How Business Cycle Was Affected By Specific Variables Economics? Essay Example

level. They suggest measuring the business cycle based on long-horizon forecasts generated by a time series forecasting model. Mitchell (1913) explains that the phases of the business cycle are interconnected through a causal relationship, where prosperity leads to crises, which then transition into depression periods. However, eventually there will be a recovery from the recession.

There is a job where economic systems do not produce a deterministic business cycle through empirical observation sensible penchants and engineerings. One variable to be examined in this empirical study is private consumption. The consumption pattern can explain the movement in the business cycle. According to Richard Dennis (2008), both internal and external consumption patterns will have an impact on the business cycle feature. Recently, Devereux, Head and Lapham (DHL, 1996) explored the macroeconomic effects of changes in government spending in a real business cycle (RBC) model with increasing returns and monopolistic competition. A positive government spending shock can increase the national output level, consumption, investment, employment, and real wages.

The fluctuation of the business cycle is influenced by the response of overall factor productivity to changes in government spending. Jamee K. Moudud (1999) categorizes government spending into two types: consumption spending on goods and services, and public investment spending on infrastructure, education, public health, research and development, and other expenses that contribute to increasing business productivity. This study also discovered that an increase in government spending effectively reduces business costs and enhances profitability, thus promoting long-term economic growth.

International trade is an economic activity that has an impact on the business cycle. W. Jos Jansen and Ad C.J. Stokman (2004) stated in their study that the exchange of goods and services between

countries is the "traditional" method through which economies influence each other. A positive net export can raise the GDP.

Other than that, the deeper trade mutualities have significantly contributed to the increase in end product degree, thus impacting the fluctuation of both trading partners.
Problem Statement
Business rhythm fluctuation encompasses recession, trough, expansion, and peak. These phases are part of the business cycle. An extensive fluctuation can have a negative effect on the economy. The government faces the challenge of intervening to reduce this fluctuation and prevent adverse effects from prolonged periods of these phases.

If a state undergoes a prolonged economic decline, it will suffer adverse effects on its wealth and employment rate. As a result, the government will increase its spending to tackle this problem, leading to inflation. Moreover, seeking financial assistance from other states to fulfill its own needs will add to the state's debt accumulation.

If a state goes through an extended period of economic decline, it can result in a substantial deficit in its budget. Furthermore, the state's currency will lose value as there is a decrease in the exchange rate. Additionally, prolonged economic growth can have adverse effects on the state's economy as excessive inflow of capital can transform steady growth into an extreme one, leading to elevated prices of goods and services and ultimately causing demand-pull inflation.

When this occurs, the rise in GDP becomes unsustainable as it solely represents an increase in the monetary value of goods and services without a simultaneous improvement in productivity. This absence of productivity growth has negative implications for a nation.

Purpose of Research: The research aimed to analyze how certain factors such as private consumption, government spending,

investment, and international trade affect economic growth.

The identification of factors that affect business cycles is crucial for government intervention in order to mitigate fluctuations. This study aims to assist the government in intervening and maintaining economic performance by proposing solutions and increasing spending during recessions. Ultimately, it is an empirical study focusing on economic activities that impact the business cycle.

The purpose of this survey is to achieve the research objective and highlight the issues related to concern rhythm.

Importance of Study

This survey will provide valuable information for calculating concern rhythm fluctuations. It will also give the government an understanding of how concern rhythms fluctuate over a period of time. When the government knows how to intervene in the fluctuation of concern rhythm, it can lead to improved economic performance in the country through increased production. Additionally, an increase in national income and Gross Domestic Product (GDP) translates to higher income and a better quality of life for everyone.

This survey is focused on tackling social issues that arise from economic downturns and the government's efforts to maintain the country's income and GDP performance. Its purpose is to enhance the overall quality of life in society. Additionally, it has the capability to reduce recession durations in the business cycle, ultimately resulting in increased wealth for the nation. However, it could also extend recovery periods and sustain peak levels.

An affluent state always has a better societal structure, which reduces internal problems. This also helps the government in implementing new policies to reduce the duration of economic downturns.

Study Organization

This study consists of three chapters, each containing specific information on the topic of "How Economic Activities Affect Business Cycle". Chapter 1

serves as an introduction to the research. It discusses the variables used in the study, such as private consumption, government spending, investment, and international trade, which all impact business cycle fluctuations.

