Issues of Economic Cycles

The indicators of economic boom

The following economic indicators show the boom cycle of an economy:

1. Strong and rising level of aggregate demand.

2. Fast growth in consumption.

3. Rising employment and real wages.

4. High demand for imported goods and services.

5. Increase in government tax revenues.

6. Increase in investment by firms and increasing profits for the private sector as a whole.

7. Increased utilization of existing resources such as raw materials and other natural resources such as minerals, oil and utilization of capital and labor.

8. Danger of demand-pull and cost-push inflationary presures building up as the economy overheats.

The Indicators of Economic Recession

The following economic indicators shows the economy is in the bust cycle:

1. Declining aggregate demand for the counties output.

2. Rapidly rising unemployment.

3. Rapid decline in business confidence and declining profits.

4. Declining investment by the private sector of the economy.

5. Reduced inflationary pressure.

6. Falling demand for imports.

7. Increased government borrowing to finance budget deficit.

8. Lower interest rate from the central banking authrities.

Infra-structure projects and multiplier effect

Major public works projects such as road works and building projects has huge potential to have a multiplier effect as they employ thousands of workers and also spur investment by private firms involved in these projects and it increases injections in the economy and in the circular flow of income of the economy as a whole.

Accelerator effect

Planned capital investment is linked to growth of demand for goods and services. When the demand is increasing business may increase investment to expand their productive capacity. However, slow down in demand also leads to fall in planned investment. This is called accelerator effect.

Conclusions

As discussed above, the concept of economic cycle and its causes are important in developing policies to stabilize the economy in the short-term and in the long-term. It is also important, that the above analysis shows it is not an easy task in practice as shocks are always unpredictable and it may not be easy to control the consequences of these external shocks. However, if the aggregate supply can be consistently increased by appropriate polices the economy becomes more resilient in absorbing these shocks and rebound quickly and reduce the duration of the boom bust cycle.