Business Life Cycle Essay

2902 words - 12 pages

Explain how the business cycle model represents the dynamic nature of the modern economy?The business cycle model is characterized by how economic activity fluctuates over period of time, which includes four phases: upswing, boom, downswing and trough (it can develop into recession or even a depression if the economic condition is deteriorating without government interruption to carry out adequate fiscal and monetary policy). An upswing tends to increase output, income, employment and expenditure until the peak or boom where it will then turn into a downswing. Booms are periods of time where the rate of economic growth is at its maximum level and the employment rate, output, income and expenditure are maximized as well. After a boom period, the economy tends to move into a downswing. At this phase, the growth rate for output and income will decrease to nearby the lowest point due to the declining level of expenditure which leads to an increase in the unemployment rate, and consequently, the economy will drop down into a trough resulting in minimum level of output, income and expenditure. On the contrast, the unemployment rate will be at its peak. The diagram of business cycle model (see Diagram 1 below) indicates the general trends in economic activity.(Diagram 1)Gross Domestic Product (GDP) is the market value of total recognized official goods and services that have been produced in a year or a particular period of time, which is a very critical indicator helping to analyze how well this economy was going on during the given period of time. Comparing to the real GDP, it isn't adjusted by inflation so that it couldn't reflect the real accurate living standard. The diagram below illustrates the Japanese real GDP growth from 2002 to 2013.(Diagram 2)As we can see from this diagram, the first cycle occurred in 2002 and sustained for three years until the end in 2005 following the second business cycle quickly. The growth rate was starting at the 0.3% with a slight increasing trend to reach the peak at the 2.4% in 2004, which had been slower than the world average all alone. When it drifted into the next year a shorter downswing came as a decline level, however, it only lasted one year and then began to build up. As the matter of fact, the Japanese economy was damaged by the Asian Financial Crisis that started in Thailand in 1997 by its government who decided to reform the current exchange rate system to a floating exchange rate system. As a result of this, its economy was influenced considerably and the growth rate dropping dramatically to the lowest point -2% since 1980, which is even worse than the collapse of Japanese economy in the late 1980's in terms of what we call it "The Lost Decade". These two financial crises are no doubt what made the Japanese economy move forward slowly in the next ten years. After 2004, Japan experienced a quick downswing to 1.2% and then a bit of relative longer upswing for two years with a 2.2% growth rate in 2006,...

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