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Business trade cycle is the fluctuations in the level of economic activities of a country over a period of time. It is also a persisting fluctuation in economic movement consisting of downturn and upturn and development and
The second type of circular flow in the macro-economy is considered the open system. The open system is the opposite of the closed system. It is an economic model that counts goods and services exchanged domestically and between nations
(Editorial Board, 2013). In the diagram in the textbook, it indicates the circular flow of money in an open economy system. Open systems allow energy
and mass to pass through and across the system boundary. An example of an open system would be the ocean. The ocean is considered an open system because it allows energy and mass to pass through. Energy which is solar radiation, latent heat and mass including water vapor and precipitation all pass across the boundary between the atmosphere and hydrosphere of the ocean.
The cycle engage the shifts over the period of time between comparatively fast development of output (upturn and wealth), and stages of comparative stagnation or decline (retrenchment or depression). Using the gross domestic product fluctuations is often measured.
The first type of circular flow is that of the closed macro-economy system. This is the circular flow of money. A closed system is an economic model that counts only domestic exchanges but not the foreign agents. This therefore means that without foreign agents, the government or the economy is free of leakages. This system is basically
shut off from surrounding environments and is self-contained. An example of a closed system would be the Earth system as a whole. Although energy passes across the Earth’s system boundary, no mass is exchanged throughout the Earth’s
system and the rest of the universe (Ritter, M., 2011).
2.1.1 CONCEPTS/ SITUATIONS OF THE BUSINESS TRADE CYCLES:
Full Employment - is a situation of the country's economy, where everyone or almost all individuals eager and capable to work at the existing salary and operational situations and are able to perform. In this level of economic activity all factors of production are completely utilized.
Businesses make up one of the sectors of the traditional circular flow model. Businesses are responsible for making the central decisions that affect what and how much of a product or service is available to household consumers and they
make these decisions based on self-interest. In an attempt to describe the
importance business plays in the circular flow of the economy, Carruthers and Uzzi (2000) state: “ Economic sociology must extend its distinctive approach to organizations, states, and markets if it is to widen its understanding of economy and society”
(p.486). Understanding the new trends of how firms operate within, how they adapt to widespread privatization, corporate restructuring, and outsourcing gives economists greater perspective on how organizations “alter profoundly how wealth is accumulated and distributed” (Carruthers & Uzzi, 2000 p.486).
Unemployment - happens when individuals are jobless and they have keenly looked for job within the previous weeks. Rate of the frequency of unemployment and it is calculated as a percentage by dividing the number of unemployed persons by all persons presently in the force of labour is an unemployment rate.
The Forces of supply and demand - In the United States and in other free enterprise systems, the distribution of resources and products is determined by supply and demand. Demand is the number of goods and services that consumers are willing
to buy at different prices at a
specific time. A fundamental characterisic of demandis all else being constant, as prices fall, the quantity demanded rises. Vice versa all ther things remaining the same as price increases, the corresponding quanity demanded falls.
Recession - happens when economic growth becomes negative. The economy is having unemployment. Business cycle tightening, a major slowdown in economic movement is a recession. Recessions usually happen when there is an extensive fall in expenditure frequently following a difficult supply shock or the eruption of an economic bubble.
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Inflation - happens when there is a general rise in the level of prices. In inflation the economy is having a full employment. When the general cost level rises, every entity of money purchases lesser goods and services.
Non-supporters of the embeddeness theory believe that economics “can better be understood as resulting from the pursuit of self-interest by rational, more or less atomized individuals. My opinion on the issue rests with authors Carruthers, Uzzi and Granovetter as I believe the “autonomous” model to be too simplistic, and although I agree that households carry most of the decision-making power in the circular flow of goods, I also believe that the government’s interaction with the economy plays helps shape consumer and household
decisions. Colander (2008) states that “ Government plays two general roles in the economy. It’s both a referee (setting the rules that determine relations between
business and households) and an actor (collecting money in taxes and spending money on projects, such as defence and education) (p. 64).
Subsequently, inflation also replicates erosion in the buying strength of currency a loss of true worth in the internal channel of exchange and unit of account in the country.
2.1.2 BUSINESS TRADE CYCLE:
Annual Growth Rate (%)
+20 ------- D
+10 ------- B
+ 5 -------
The business trade cycle diagram has four phases and each phase have its own characteristics.
The circular flow model is defined as the flow of resources from households to firms and of products to firms from households. These flows are accompanied by reverse flows of money from firms to households and from households to firms. The circular flow is comprised of the resource market, households, product market, businesses, and the government.
