Issues of Economic Cycles

Definition of Economic Cycle

Economic cycle means the changes of real Gross Domestic product (GDP), along the GDP trend of any country.

The Nature of Economic Cycles

The boom and bust economic cycles may vary in duration and frequency. As well they may vary for a country in different periods in the nature of the boom bust cycle in terms of duration frequency. As well, all countries experience economic cycles but normally in differing periods.

Models of Economic Cycles

The models vary in terms of the nature of economic cycles, whether they are due to internal changes to the economy in terms of output and prices or due to external economic shocks.

The Reasons for macroeconomic stabilization of economic cycles

The importance of stabilization of economic cycles is due to the fact that fluctuation in output and prices causes to increase the uncertainty for businesses and consumers and there for reduces the long-term growth potential.

In addition, stability allows governments and business to plan for the long-term in investing in physical and human resources to improve productivity in the long-term there by increase in the economic growth potential.

Prime causes of global economic fluctuations

The global economic fluctuations are caused by demand side or supply side events or shocks. The main demand side shocks are growth and income of main trading partners of a country, interest rate decisions in other parts of the world particularly in Europe and USA, foreign capital investment decisions of global multinational companies in the current globalized world economy.

Global supply-side shocks which causes fluctuations are global commodity prices such as oil, metal prices such as gold and other raw materials.

Economic Policy tools of Economic stabilization

Main tools of economic stabilization policies are monetary and fiscal policies. Monetary policy increase aggregate demand by changes in the interest rate or intervention in the currency market to influence the value of the currency.

The fiscal policy address to give incentives by manipulation direct and indirect tax rates, changes in tax allowances to individuals and companies, and changes to government spending and borrowing in the financial market.

Long-term economic management policies

Long-term economic policies tend to affect the the aggregate supply of an economy be giving incentives to firms like investment incentives, labor market reforms and policies directed to increase competition in the product market. To increase productivity, dynamic efficiency of the economy, technological development and innovative capacity of the economy and environmental sustainability.