In Chapter 2, the literature review section will gather secondary information to support the problem statement. This section will define the term "business cycle" and discuss the variables that affect it, such as current issues and the existence of the problem. The effects resulting from the problem will also be discussed. Chapter 2 examines variables including private consumption, investment, international trade, and government expenditures. Chapter 3 will provide a brief description of the theoretical framework, data sources, data collection, and methodology.

The theoretical model presented in this survey includes the independent variables and dependent variable. The gathering of information and the various types of information will be discussed. Furthermore, later in chapter 3, the methods used in this study will be explained.

The definition of business cycle

According to Parkin-Bade economics (Avi Jonathan Cohen, 1997), the business cycle is measured by fluctuations in real GDP and other economic variables. The business cycle is known for its irregular and unpredictable ups and downs.

The text examines the idea of a business cycle, which includes four stages: contraction, trough, enlargement, and extremum. Based on the New Keynesian theory (introduced by Bernanke and Carey in 1996), fluctuations in aggregate demand and supply affect the business cycle. In the short term, both prices and production levels rise due to increased aggregate demand. Nevertheless, price increases are limited compared to demand because labor costs are not entirely flexible (i.e., nominal wages remain unchanged).

This is because various factors influence the imperfect market, including contracts, bill

of fare costs, and the current situation. When the price level rises due to an increase in the money supply while real wages decrease, employment and output will also increase simultaneously. Positive supply shocks, caused by a decrease in oil prices and technological advancements, decrease marginal costs and raise aggregate supply. However, negative supply shocks have the opposite effect, increasing marginal costs and reducing aggregate supply, ultimately leading to an economic downturn.

Similarly, a decrease in spending and investment expenses creates a recession because as the overall demand decreases, prices do not rise quickly. As a result, real wages will increase, leading to a decline in employment and output. The reduction in output can impact the business cycle. According to Burns and Mitchell (1945), "expansions happening at approximately the same time in many economic activities, followed by similarly general recessions, contractions, and resurgences which merge into the expansion phase of the next cycle; this sequence of changes is recurring but not periodic."

Economic activities that affect the business cycle

Business cycle instability can come from various sources and can be exacerbated by different economic policy governments, possibly reflecting slowly-evolving institutional factors (Acemoglu, Johnson, Robinson, and Thaicharoe, 2003) and varying levels of financial and trade openness (Kose, Prasad, and Terrones 2006).

Private consumption

According to Barro and Ursua (2008), they examine international evidence on output production and private consumption to analyze the response of consumption to output production.

The authors' preliminary findings indicate that private consumption is more responsive to changes in output production compared to anticipated changes in consumption and pricing models. However, their methodology does not allow for the evaluation of cross-country effects of macroeconomic shocks on national consumption

levels. Albrecht Ritschl, Samad Sarferaz, and Martin Uebele (2008) argue that within a dynamic framework, they observe the effects of differences in the underlying mechanism on individual output and consumption series. They find limited evidence of increased international co-movement between consumption and output production. Contrary to theoretical expectations, consumption is even less integrated globally than output production. Satoshi Urasawa (2007) discovers that private consumption is procyclical and may even lead fluctuations in output, suggesting that private consumption may predict variations in output rather than output predicting consumption as proposed in the traditional Keynesian model.

The impact of private consumption on the business cycle is significant. In the 1980s, private consumption played a crucial role in Japan's strong economy. However, since 1991, sluggish consumption caused by uncertainty about the future has had a highly negative effect. Bimal Singh (2004) states that private consumption expenditure is the largest component of Fiji's Gross Domestic Products (GDP), accounting for approximately two-thirds of the country's GDP. Between 1979 and 2001, private consumption averaged around 65 percent of GDP annually in Fiji. This emphasizes the importance of private consumption in Fiji as a vital component of aggregate demand, not only because it influences economic growth but also determines the business cycle.

The ingestion map has appeared in macro-models and will affect the variation in the concern rhythm, according to the Deutsche Bundesbank monthly reports (2007). It is stated that the cyclical pattern of actual private consumption expenditure is highly connected to the growth of real GDP. Moreover, in a long-term perspective, both variables' sensitivity to cyclical fluctuations has declined. Analyzing the time span between 1970 and 2006, there was no prominent lead

of either GDP or private consumption over the other.

