Home > Economics > The global economy > The international business cycle
This tutorial was written by Ken Edge
Head Teacher HSIE
Cardiff High School
Outcomes
Overview
Content
Review exercises
More
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. |
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.
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.
Access the OECD Business Cycle Clock at: http://stats.oecd.org/mei/bcc/default.html ![]()
This online business cycle clock provides a real time explanation of how the international business cycle affects the domestic economy.
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:
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
Factors that can affect the level of global economic activity
Table 1 GDP Growth
| Region | 1991/2001 | 2002 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 |
| World | 3.1 | 1.9 | 4.0 | 3.4 | 3.9 | 3.8 | 2.9 | -1.2 | 3.4 |
| Developed Economies | 2.6 | 1.9 | 3.0 | 2.4 | 2.8 | 2.5 | 1.6 | -1.2 | 2.5 |
| Transition Economies | 4.9 | 7.1 | 6.6 | 7.5 | 8.4 | 4.3 | 5.8 | 5.4 | |
| China | 10.3 | 9.1 | 10.1 | 10.4 | 11.1 | 11.4 | 10.00 | 9.1 | 6.5 |

The Global Financial Crisis is an example of how events in a region of the world can impact on the international business cycle.
It commenced in 2007 with a financial crisis in the US housing market. Many financial institutions lent money to consumers for purchasing houses that the borrowers could not repay. The lenders made commission and fees from lending the money. The more money they lent these 'subprime' consumers and house buyers the more commissions and fees they made. The risks were taken by the actual providers of the capital and funds for lending. The lenders at first were happy to lend the money to these subprime house buyers as the interest rates charged on the home mortgages were high. Everyone seemed to win. The financial firms lending earned significant fees and commissions. The lenders received a high rate of interest on the loans. The house buyers could be sure that the value of the house would increase and when they went to sell it they could pay off the loan.
In late 2007 the number of house buyers unable to pay their loans increased rapidly. This affected the market for in which the house mortgages were bought and sold. Very quickly lenders stopped lending for house purchases. The prices of houses started to fall as very new buyers entered the market, as they could not access home loans. Financial institutions began to make losses. This led to a panic as people withdrew their funds from financial institutions. A number of very large investment banks on wall street failed. Lehmann Brothers, one of the largest investment banks became bankrupt. In a short time the credit markets, where business borrow to fund investment and business expansion sized up and it was difficult to borrow funds. Business could not raise loans for investment and working capital. Many businesses had also borrowed heavily and had great debts (highly geared or leveraged). Many of these businesses also began to fail and unemployment began to rise rapidly. This rise in unemployment caused more and more consumers and mortgage holders to be unable to pay their house mortgages causing more consumer and personal bankruptcies and more 'subprime' mortgage losses.
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
Latest global research ![]()