Phase A - In phase A, it represents the depression in the economy. The economic activity in this level is the lowest. They are having motionless output. The firms are unenthusiastic. The firms are scared to produce more.
United States hires someone from India to work as a customer service representative. The households leaks when consumers buy goods and services from foreign businesses, and the money those households save whether in checking accounts or stocking. The business leaks when firms use labor, capital and other resources from foreign households. These leaks then inject money into the system.
The employment level in this phase is very low. The aggregate demand is lesser than the aggregate supply due to a high unemployment. People would not buy goods and services that are unnecessary. The inflation rate is negative in this level. Firms would not invest in this level or the firms will wait to invest new investments.
Injection is considered as things that enter into the households or businesses due to the leaks that were caused in the open system. An injection that comes into the household is that of foreign firms sending wages and rent to US households. An injection that comes into the businesses is that of foreign households purchasing goods produced by US firms. An example of a leakage would be a household buying a foreign car from a foreign company outside the
United States. An example of an injection would be households in japan purchasing pens and pencils from firms in the United States.
Phase B - In phase B, it represents the recovery in the economy. The economic level activity in this economy is low but it is rising. Fast economic development as output levels increase. Firms become confident and will begin to invest.
Carruthers and Uzzi (2000) begin their paper by briefly highlighting the history of economic sociology. The authors describe that economist have come to accept as wisdom theories of “ how organizations influence individual action and respond to the environment” (p. 487) based on the economist’s “black box” metaphor of internal organization. The authors explain the focus from
internal organization to the organization’s influence on economy as the “shifting from firms to markets” (p.486).
The employment level in this economy is rising. The resources are increasingly utilized. Space between authentic and possible general production level tightens. Aggregate demand is lesser than the aggregate supply due to the economic recovery but if it is booming it is possible to have an equal aggregate demand and aggregate supply.
Equilibrium Price - The supply and demand curves intersect at the point where supply and demand are equal. The price at which the number of products that businesses are willing to supply equals the amount of products that consumers are willing
to buy at a specific point in time.
The economy is having a low but rising inflation rate. Recovery begins when firms would not postponed new funds to restore outdated assets.
Phase C - In phase C, it represents the prosperity in the economy.
The flow begins with workers leaving their households and going to work at businesses. They not only bring with them their labor, but also all the other factors of production, including land (natural resources), capital, and entrepreneurial talent.
The economy is experiencing a highest economic level activity. Companies are very confident and they are persistent to invest. In this phase the economy reached the peak level. The economy is experiencing a very high employment level.
Economic Sociology in the New Millennium by scholars Carruthers and Uzzi (2000) is a compelling paper that offers an in-depth analysis of economic sociology theories and how they can be used to explain the interactions between businesses, households, and government which form our understanding of the economy.
All resources are fully utilized and have reached maximum growth. The aggregate supply is equal to aggregate demand. The economy is experiencing a very high inflation rate. If the demand of household is high the firm's pricing will go up in order to achieve the fully utilized factors.
A Market is an institution or mechanism which brings together buyers (demanders) and sellers (suppliers) of particular goods and services.
Phase D - In phase D, it represents the recession in the economy. The economy is experiencing high but falling economic level activity. The production in this level will decline. Company's confident to invest begun to decrease.
Households also play an important role in the circular flow of goods and services. Colander (2008) states that “households are the most powerful economic institution. They ultimately control government and business, the other two economic institutions” (p. 63). The power of households comes in the form of votes that are cast to “determine government policy” (p.63), and which products and services business will produce and sell. Carruthers and Uzzi (2000) illustrate the power households have on businesses by demonstrating how corporations such as STATA, recognize and take advantage of consumer sovereignty in their decision- making. One of Carruthers’ and Uzzi’s (2000) key beliefs is the roles
of business, households and government are “ in the process of being deconstructed into their constituent elements and reconfigured into new roles through identity bricolage” (p.487). What STATA and many other organizations are doing to remain competitive is to
redefine the classic textbook circular flow of goods and services model by “literally turning customers into
suppliers!” (p.487). Organizations today are transforming the way they interact with households and are more than ever relying on the consumer’s needs and desires (Carruthers & Uzzi, 2000). Businesses are able to take advantage of technology to transforms the “one way flow of information from
seller to buyer into a two-way flow” (Carruthers & Uzzi, 2000, p. 487).
Unemployment is rising. Resources are not fully utilized in this level. Difference between authentic and possible general production expands. The aggregate supply is more than the aggregate demand. The economy is experiencing a high
but falling inflation rate.