The correlation between macroeconomic activity and consumption is strong, although there have been cases in which one variable came before the other. For instance, in the 1970s, private consumption decreased before GDP did, and the subsequent recovery followed this pattern too. Conversely, in the late 1980s and mid-1990s, macroeconomic activity prompted an increase in private consumption. Presently, despite a robust economic growth, there hasn't been a corresponding surge in private consumption.


Investing

Martin A.

According to Armstrong (1999), when the G5 discuss the 40% decrease in the value of the US dollar between 1985 and 1987, it essentially signals foreign investors to withdraw. As a result, the US business cycle experiences a downturn. In the case of Japan, as the Japanese invest domestically, the value of their currency rises rapidly. This also allows them to attract foreign investments.

At the end of 1989, everyone was present in Tokyo. Investment fund directors around the world were praising the benefits of Japan. When the Japanese bubble reached its highest point, capital started to show interest in foreign investment. This ultimately contributed to improving their business performance.

According to Satoshi Urasawa (2007), private non-residential investing is strongly pro-cyclical with a slowdown, while private residential investing is pro-cyclical with a lead of two quarters [1]. Private investing has a close relationship with end product in both recovery and recession periods of the business cycle. In contrast, public investing is counter-cyclical with a slowdown. This is because public investing during this period aims to stabilize the economy. Jyun-Yi Wua?, Ruey Yau, Chih-Chiang Hsu (2009) propose that foreign

direct investing (FDI) may be another important factor for business cycle correlations. FDI has experienced significant growth since the 1980s.

Figure 1 displays the FDI influxs and escapes as a percentage of GDP for the G7 nations (Canada, France, Germany, Italy, Japan, the U.K., and the U.S.) and the world in various years[2]. Inward FDI as a percentage of GDP for the world rose from 0.50% in 1980 to 4.39% in 2000. The portion of GDP represented by outward FDI for the world increased from 0.51% in 1980 to 3.53% in 2000. In the case of the G7 nations, both inward and outward FDI experienced growth of over five times during these two decades.

Despite Japan's low inward and outward FDI rates in 2000 (0.17% and 0.67% respectively), it is still important to consider the role of FDI in business cycle co-movements. According to Jyun-Yi Wu, Ruey Yau, and Chih-Chiang Hsu (2009) at the Department of Economics, National Central University, Jansen and Stockman (2004) found that countries with tighter FDI linkages have more correlated business cycles, although they suggested that the impact of FDI is smaller than that of bilateral trade.


Government Spending


(Dar & Amir Khalkhali, 2002) argued that overspending by the government would have a negative impact on economic growth. Peter Sjoberg (2003) studied the case of Sweden and the relationship between changes in government spending and GDP growth, as depicted in figure 2.

The graphic demonstrates that the tendencies of government outgo and GDP growth rate are moving in opposite directions. This confirms that when there is a higher amount of government spending, it results in a decline in the GDP growth rate. Norberg (2001) suggested

that this could be problematic for the country as it may reduce the standard of living for its citizens. Therefore, the government should avoid excessive spending in order to maintain a positive GDP growth rate. Numerous studies have been conducted on the effects of government expenditure on economic growth rates, and the findings consistently reveal a negative relationship between these two variables (Barro 2008).

This survey supports the idea that when government spending exceeds a certain level, it causes a decrease in the GDP growth rate. Another survey conducted by Landau (1983) using a sample of 96 countries concluded that there was a negative relationship between government spending and growth in national output. According to Abbas Valadkhani's (1993) survey, government capital expenditure played an important role in influencing GDP growth, regardless of structural changes and government shifts during the period under study. An empirical study in the late nineteenth century found a relationship between government expenditure and GDP, known as Wagner's "law", which states that as per capita income increases, the importance of the public sector will also increase (Bird, 1971). Meltzer and Richard (1981) presented their model and stated that "government spending is undertaken to satisfy the median voter, which would create a relationship between economic growth and government expenditure if the position of the decisive median voter in the income distribution shifts towards the lower end. For example, as the economy grows, the incomes of skilled workers may increase much more than the incomes of unskilled workers, leading to increased inequality."

