Posted: May 24th, 2022
An analysis of the problems caused by changing economic conditions
Problems caused by business/trade cycles
Trade or business cycles refer to webbed stages in a particular economy as it expands and shrinks. These cycles are universal as they occur in all countries with capitalistic economies, only that they occur at different times. However, increased globalization tends to unify the business cycles among other countries more regularly than in the past. Trade cycles are established by evaluating not only the inflation-adjusted Gross Domestic Product (GDP) but also the aggregate measure of the key economic indicators. The four key economic indicators are industrial production, sales, employment, and income. Ample knowledge of the different cycles is essential to businesses as it aids in determining the next course of action. There are four phases of trade cycles: boom, recovery, recession, and slump, as discussed below.
Figure 1shows the phases of trade cycles in an economy
This phase occurs after the depression as the government tries to revitalize the economy through expansionary monetary policies. At the start of the recovery process, businesses increase their investments, which leads to a linear increase in employment and income. Availability of steady income increases individuals’ purchasing power. Subsequently, the demand for consumer goods steadily increases. As the consumer goods market attracts more supply, the prices of producer goods rise, which affects the distribution of income. As a result, the profit margins increase, leading to higher wholesale prices than retail prices. Notably, economic factors such as wages and rent do not increase proportionally to prices.
The boom, commonly referred to as the expansion stage is the most desired or normal economic state. This phase is characterized by the constant increase in economic factors such as profits, output, demand and supply of commodities, and production. The employment levels are remarkably high, and the stock markets prosper during this period. Also, the cost of factors of production and the output costs increase concurrently, thus striking an economic balance. Since debtors are financially capable of paying the debts, the creditor lends more money at high-interest rates. Businesses should take advantage of these financial aid options to invest in the numerous viable business opportunities available in the boom phase. When companies invest idle resources into the economy, equal cash inflow and outflow favour economic growth. The expansion period eventually reaches the peak whereby all factors of production are extremely high but cannot increase any further. A rise in input prices characterizes this period leading to an increase in output prices while the income levels stagnate.
A recession occurs when economic activities in a vicious cycle significantly decrease. An increase in output prices due to a drastic rise in input prices necessitates people to restructure their budgets. Consequently, widespread spending occurs, leading to an adverse demand shock. As a result, there is a decrease in production activities and subsequent demand for raw materials. People tend to hold their money back, leading to a shrinkage in the money supply. Also, a wave of pessimism spreads into businesses during the recession, forcing them to convert from seller markets to buyers’ markets.
Slump or depression occurs when there is a general fall in economic activities. Unlike the recession, which lasts for a short time, depression lasts for long periods, usually more than ten months. It is a more severe downturn than a recession. These slumps are characterized by the abnormal increase in unemployment rates, decrease in credit offers, and output reduction due to a drastic reduction in demand for consumer goods. Since there is decreased money flow, many businesses become bankrupt and default on their debts. The primary characteristics that differentiate an economic depression from a recession are price deflation, constant financial crises, and stock market crashes.
The UK economy was in the boom phase for the longest time until the novel coronavirus pandemic. The pandemic demanded minimal physical interactions, and many countries cut short trading activities with severely affected countries. Adjusting to this new normal led to the collapse of many businesses and a financial crisis. However, the country is currently in its recovery stage, as depicted by the increase in GDP in the last year. The country has maintained a remarkable V-shaped economic graph that implies a significant positive growth rate. Compared with other EU countries such as Germany, the UK’s economy is doing well, though not as compared to these countries. Even though Germany recorded a slight improvement in GDP compared to the UK, these two economies are not comparable. This is because the UK uses different measures in calculating education and healthcare industries’ outputs. The UK economy is yet to attain the US’ recovery rate as the latter’s annual GDP in 2021 was four times that of the former.
Reasons for inflation and its effects
Inflation refers to the increase in the prices of goods and services in a particular economy. It equally affects necessities and wants expenses. Various factors can influence inflation, such as production costs, demand, and fiscal policies. These factors lead to different inflation types, including cost-push inflation, demand-pull inflation, the housing market, and expansionary fiscal policies.
Cost-push inflation occurs when prices increase due to an increase in the price of factors of production. The demand for goods remains constant as the supply decreases. Essentially, the high production costs are passed onto consumers by increasing the cost of consumer goods. One of the clear indicators of cost-push inflation is a rise in the prices of commodities such as oil and metal, which are the essential production inputs. Additionally, wages affect the cost of production as the most significant expansion for businesses. Thriving economies decrease unemployment rates which may lead to labour shortages. Companies are forced to offer high wage rates to attract quality skills. Subsequently, the production costs increase, leading to cost-push inflation.
On the other hand, demand-push inflation occurs when there is strong demand for a particular good or service. Even though the strong demand leads to the short-term supply and demand imbalance, constant demand can resonate with the economy. This causes an increase in demand for other goods causing demand-pull inflation. High employment rates increase income, increasing demand for particular goods and services, especially luxurious ones. The demand surpasses the supply; hence consumers are willing to pay more for the few available products. Additionally, manufacturers’ can raise the prices because they know that a product is a basic need leading to demand-pull inflation. However, companies cannot submit the prices without the leverage of increased demand.
