Although it is difficult to define the business cycle in one statement, it has one defining characteristic. Belongia (1992, pp. 43), describes the business cycle as ‘characterized by a decline and contraction and a subsequent rise and expansion of aggregate economic activity.’ Economic activity is measured by total employment, output, real income and real expenditures (Belongia & Garfinkel, 1992).
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Although the economic cycle is not a steady phenomenon, it tends to exhibit a steady pattern. First, there is an expansion/incline of above-average growth, followed by a peak, then a contraction/decline of below average growth and finally a trough/low point. This is illustrated by figure 1 in the appendix which illustrates the dynamic state of the economic cycle.
Characteristics of the Business Cycle
As aforementioned, the main characteristic of the business cycle is the incline and decline of economic growth. The cycle is affected by total employment, output, real income and real expenditures. Although defined as a cycle, drastic changes in economic situations are unpredictable and they never pursue a perfunctory pattern.
Primarily, the growth of an economy is measured using real GDP. According to economists, Gross Domestic Product is the measure of value of all goods and services produced within a nation in a given time (Mankiw, 2009). The business cycle basically represents an incline or decline of real GDP. When there is an incline/expansion along the business cycle, it means there is positive growth of real GDP. On the other hand, during a decline in the business cycle, there is a contraction in a country’s real GDP.
Inflation can be defined in general terms as the rise of prices of goods within an economy. When prices of products increase, it indicates that one unit of currency purchases less. In addition, inflation also drives up the cost of production in the country. When cost of production goes up, productivity and nominal GDP go down. If the inflation rate continues to rise over an extended period, real GDP declines. This will be represented in the business cycle by a decline or a trough.
Unemployment is defined as a scenario where people who have vigorously searched for jobs for a period exceeding a month are still devoid of a job (International Labor Organization, 2011).
The major effect of unemployment is the fact that unemployed individuals have a lesser purchasing power due to decreased/depleted earnings which contributes to inflation. As a result unemployment ends up causing a decline in real GDP (Fleser & Dobre-Baron, 2010). Unemployment also reduces a country’s productivity, leading to a further decline in the country’s real GDP.
Analysis: Australia and the United States
Over the last decade, the economies of Australia and the United States have undergone upsurge and decline due to different factors. In the last decade, Australia’s real GDP rate has been fluctuating at levels of between 1.2 to 4.8%, growth from 2000 to 2006 was in decline but the situation improved in 2007 before anther decline followed.
The fluctuating growth in GDP has been contributed by growth in business activities in the country from activities in the mining industry that has keeps changing due to world economic outlook. While the United States has also experienced fluctuating GDP growth rates in the last decade, although its growth has seen more steady periods between the years 2002 to 2008.
The growth periods in the US were contributed by good commodity prices and cheaper imports but this changed from 2008 when the US experienced economic meltdown contributed by increased debts and sub-prime mortgage problems. The global economic meltdown of 2008 hit both economies hard, but they have both bounced back. This is shown by figures 4 and 5 in the appendix.
Australia shows a general rise in inflation while the inflation rate in the United States has been relatively stable over the last ten years. Both countries, however, show a significant dip in inflation during the economic meltdown of 2008. Commodity prices plummeted as demand went down for commodities around the globe.
Inflation rates in Australia over the last decade have been fluctuating but in between 2002 and 2006, the rates steadied at around 2.8% and 3.8%. On the other hand, the United States inflation rates have steadied at levels of around 2 to 4% with the year 2008 registering the highest inflation of 4%. This is shown by figures 4 and 5 in the appendix.
Over the last decade the unemployment rates in Australia have been on the downward trend from a high of 6.5% to a low of 4.2% in 2008. This could be attributed to growth in business especially in the fields of agriculture and mining. However since 2008, the unemployment rate has been on the increase due to effects of the economic meltdown of 2008 (Fleser, 2008).
On the other hand, the United States has witnessed growth in unemployment rate from a low of 4% in 2000 to the current levels of around 11%. The weak dollar and bad economic environment has seen the collapse of many industries in the United States contributing to high unemployment levels (Data 360, 2011). This is shown by figures 6 and 7 in the appendix.
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Belongia, M. T. & Garfinkel, M. R., 1992. The business cycle: theories and evidence : proceedings of the Sixteenth Annual Economic Policy Conference of the Federal Reserve Bank of St. Louis. Norwell, MA: Kluwer Academic Publishers.
Data 360, 2011. GDP-Real (Adjusted) United States. Web.
Fleser, A. & Dobre-Baron, O., 2010. Economic and Social Implications of Unemployment and Opportunities of Diminishing it. Tome VIII, 3(11), pp.72-77.
IndexMundi, 2011. Australia GDP. Web.
International Labor Organization, 2011. ILO SAYS GLOBAL FINANCIAL CRISIS TO INCREASE UNEMPLOYMENT BY 20 MILLION. Web.
Mankiw, G., 2009. Measurement of Gross Domestic Product. In J. Sabatino, ed. Principles of Economics. 6th ed. Mason, OH: South-Western Cengage Learning. p.494.
QuickMBA, 2010. The Business Cycle. Web.