CASE 5: BUSINESS CYCLES
1. Do an internet and study business cycles. Discuss the occurrence of business cycles complete with references.
Business cycle is the economy-wide fluctuations in a production or economic activity.
These fluctuations occur around a long-term growth trend, and typically involve shifts over time between periods of relatively rapid economic growth (expansion or boom), and periods of relative stagnation or decline (contraction or recession).
These fluctuations are often measured using the growth rate of real gross domestic product.Economists and policymakers monitor both the GDP deflator and the consumer price index to gauge how quickly prices are rising in the economy. Because the CPI is also used in how inputs are included in national income accounts, an overstated CPI means that GDP is likely understated
Consumer Price Index: The CPI is used as a tool for understanding the cost of living. It measures the changes in the prices of goods that ordinary people buy year-by-year. The most common critique of the CPI is that it has trouble capturing the cost-of-living gains through innovation in products and entire economic sectors, or through changing consumer behavior. For instance, people may start eating more chicken than beef because of fears about mad cow disease or surprising improvements in the taste of chicken, but the CPI uses a fixed “basket of goods” approach for tracking prices each year that does not adjust to such changes in consumer behavior. If that basket were to include beef but not chicken, the CPI would record a drop in beef prices yet fail to measure the subsequent rise in chicken prices.
2. Variables
a. Stock Variables
i. GDP – The gross domestic product is the total value of final gross profits that a nation was able to produce in a year.
GDP = private consumption + gross investment + government spending + (exports − imports)
ii. House Hold – This is the basic residential unit, this is not similar to the number of families. It is a basic measurement for the analysis of social, government, and micro-economic models. In dictionary terms, it refers to the individuals that stay on the same dwelling.
iii. Firms – This refers to the companies that provide goods and services to customers or consumers.
iv. Number of People Employed – Refers to the people who are working under the firms that provide services and goods to the consumers.
v. Number of People Unemployed – Refers to the people who are available to work or be employed.
b. Rate Variables
i. Growth Rate of GDP – Refers to the input in the GDP, which is the percentage rate of increase in the real gross domestic product.
ii. Spending – These are the costs related in transactions made by firms.
iii. Income Rate – Income rate is the inflow of money by the firms.
iv. Employment Rate – The rate in percentage of people who are currently employed.
v. Unemployment Rate – This pertains to the percentage of people who are member of the workforce but are not employed and are looking for jobs.
3. Complete the stock flow diagram and run the model that replicates the fluctuations. Discuss the stock flow diagram
In the stock flow diagram we can see that the GDP growth rate is affected by labor and capital productivity, work rate and income rate.
The growth rate of GDP then affects the common price index which affects the spending rate of people which gives income to the workers. The workers than have money for their house holds. The income rate affects the growth rate of GDP
The number of employed affects job opportunities which then affects expected progress.
Motivation to work is affected by expected progress workload and benefits and safety. It then affects the unemployment rate.
4. Discuss the results of the simulation and simulation and explain why the fluctuations occur. Use the graphs of the other variables to explain them.
It is seen in the figure above that when the model was simulated, the stock variables affect the behavior of the GDP. This is due to that these stock variables contribute to the equation for GDP. It is observed that the number of household follows the behavior of GDP. Another oscillation is the number of firms, and there is a delay in which the GDP follows the behavior that the firm has.
5. Parameter Sensitivity
a. 50% increase in rate of spending by household
Seen in the figure above that the GDP had a faster rate of increase when the input to the number of firms increased by 50 percent. This shows that there when a number of firms increase, then it is good for the economy of the country, because even though the GDP still oscillates, it will reach a higher value at a faster rate.
b. 50% decrease in spending by household
In the figure above, it shows that when the input to the stock variable “Firm” is decreased by 50 percent, the growth of GDP slows down.
6. Policies
a. Stock Flow of Policy
b. Effects on the Model
It is observed in the figure above that investments improve the growth rate of the GDP, as it shortens the through experienced from the booms and recessions that is going on in the country.
7. Conclusion and Recommendation
There are various factors that affect business cycles. Each factor has major effect on a business cycle.
1. Do an internet and study business cycles. Discuss the occurrence of business cycles complete with references.
Business cycle is the economy-wide fluctuations in a production or economic activity.