Another cause of inflation occurs in housing markets, whereby there is an increase in house prices due to the rise in demand for homes as the economy expands. Demand for homes also leads to increased products and services associated with the housing industry, such as construction materials and interior design services. On the other hand, the government can increase the discretionary income for both consumers and businesses through expansionary money policies. For instance, companies can invest extra income in capital improvements when the government reduces taxes. As a result, the businesses hire more employees, which increases revenue and spending. Also, the federal banks can lower the lending interest rates to raise money in circulation. An increase in money flow prompts more expenditure and demand for goods and services, leading to inflation.
Inflation has adverse impacts on the economy in the long run. It leads to high-interest rates. Initially, the interest rates are low when the government implements expansionary monetary policies. However, banks raise their interest rates to recover the loss of purchasing power of their funds. This discourages investors from borrowing, leading to decreased investments. Additionally, inflation falls on exports as countries are reluctant to purchase inflated goods. Lastly, inflation encourages consumption and discourages saving. An increase in costs of goods makes people buy goods at the moment as they fear that the prices might go higher. This prevents people from saving, thus decreasing funds in the financial markets. As a result, banks and other financial organizations offer limited credits that can support significant economic growth.
Types of unemployment
Unemployment can be defined as limited job vacancies available for people willing and can work at the current wage rate. These candidates often end up working at jobs that offer less salary than they are qualified for or become unemployed. The primary types of unemployment are cyclical, frictional, structural, and seasonal unemployment. Frictional unemployment refers to unemployment that occurs when it takes long periods before people can find jobs that ensemble their tastes and qualifications. Since frictional unemployment will never be zero, full employment will be impossible. There will always be new entrants such as fresh graduates and r-entrants like homemakers in any typical economic market. The primary cause of frictional unemployment is the lack of information necessary to match a qualified person to a specific job. Essentially, this imperfect information creates a wide gap between the employer and potential employee despite the availability of job opportunities.
Structural unemployment is a type of employment that arises when there is a mismatch between people’s demographics and the nature of jobs available. There are particular jobs in an area, but the residents do not meet the required skills and talents. Conversely, some areas have qualified workers, yet there are no job vacancies to fill. This type of unemployment is common when industries are undergoing technological advancements. For example, mechanization in farms implies that unnecessary farmers will be laid off. When these farmers migrate to the cities searching for greener pastures, they find no job that requires farming skills.
Furthermore, cyclical unemployment occurs when businesses cannot support their workers due to decreased demand for goods and services. Therefore, some workers are laid off, leading to cyclical employment. According to Keynesian economics, cyclical unemployment is a by-product or direct impact of trade cycles, particularly recession. During economic recessions, customers tend to minimize their spending in fear of worse times than the current ones. As a result, the demand for goods and services decreases; hence businesses cannot sustain all employable workers. As the name suggests, seasonal unemployment occurs when the need for particular skills and talents ends after a specific period. This means that a job is only available for a few months in a year. Some seasonally unemployed workers include farmers, ice cream vendors, and hotel and tourism workers.
A series of factors cause unemployment; hence it is difficult to pinpoint a factor. A combination of several factors limits available job opportunities. Notably, all the causes of unemployment are economical. For example, technological advancements mean that people have to align their skills with the change, which may cause structural unemployment. Additionally, intensive use of machines in industries renders many workers jobless. An increase in population is a prevalent cause of unemployment. Rural-urban migration contributes to the high population in towns and cities. If the economic growth in these regions is relatively slow, the available job opportunities are inadequate for the increased population. The government also plays a crucial role in increasing unemployment rates in a country. For instance, when the government raises the minimum wage rate, its primary intention is to improve the workers’ living standards. However, such policies adversely affect businesses as they increase production costs. Subsequently, they are forced to lay off some workers.
It is worth noting that the BLS does not include all joblessness cases in unemployment. When one quits looking for a job, they are not included in the unemployment rate. Also, when one leaves work due to retirement, education advancements, or caring for children, they are not included in the unemployed category. This is because they are not actively looking for job opportunities. According to the BLS, people looking for jobs in the last year but not searching in the current month belong to the marginal unemployment class. The categorization of unemployment cases has raised numerous controversies as the population feels like the government fails to account for the real unemployment rate and uses statics that reflect the official unemployment rate.
The government has a crucial task in reducing unemployment cases in the country. Some government actions that can deal with unemployment issues are implementing relevant education systems, encouraging direct foreign investment, and diversifying economic activities. The majority of the education systems in the UK pay little attention to skills development. This implies that the graduates cannot employ themselves due to lacking the necessary skills and experience. On the other hand, foreign investments revive the economy, creating more job opportunities. By diversifying the economy, the country will have numerous job opportunities for people within a particular industry, which will reduce seasonal unemployment.
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