Insights On Global Economy And Business Cycles

GDP growth rates despite economic tensions in the USA

  1. Article Title: “Amid massive Trump-induced chaos, GDP growth continues. Why?”(Dallasnews.com 2018)

Article Source: https://www.dallasnews.com/opinion/commentary/2018/07/19/amid-massive-trump-induced-chaos-gdp-growth-continues

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  1. Article Summary

According to the article, on one hand, the country can be seen to be struggling with a possible trade war, fallacies on part of the government and political tensions and on the other hand the GDP of the country can be seen to be showing positive and impressive growth rates (nearly 4.5%) (Dallasnews.com 2018). The article attributes this growth in GDP to the aspects like the increase in the development and economic activities of the economies with which the USA enjoys economic linkages, fiscal stimuli on part of the government in the forms of tax cuts and increased government expenditures (Jorgenson, Gollop and Fraumeni 2016).

  1. Analysis:

The above phenomenon can be explained with the help of the AD-AS model. The components of AD include consumption, investment, government expenditures and net exports:

AD = C+I+G+NX

Due to the fiscal stimuli, G can be seen to be increasing and due to a highly profitable financial market and robust development of partner economies, investment is also rising. The growth of the partner nations is also contributing in higher exports, thereby increasing NX. Along with the same, with the tax cuts, especially in the domain of businesses and corporate expansions, the investment can also be seen to be increasing in the country, which, in turn, can also be seen to be contributing to the increase in the AD of the country.

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This increase in the AD, can be seen to be increasing the GDP of the country (Heijdra 2017), as with the increase in the AD, the producers are encouraged to produce more, thereby increasing the economic productivity of the country, which is reflected in the GDP dynamics of the country.

  1. Article Title: “Japan’s core inflation rate rises to 0.8% in June on energy boost” (Asia.nikkei.com 2018)

Article Source: https://asia.nikkei.com/Economy/Japan-s-core-inflation-rate-rises-to-0.8-in-June-on-energy-boost

  1. Article Summary:  

As per the assertions of the article, in the quarter of June, the CPI of Japan, rose by nearly 0.8% (Asia.nikkei.com 2018). The main reasons behind the rise in the inflation, as per the arguments put forward by the article, are that of increase in the price of oil and gasoline and also on the aspects of loose monetary policies which include the policy of monetary easing (Abhyankar, Xu and Wang 2013).

  1. Analysis:

The situation prevailing in the country, in terms of the price level scenarios can be explained with the help of the concepts of demand and supply dynamics and the same can be expressed with the help of the diagram as follows:

As the above figure shows, due to the rise in oil price, the overall production level can be seen to be falling, mainly due to the increase in the cost of production, which compels the producers to reduce their production (Bernanke et al. 2018). However, due to the monetary easing and loose monetary policy on part of the Japanese Government, the demand does not seem to be negatively affected, to that extent, which in turn can be seen to have aggravated the inflation to a greater extent, since a fall in the supply with the demand patterns remaining the same, tend to draw the average price levels of the country upwards.

  1. Article Title: “Why Wages Won’t Rise When Unemployment Falls”(Forbes.com 2018)

Inflation aggravated in Japan due to rise in oil prices

Article Source: https://www.forbes.com/sites/teresaghilarducci/2018/07/18/why-wages-wont-rise-when-unemployment-falls/#56b42e635d9d

  1. Article Summary:

The article contradicts the general assertion of Phillips Curve, citing the case of the contemporary economy of the USA, where the wages are not seen to be rising with the fall in the rate of unemployment. The primary reason attributed to the same, by the article, is that of the rising importance of capital over labour and productivity running ahead of wages (Coibion and Gorodnichenko 2015). The other reason pointed out by the article, is that of the increase in the demand as well as the supply of low wage employment scopes, in the face of the increase in the labour force in the country and the loss of the bargaining power of the workers due to the weakening of the labour unions (Forbes.com 2018).

  1. Analysis

The relation between the wage and the level of employment of labour, in the contemporary economy of the USA, can be elaborated with economic concepts of demand-supply situations in the labour market (Coibion and Gorodnichenko 2015). The wage being the price of the labours, an increase in the supply of labours leads to fall in thee wages and vice versa, which is shown as follows:

In the concerned case, due to the presence of huge labour supply in the economy of the USA, new jobs are created which are mostly of low-wage types and the labours, in the face of high competitions, are accepting the same, which in turn can be seen to be contributing in sluggish growth in the wage levels in the country. The aspects of presence of higher importance of capital over labour and the chances of substitutability of the latter by the former also make the labours more vulnerable, thereby compelling them to resort to low paid jobs.  

  1. Article Title: “Bank Indonesia keeps interest rate on hold”(Businesstimes.com.sg 2018)

Article Source: https://www.businesstimes.com.sg/banking-finance/bank-indonesia-keeps-interest-rate-on-hold

  1. Article Summary:

According to the assertions of the concerned article, in spite of the presence of room for increase in the rate of interest, the government of Indonesia, has resorted to keep it constant rate of 5.25% in the current period (Rosser 2013). The primary reasons behind the same, as highlighted by the article are the presence of harmless dynamics in the inflation scenario of the country as well as the stagnation in the economic growth of the country to boost which the rate of interest is not hiked further by the government.