These fluctuations occur around a long-term growth trend, and typically involve shifts over time between periods of relatively rapid economic growth (expansion or boom), and periods of relative stagnation or decline (contraction or recession).
These fluctuations are often measured using the growth rate of real gross domestic product. Economists and policymakers monitor both the GDP deflator and the consumer price index to gauge how quickly prices are rising in the economy. Because the CPI is also used in how inputs are included in national income accounts, an overstated CPI means that GDP is likely understated
Consumer Price Index: The CPI is used as a tool for understanding the cost of living. It measures the changes in the prices of goods that ordinary people buy year-by-year. The most common critique of the CPI is that it has trouble capturing the cost-of-living gains through innovation in products and entire economic sectors, or through changing consumer behavior. For instance, people may start eating more chicken than beef because of fears about mad cow disease or surprising improvements in the taste of chicken, but the CPI uses a fixed “basket of goods” approach for tracking prices each year that does not adjust to such changes in consumer behavior. If that basket were to include beef but not chicken, the CPI would record a drop in beef prices yet fail to measure the subsequent rise in chicken prices.
Reference:
http://en.wikipedia.org/wiki/Business_cycle http://www.the-american-interest.com/article.cfm?piece=624
http://www.cameron.edu/~abduls/mpp/chap_23/tsld027.htm
2. Variablesa. Stock Variables
i. GDP – The gross domestic product is the total value of final gross profits that a nation was able to produce in a year.
GDP = private consumption + gross investment + government spending + (exports − imports)
ii. House Hold – This is the basic residential unit, this is not similar to the number of families. It is a basic measurement for the analysis of social, government, and micro-economic models. In dictionary terms, it refers to the individuals that stay on the same dwelling.
iii. Firms – This refers to the companies that provide goods and services to customers or consumers.
iv. Number of People Employed – Refers to the people who are working under the firms that provide services and goods to the consumers.
v. Number of People Unemployed – Refers to the people who are available to work or be employed.
b. Rate Variables
i. Growth Rate of GDP – Refers to the input in the GDP, which is the percentage rate of increase in the real gross domestic product.
ii. Spending – These are the costs related in transactions made by firms.
iii. Income Rate – Income rate is the inflow of money by the firms.
iv. Employment Rate – The rate in percentage of people who are currently employed.
v. Unemployment Rate – This pertains to the percentage of people who are member of the workforce but are not employed and are looking for jobs.
3. Complete the stock flow diagram and run the model that replicates the fluctuations. Discuss the stock flow diagram
In the stock flow diagram we can see that the GDP growth rate is affected by labor and capital productivity, work rate and income rate.
The growth rate of GDP then affects the common price index which affects the spending rate of people which gives income to the workers. The workers than have money for their house holds. The income rate affects the growth rate of GDP
The number of employed affects job opportunities which then affects expected progress.
Motivation to work is affected by expected progress workload and benefits and safety. It then affects the unemployment rate.
4. Discuss the results of the simulation and simulation and explain why the fluctuations occur. Use the graphs of the other variables to explain them.
It is seen in the figure above that when the model was simulated, the stock variables affect the behavior of the GDP. This is due to that these stock variables contribute to the equation for GDP. It is observed that the number of household follows the behavior of GDP. Another oscillation is the number of firms, and there is a delay in which the GDP follows the behavior that the firm has.
5. Parameter Sensitivity
a. 50% increase in rate of spending by household
Seen in the figure above that the GDP had a faster rate of increase when the input to the number of firms increased by 50 percent. This shows that there when a number of firms increase, then it is good for the economy of the country, because even though the GDP still oscillates, it will reach a higher value at a faster rate.
b. 50% decrease in spending by household
In the figure above, it shows that when the input to the stock variable “Firm” is decreased by 50 percent, the growth of GDP slows down.
6. Policies
a. Stock Flow of Policy
b. Effects on the Model
It is observed in the figure above that investments improve the growth rate of the GDP, as it shortens the through experienced from the booms and recessions that is going on in the country.
7. Conclusion and Recommendation
There are various factors that affect business cycles. Each factor has major effect on a business cycle.