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Home > Economics > The global economy > The international business cycle

Outcomes
Overview
Content
Review exercises
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Outcomes

HSC topic: The Global Economy is covered in the Board of Studies NSW Stage 6 Economics Syllabus (1999) on pages 31-33. The specific outcomes for this tutorial are:

H1:	demonstrates understanding of economic terms, concepts and relationships.
H3:	explains the role of markets within the global economy.
H4:	analyses the impact of global markets on the Australian and global economies.
H8:	applies appropriate terminology, concepts and theories in contemporary and hypothetical economic contexts.

Overview

The tutorial describes the characteristics of the international business cycle and relates these to current World Output figures (Real GDP). Global economic events are analysed to explain some of the patterns and trends in the business cycle.

Being up to date and aware of contemporary issues

This tutorial is based on 2002 information and this should be kept in mind as you read it. Students of Economics need to be aware of what is happening now and what has happened recently, in respect to the international business cycle.

After completing this tutorial you may wish to do some research on the current situation by visiting the websites listed under 'MORE' at the bottom of this page.

Content

1. The International Business Cycle

   The global economy, like any economy, is affected by regular and recurring fluctuations in the levels of economic activity. If a country’s economy is experiencing a boom or recession its domestic demand for goods and services can be affected. The combined effects of the level of economic activity of individual countries will in turn affect the global economy.

   The periodic and irregular expansions and contractions in world output can be measured by changes in real world GDP.

   Characteristics of the phases in the business cycle:

   • An upswing in economic activity, or recovery, is usually associated with rising levels of GDP, consumption expenditure, investment expenditure and decreasing levels of unemployment. This may lead to a boom with high levels of GDP with businesses operating at close to full capacity, inflation rising due increasing costs and interest rates at higher levels.
     
     
   • A recession is a downturn in economic activity and is associated with falling levels of GDP, consumption and investment expenditure. Inflation and interest rates are declining and unemployment is rising. A recession will have a trough at the lowest point. A trough has GDP, consumption expenditure and investment expenditures at the lowest levels. Unemployment is high and inflation is low.

   Historically there is a strong relationship between the business cycles of the world economies. To identify a global recession is a difficult task, even when they are occurring. This is why most recessions are not determined until after the economic event has taken place. Gross world product (GWP) tends to go through upswings, booms, downswings and troughs.

   Graph 1

   International Business Cycle

   

    

   Factors that can affect the level of global economic activity

   • investment flows: especially if one nation is experiencing higher levels of economic growth. An example is the Chinese economy which is expected to grow at a rate faster than most developed nations in the next five years (figures in Table 1 below, indicate this trend).
     
     
   • monetary conditions: variations in real interest rates and exchange rates may cause increased investment flows from one country at the expense of another. The increases in interest rates by the US during 2000, to reduce domestic inflation, and bring back economic growth, and then the subsequent reductions during 2001 affected global investment flows and the value of the dollar in Australia.
     
     
   • market confidence: the Australian economy, like most world economies, is influenced by the economic conditions in the United States, Japan and Europe. Strengthening or weakening consumer confidence in these economies tends to influence economies in other parts of the world.
   
   
   

2. World output

   The following graph indicates the growth patterns in world output (series 1) over the past decade. Australia’s real GDP growth figures are indicated by series 2.

   The variations in growth figures can be linked to the international business cycle and the changes in levels of world economic activity (Real GDP).

   Graph 2

   

   Source: IMF World Economic Outlook 2001

    

   Table 1

   The growth figures for Advanced and Transition economies

   

   Source: IMF World Economic Outlook May 2001

   Note:
   The percentage changes in graph 2 and Table 1 were calculated using PPP (purchasing power parity) weights which compares the relative prices of goods and services in different nations.

3. Global snapshots:

   The Asian Economic Crisis is an example of how events in a region of the world can impact on the international business cycle.

   It took place during the later part of the 1990s and caused economic hardship in many Asian economies. In 1997 there was concern about the growing current account deficit (CAD) in Thailand. The government floated the Thai baht to try and stop the outflow of capital. This precipitated a large depreciation of the Thai currency.

   The impact of the depreciation was also felt in Korea and Indonesia, where currency traders slashed Korean and Indonesian currency values. Many Korean and Indonesian companies could no longer afford to pay for imports and many closed their doors. This caused millions of workers to lose their jobs.

   The International Monetary Fund (IMF) had to provide emergency funds to help stabilise these economies. Within two years a number of these economies had recovered from the crisis.

    

   Global Economy 2001

   During 2001 there was a slowdown in global growth from the very high rates of late 1999 and early 2000. By the end of 2000 global economic activity, particularly in the United States, had weakened and the Japanese economy was stalling in recovery.

   This was partly due to the tightening of monetary policy in the USA to dampen the high rates of growth in late 1999. The Japanese economy also slowed, indicating weaker consumer confidence, slowing business investment and weakening export growth.

   Other factors which may have led to a slow down in the growth of domestic demand and weaken consumer and business confidence in the global markets include:

   • higher energy prices when OPEC restricted supply to the world markets
   • the reassessment by many transnational corporations of earning their capacity
   • the slowing growth in the world technology sector, e.g. declines in the NASDAQ index in America and the failure of the One.Tel Company in Australia (June 2001).

Review exercises

Use the tables, graphs and global snapshots in this section to answer the following questions.

1. Describe the characteristics of each of the phases in the International Business Cycle.
   
   
2. World Real GDP grew by only 2% in 1998. Outline the reason for this situation.
   
   
3. Comment on the relationship between the World and Australian levels of real GDP in 1998. Suggest reasons for this situation.
   
   
4. Global Boom or Doom?     Flash version     HTML version
   
   
5. Of the countries listed in Table 1, which achieved an increase in real GDP greater than world output in 2000? Give reasons for your answer.
   
   
6. Suggest some changes in global economic conditions that are needed to increase the levels of world output.

Answers

More

The United States stock exchange technology index (NASDAQ ) has some interesting information on recent trends.

Various organisation post information on the internet on recent trends in the international business cycle and a google search including the current year will bring several sites, including the following National Australia Bank Site which includes a Global Overview October 2004