  1. Analysis:

The rate of interest in a country is inversely related to the investment volumes of the same, as with the increase in the rate of interest, people become less eager to borrow money for the purpose of investing, as can be seen from the following figure:

USA sees increase in employment but not wages

Due to the successive rise in the rate of interest, the investments and economic productivity of Indonesia could be seen to be hampered, as can be seen from their sluggish economic growth. Investment being a part of the AD, the fall in the former effects the latter negatively which in turn is expected to lead to an economic stagnating situation in the country. To combat the same and to increase the level of investments, the rate of interest can be seen to be keep at a constant level in the recent period (Arrow and Kruz 2013).

  1. Article Title: “EXPLAINER: The business cycle and GDP”(Fin24.com 2018)

Article Source: https://www.fin24.com/Economy/explainer-the-business-cycle-and-gdp-20180703

  1. Article Summary:

Explaining the aspects of GDP and its components like consumption, government spending, investments and also the net exports, the article asserts that in spite of the difficulties of predicting the future situation of the economy of South Africa, the current situation can be seen from the Business Cycle Indicator of the country, which is as follows:

From the above figure, the article asserts that there are possibilities of upward patterns in the business cycle of the economy in the future years (Fedderke 2014).

  1. Analysis

The “Business Cycle” of an economy, showing the fluctuations in its growth patterns, is generally dependent on the economic fluctuations in a country and can be seen to be generally of the following nature:

The upward rise till the peak indicates towards positive economic growth and a period of high productivity and boom while the downward dynamics and trough highlight the presence of economic stagnation and recessionary situations (Gilchrist and Zakrajšek 2012). Thus, from the situation of the economy of South Africa, it can be assumed that the economy of the country is in the path of high productivity and can experience further positive growth in the business cycle in the coming years. That is in the coming years, the country is expected to be on the upper (high productivity and boom) area of the business cycle.

Conclusion

From the above discussion, it can thus be asserted, that in spite of the economic tensions, the economy of the USA can be seen to be increasing due to its own fiscal stimuli as well as development of the partner countries. The inflation in Japan, can however be seen to be aggravated by the rise in the oil prices as well as loose monetary policies in the country. The increase in the employment in the USA, however, cannot be seen to be rising the wages as most of the jobs created are of low-wage types. To stimulate the stagnated economic growth of Indonesia, the Central Bank can be seen to stall the hike in the rate of interest in the recent periods. South African economy, however, can be seen to be showing positive growth trends, with future prospects of boom in its business cycle if the trend of economic growth continues.

References 

Abhyankar, A., Xu, B. and Wang, J., 2013. Oil price shocks and the stock market: evidence from Japan. The Energy Journal, pp.199-222.

Arrow, K.J. and Kruz, M., 2013. Public investment, the rate of return, and optimal fiscal policy. RFF Press.

Asia.nikkei.com (2018). Japan’s core inflation rate rises to 0.8% in June on energy boost. [online] Nikkei Asian Review. Available at: https://asia.nikkei.com/Economy/Japan-s-core-inflation-rate-rises-to-0.8-in-June-on-energy-boost [Accessed 20 Jul. 2018].

Bernanke, B.S., Laubach, T., Mishkin, F.S. and Posen, A.S., 2018. Inflation targeting: lessons from the international experience. Princeton University Press.

Businesstimes.com.sg (2018). Bank Indonesia keeps interest rate on hold. [online] The Business Times. Available at: https://www.businesstimes.com.sg/banking-finance/bank-indonesia-keeps-interest-rate-on-hold [Accessed 20 Jul. 2018].

Coibion, O. and Gorodnichenko, Y., 2015. Is the Phillips curve alive and well after all? Inflation expectations and the missing disinflation. American Economic Journal: Macroeconomics, 7(1), pp.197-232.

Dallasnews.com (2018). Amid massive Trump-induced chaos, GDP growth continues. Why? | Commentary | Dallas News. [online] Dallasnews.com. Available at: https://www.dallasnews.com/opinion/commentary/2018/07/19/amid-massive-trump-induced-chaos-gdp-growth-continues [Accessed 20 Jul. 2018].

Fedderke, J.W., 2014. Exploring unbalanced growth in South Africa: Understanding the sectoral structure of the South African economy. Economic Research Southern Africa (ERSA), ERSA Working Paper, (468).

Fin24.com (2018). EXPLAINER: The business cycle and GDP. [online] Fin24. Available at: https://www.fin24.com/Economy/explainer-the-business-cycle-and-gdp-20180703 [Accessed 20 Jul. 2018].

Forbes.com (2018). Why Wages Won’t Rise When Unemployment Falls. [online] Forbes.com. Available at: https://www.forbes.com/sites/teresaghilarducci/2018/07/18/why-wages-wont-rise-when-unemployment-falls/#56b42e635d9d [Accessed 20 Jul. 2018].

Gilchrist, S. and Zakrajšek, E., 2012. Credit spreads and business cycle fluctuations. American Economic Review, 102(4), pp.1692-1720.

Heijdra, B.J., 2017. Foundations of modern macroeconomics. Oxford university press.

Jorgenson, D., Gollop, F.M. and Fraumeni, B., 2016. Productivity and US economic growth (Vol. 169). Elsevier.

Rosser, A., 2013. The politics of economic liberalization in Indonesia: state, market and power. Routledge.