Colander, C. (2008). Economics (7th ed.). New York: McGraw-Hill.
Recession will begin if the firms will become pessimist and will stop investing. Hardship is extensive in this level but if the loss is not too critical it is still a recession level.
In conclusion, the business trade cycle is very crucial in every businessman and even to normal individuals. We must be vigilant in our economy. We must know what is happening around us to avoid so much loss. During recession and depression, people should be very careful in spending money and save as much so that we would not end up in nothing.
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During recovery, it is a good time to invest but invest only if you are sure and analyze properly if the economy will going to boost or not. During prosperity, people will spend more as the employment level reaches its maximum growth.
The instruments may in the form of tax, subsidies, factor payments etc. Foreign sector : foreign sector is an integral one for any open economy. Since the international trade become more active every country take it as a vital one to make policy, improve national growth etc
. in an open economy, factor rewards are flowing both in to the economy and out to the economy. Whatever may be the flow of transaction s it will come under the foreign sector or external sector. It includes imports, exports, granting loans between countries
, payments for renting services like shipping, air services etc.
Investors and individuals can invest and spend as long as you know what is going on in the economy. Be sure that you are knowledgeable and well inform about your investments and in your future investments.
Together, the supply of resources and the payments for their use constitute the factor market. What do the businesses do with all those resources? Since we assumed no investment in new capital, no government, and no foreign sector, all they can do is produce consumer goods and sell them to households..
There is no harm in predicting the future's economy as long as you can coup up with it.
In every country there are people are unemployed. What are the main reason of being unemployed? Is it because of low qualification, above of the age limit or people are basically lazy? There are so many reason why people are being unemployed.
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These are due to economic level activity, firm's regulations on qualifications, age limit and own self perception. Some individuals are just lazy especially if the government are giving them allowances. Some countries like in USA
their government is giving some allowances to the unemployed people. Some are experiencing shame to be unemployed some are undergoing depression of being unemployed.
According to http://www.bls.gov/news.release/mmls.nr0.htm the U.S. Bureau of Labour Statistics reported that in December 2010 employers took 1,483 mass layoff actions involving 137,992 workers.
Carruthers, B. & Uzzi, B. (2000). Economic sociology in the new millennium. Contemporary Sociology. 29(3), 486-494. Retrieved on December 18th, 2008 from: JSTOR database.
In a single employer at least 50 persons involved in a mass layoff. 19,564 are the total number of mass layoff events in 2010 and preliminary declares at 1,854,596 were lesser than in 2009 when both results and claims reached their maximum annual point on record.
Below is the table from year 1996 to 2010 Number of layoff events and initial claimants for unemployment insurance:
Initial Claimants For Unemployed Insurance 1996
14,111 1,437,628 1997
14,960 1,542,543 1998
15,904 1,771,069 1999
14,909 1,572,399 2000
15,738 1,835,592 2001
21,467 2,514,862 2002
20,277 2,245,051 2003
18,963 1,888,926 2004
15,980 1,607,158 2005
16,466 1,795,341 2006
13,998 1,484,391 2007
15,493 1,598,875 2008
21,137 2,130,220 2009
28,030 2,796,456 2010
3.1.1 COST OF UNEMPLOYMENT:
Financial Cost - Individuals experience financial cost due to unemployment in the country. It affects financially to the unemployed person. Individuals can lose their nature of living. For e.g. unemployed person can lose his car, mortgage, things that he used to live and even people who used to be his friends. It also cost in his own family necessities. For e.g. if the unemployed is a family man it cost his wife and children's necessities.
Personal Cost - In this cost of unemployment it can affects the person's lifestyle, confidence, well of being and even psychological stability. The unemployed person will feel conscious of every person in his surroundings. He will feel insecure, he will think of what others talk behind his back and he even think nonsense towards others. By all of these the unemployed will do stupid things to cover their feelings like drinking alcoholic drinks, smoking and some taking drugs to ease their pain.
Societal Cost - In this cost of unemployment the person will become hysterical. As mention above about the personal cost that it can affects their emotional and psychological stability if these become unstable, the person might do some stupid things. For e.g. beating up his wife and children due to the wife's nagging. Neighbours and friend will keep distance not only to the unemployed person but to his family too. This will happen due to the uncertain deeds by the unemployed person.
Economic Cost - As in the circular flow of income labour is one of the factors of production.
And what do the members of the households do with their incomes? Since we assume no savings, government, nor foreign sector, all they can do is spend the money on consumer goods -- consumption. Together, the provision of goods and the payment for them constitute the product market.
