that "this is how it happens"; as science also tries to find out the reasons for the happenings.

Body:

One of the first concepts given by macroeconomics to man is the concept of business cycles, and one has seen this happening for many years. At present one of the major events in the world is the war going on in Iraq, and this was expected to have some effect on the economy in United States, as there is a lot of expenditure for this war, and it is unlikely that America will get financial help for this war from the Arab allies like Saudi Arabia or Kuwait. In World War II the impact on the economy can be clearly seen from the following figure.

Graph 1 -- Business Activity in United States since 1914

(The Business Cycle)

There was a climbing boom in the economy which suddenly collapsed with the end of the war. Prior to the war, there was a recession due to the great depression which was cleared only due to World War II. The subsequent wars in Korea and Vietnam also created fluctuations in the economy, but there was nothing like the impact of World War II. The explanations of the impacts of different phases are given in the form of theories by stating that when a period of recession comes, then there is a low point formed for the recession, and then expansion of the economy starts again till it reaches a peak. The approach is clearly one of just observation of the events and not providing any scientific reasons for the events that happen or even providing a rational method as to the reasons why it happens. Otherwise, the same principle should have applied to both the Korean War and the Vietnam War as it had applied to World War II. (The Business Cycle)

At the same time, certain industries feel that there situation was recessionary till the 1990s and has then started recovering. (Casebauer) Thus it seems that there are now different business cycles for different industries. Yet, the theories about business cycles remain the same and that says business cycles occur due to expansion and contractions of the economy. According to some experts, this happens due to declines in GDP that last for more than two quarters. This has happened recently and the GDP in real terms was almost stationery for a period and the interest costs were reduced so that people start investing. The public invested in real estate and that has also now played out. But the theory states that during a recession entrepreneurs cannot invest in business as the sales are falling. (The Business Cycle)

Well even if the sales fall, it may still be worthwhile to invest as share prices are no longer tied up to the returns that the investor will get. This is seen from the price to earnings ratios in the market which used to be between 8 and 15 to one. What that means simply is that on investment, the return of the investment was expected between 8 to 15 years. Earlier when the ratios hit as much as 22 to one, one of the things had to sustain the share -- an increase in earnings or a decrease in the price. Now the ratios have reached as much as 35 is to one. This is as per the S& P. index, and though this is the figure for the index, some particular stocks are given much higher ratios. (Final book of Daniel) This is encouraging some individuals to increase their faith in God and some others to some false disciples. It is clear that the picture has changed and one of the main reasons is that the concept of money in itself has changed. Earlier, the concept of dollars was tied up to a fixed rate of exchange with gold, and this has now been removed. Thus the money of today is only tied up to the faith that people of the country have in it.

Well getting back to the business cycle, the earlier concept was that a recession caused less purchase at all levels, and from all levels. The industrialists did not want to expand production facilities, and they spent less. Due to this reduction in expenditure, there is further fall in sales and income. The situation continues till a low point or depression is reached and at that position there is large scale unemployment, a decrease in annual incomes and overproduction. Then ultimately the economy reaches the lowest point and it is stuck there till the process of expansion and recovery starts. How long will a depression last? No one knows and some depressions have lasted for years. Then come expansion and recovery. Why does this start? No one knows and the last great depression that took place in the 1930s lasted for a long time, and the recovery came with World War II. This can be understood by the following graph.

Graph 2 -- Phases of business cycle

There was more demand for goods and these had to be produced. Wars had to be fought and this required soldiers. Thus the economy starts recovering. It is then supposed to reach a peak and again the economy is supposed to decline. At the stage of peak, one should also be wary of another problem that may come, and that is inflation. This is the basic theory of business cycles, and one of the fundamental principles of economics.