International Trade The global economy has become more integrated in recent years due to the increase in international trade and financial flows between countries.

More and more countries are open to trading with each other, allowing them to benefit from one another. All of this can have a significant impact on fluctuations in the business cycle.

Chanda (2001) shows that, according to an index of capital account openness, more developing countries have been negatively affected by globalization compared to non-developing countries. On the other hand, Rodrik (1998) found no evidence of capital account openness influencing economic growth. In related studies, Jong (2001) suggests that the increased correlation of the Asian business cycle is a result of greater mutual trade confidence among countries. Additionally, Shin and Wang (2002) emphasize that fluctuations in the business cycle are caused by the rise in intra-industry trade rather than trade alone. Eichengreen (1992) and Krugman (1993) explain that business cycles may be impacted by trade integration if intra-industry trade accounts for a significant portion of overall trade.

Conversely, if tighter trade integration boosts higher inter-industry trade resulting in higher specialization in industries, the sector-specific shocks may become region-specific shocks and therefore increase the possibility of asymmetric alterations in business rhythms. Frankel and Rose (1998) state that countries with closer trade links tend to have more tightly correlated business rhythms. Frankel and Rose also say that "state pairs that trade more with each other experience higher business rhythm correlation." Baxter and Kouparitsas (2005) and Abbott et al. (2008) also reach similar conclusions whereby intense bilateral trade tends to result in a high degree of synchronism among business rhythms. According to the theoretical literature, the impact of trade integration on business rhythm correlation could have significant implications.

If the demand side drives concern rhythms, trade integration is expected to

increase the correlation of concern rhythms. As a result, a state's increased demand for foreign goods may positively impact the concern rhythm. The effect of this impact on the trading partners of the state depends on the depth of trading among all partners. Alternatively, if industry-specific shocks drive cyclical output, the relationship would be negative if increased specialization in production leads to inter-industry trade.

Normally, this can be observed in developing states. In 1992, Dollar analyzed the correlation between economic performance and openness to trade, as well as the correlation between growth and real flows. Both results indicate that openness to trade and real trade flows are strongly linked to growth.

Research Methodology

Research methodology refers to the study of methods, regulations, and hypotheses.

It is also referred to as a systematic study of methods that have been used within a field. Research can also be defined as a structured and systematic way of finding answers to questions.

Theoretical Model

In this research, the dependent variable is real GDP which is used to measure economic activity. The independent variables include factors such as private consumption, government expenditures, investment, and international trade. Additionally, determining the activities that will impact fluctuations in the business cycle.

Data Sources

This research will utilize secondary data.

Secondary information is information that is gathered by someone other than the user and compiled into statistical statements. It is used by research workers to gain initial insights into the research project.

Data Collection

The information collected in this research comes from DataStream. From DataStream, we were able to download secondary information including private consumption, government expenditures, investments,

and net exports. All of these variables are used in this study.

Methodology and Model



Ordinary Lease Square ( OLS ) Linear Regression Model


Ordinary Least Squares ( OLS ) is commonly used to estimate the relationship between a dependent variable and one or more independent variables.

The Ordinary Lease Square theoretical account aims to minimize the Residual Sum of Squares and adhere to the assumptions of the classical linear regression model. OLS calculators, known as Best Linear Unbiased Calculators (BLUE), are employed. The linear regression model is specified as follows: ln RGDP = C + I±1 ln P + I±2 ln I + I±3 ln G + I±4 ln T + Iµi ln represents logarithm; RGDP denotes real gross domestic product; C is constant value; P refers to private consumption; I represents investment; G stands for government expenditures; T denotes international trade, and Iµi is a disturbance term.

Unit Root Test
A unit root test is a statistical test that examines the proposition that the autoregressive parameter in an autoregressive time series model is equal to one. This test is used to analyze the stationarity of the data. If these variables are not stationary, using OLS regression will result in invalid estimates.

Therefore, if variables are non-stationary, cointegration techniques can be used to analyze these long-term relationships. Detrending Techniques are necessary when the data is non-stationary as it helps eliminate the bias effect caused by OLS regression test. Thus, detrending techniques are used to remove the linear trend and convert non-stationary data into stationary form.