15. What causes the business cycle?

The business cycle or trade cycle is a permanent feature of market economies: gross domestic product (GDP) fluctuates as booms and recessions succeed each other. During a boom, an economy (or at least parts of it) expands to the point where it is working at full capacity, so that production, employment, prices, profits, investment and interest rates all tend to rise. During a recession, the demand for goods and services declines and the economy begins to work at below its potential. Investment, output, employment, profits, commodity and share prices, and interest rates generally fall. A serious, long-lasting recession is called a depression or a slump.

The highest point on the business cycle is called a peak, which is followed by a downturn or downswing or a period of contraction. The lowest point on the business cycle is called a trough, which is followed by a recovery or an upturn or upswing or a period of expansion. Economists sometimes describe contraction as 'negative growth'.

16. Economic theory and the business cycle

The standard classical theory of the economy, the theory that we all tend to begin with when we learn about economics, suggests that it's very, that economies naturally return to an equilibrium level, where they make full use and efficient use of all their resources. But most of the textbooks, when they're moving to teach that model, also mention the fact that there are a

number of very strong assumptions to make that model work. There has to be perfect competition, there has to be a lack of exogenouus shocks, shocks from the world outside in terms of exchange rates or commodity prices to the system, there has to be perfect information so everybody knows what's going on in the market at anyone time, and the responses have to be very quick. Industrealists have to adjust their prices very quickly, wage-setters have to adjust their wages very quickly.

17. The business cycle and goverment intervention

Note Precisely how Keynes believed the governmenl could stimulate the economy and bring it back into an equilibrium a little bit faster by increasing the money supply, or lowering taxes, or increasing government spending, in this way ending people's expectations of a continuing recession - is discussed in the following unit.

The great depression of 1930s demonstrated that market system can`t produce equilibrium by itself and doesn`t automatically lead to full employment. Goverments helps to regulate business cycle. During recession it can stimulate aggregated demand by lowering taxes, increasing government purchases.During expansion government reduces transferts and government puchchases ion such a way it decreases addregate demand and bring the economy back into an equilibrium a little bit faster

18. Inflation and unemployment

Most economists agree that it is possible for government policy to reduce unemployment temporarily, at the cost of increased inflation.Over the longer term there isn't a conflict between inflation and unemployment.The governments in most industrialized countries believe that continuously low and stable inflation will also help to keep unemployment low. The easiest way to achieve low inflation is deliberately to leave some resources unused.(It means to run economy a little bit below the capacity level.) In the long term, countries can increase their rate of employment by increasing productive capacity or improving the quality of the work force.

19. The growth of the international trade

International trade – trade among countries, comprising import and export of goods and services. Trade policy comprises all the regulations adopted by the government that promote or restrict foreign trade and protect the national economy from foreign competition. There are tariff instruments and non-tariff instruments. International trade is a dynamic flow. It is characterized by growing interdependences in the world economy; diminishing transport costs, easier access to information, decreasing level of tariffs

Developed countries continue to dominate in the international trade relations. National borders tend to become unimportant in international trade.

20. Free trade and unemployment

Free trade is disruptive; in other words it causes big economic changes, such as the closing down of an entire industry in a country, as the product begins to be made more cheaply somewhere else. it means that people have no gurantees. People in industrial countries can only put up with the disruption caused by free trade if they can quite quickly find a new job. There is also a problem of mass unemployment. if it isn`t solved , people will walk away from free trade and the world will be poorer as a result. No country on its own can deal with unemployment problem. The problem can be solved in case of cooperation between countries and coordinating economic policies.

21. Ecology and the individual consumer

In recent years the quest for economic growth has increasingly come up against a concern for the protection of the natural environment. Ecologists are concerned about the consumption of non-renewable resources, the creation of waste, and the pollution of the land, sea and air. Companies might be obliged to reduce pollution though legislation, financial incetives and consumer pressure. There are 3 important pressure groups: government consumers` association, industry that are involved in enviromental issues. If these pressure groups are working together they will reach positive result. Very important is the system that measures the environmental acceptability or'eco efficiency'of all manufactured products. Coomon goal of all people is regulating and limiting pollution.

22. Pollution and market solutions

Most people today agree that we ought to be as ecomomical as possible in our use of natural resources, particularly energy, and to limit pollution to a minimum. Ecologists sometimes argue that manufacturers should either clean up their production processes, i.e. limit the amount of waste and emissions they produce, or be forced to close down. Manufacturers often reply that it is frequently uneconomical to clean up, and impossible if their competitors do not face the same constraints. Furthermore, if all polluting industries were closed down, the economy would quite simply collapse. Some economists suggest applying market solutions, i.e. finding a way to

give financial rewards to producers who economize in the use of energy, and who pollute less, and to penalize polluters, but without the use of taxes.