If the economy is having an increased of unemployment it affects the income in the country. For e.g. as of the increasing of unemployment the firms will lower the wages of their employees and the employees cannot do anything, the employer can easily find another employees to replace them. This will cause a lower gross domestic product (GDP) or output in the country
Costs to the government - Government gave us a safety place to live in, gives education, free medical and gives us some benefits. If unemployment increases, government can collects taxes lesser as unemployed cannot pay taxes to the government. Firms will be having lesser profit due to unemployment and there will be a reduction of corporate tax.
In return for the factors of production (resources or inputs), businesses pay incomes: wages, rent, interest and profits to the members of the households.
Households cannot spend more and only spend in the necessary goods, low consumption and low consumer spending. This will lead a decrease in tax revenues from service tax and value added tax (VAT). The government must to increase their benefits cost
. For e.g. government will put on more spending in health care and education as the
unemployed person cannot send
their family in hospitals and in schools.
I therefore conclude that the cost of unemployment has a big negative impact in our economy and the individuals surround it. The households, firms and the government should help each other in order to decrease the unemployment. Households should give the maximum factors of production. Firms will use all the factors of production efficiently. Government will monitor the economy vigilantly and must create a faster solutions if there is an increased of unemployment in the country. Government have to know what is the right time to increase and decrease taxes in order to balance the economy in the country. Furthermore, all individuals have their own responsibilities in order to have a full employment economy.
Unemployment causes if the economy is having a depression and recession. It affects all the individuals in searching a job. If you resign from a job, the gap between the moment you resign and the time that you started to work again is also unemployment. There are some causes of unemployment. These are frictional unemployment, structural unemployment, technological unemployment, regional unemployment and seasonal unemployment.
4.1.1 Causes of Unemployment
Frictional Unemployment - This type of unemployment happens when people is searching for a job. When the firm takes time to choose which candidates qualified the most for a certain job, those candidates are unemployed and the period of time of waiting is called frictional unemployment. For e.g. fresh graduate students they must take some time finding a job before they can find one.
Frictional unemployment happens due to factor immobility. These are geographical immobility and occupational immobility. Geographical immobility happens when an employee do not want to be relocated to another place. For e.g. a manager in a company may refused to be relocated to another state if he is going to be apart from his family. Occupational immobility happens when the employee cannot perform well to his job due to poor knowledge and lack of experience. For e.g. a fresh graduate engineer cannot fully comprehend the work due to his lack of experience.
Structural Unemployment - Happens when the economy in the country changes and it is experiencing a rapid growth while other industries are tightening and need to have a closure. For e.g. last time Malaysia in 1960's they focus in agriculture, 1980's focus in manufacturing companies and in 2000 they already focus in tourism. Structural unemployment happens if there is a change in demand trend, taste and preferences. For e.g. in 1980's there is a demand of leather jackets but as the changes in fashion occurs nowadays people prefer wear cotton than leather.
Technological Unemployment - Happens when there is a rapid growth of technological changes in the country. By this the firms will prefer to use machines than labourers. Automation will be use by the firms in order to increase productivity. For e.g. the machine can produce 500 outputs a day while in the other hand 10 labourers can produce 500 outputs. The firm will prefer to have a machine than more labourers. Redundancy will occur to the excess employees.
Regional Unemployment - Happens when a particular region is having unemployment. For e.g. a state is having a sea port in almost 15 years of operation suddenly they have a closure due to the changes of economic growth. They want to open an airport. The employees in the sea port will be unemployed and will switch to a job. However by switching a job they must undergo some training courses to coup with the new technologies.
Seasonal Unemployment - Happens when there is changes in weather and season in the country. Some countries are having four seasons like Europe. They have winter, spring, autumn and summer. Some jobs cannot carry if it is winter season and so on with the other seasons. For e.g. during winter in Europe the oceans freezes the fishermen cannot do fishing so they will wait until the block of ice in the oceans melt. Another example if it is raining for a month, the farmers cannot plant crops in the fields they will wait until the rain stops to enable to plant crops.
I therefore conclude that having a full knowledge about the causes of unemployment will helps us create solutions on how to prevent to be unemployed for a long period of time. Individuals should prepare by upgrading themselves and do some training courses. By doing these it can helps us preparing ourselves specially the rapid changing of our technology. It is very helpful if individuals have their own part time job during seasonal unemployment. Fishermen can do some mechanics during winter season. The main point is that people do not want to be unemployed, one good solution is that people can reach out to the government programs so that they can coup up with the uprising economy in the country.
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