Understanding Economic Cycle

Economic Cycle in Organized Economy

1. Unstable Period in Organized Economies

2. Recovery Period in Organized Economies

3. Stability Period in Organized Economies

4. Productive Period in Organized Economies

5. Unsettled Period in Organized Economies

Under globalization Economic cycle works best only in free market economy, but free market economy can be regulated. Economy must necessary have fully currency convertibility to experience economy cycle for price stability.

Economic cycle in 21st century has evolved, the main difference in modern economic cycle is stages of economic cycle and classification of economies globally.
While factors determining economic cycle are the same for organized economy and unorganized economy, Economic cycle works differently depending on two different economy.

The Factors determined economic cycle are:

• Net Economic Yield = Economic Growth - Inflation
• Price Stability
• Net Parity = Purchasing Power Parity - Earning Power Parity
• Employment
  

In modern Theory of Economic Cycle, recession, inflation, deflation and depression are not the labels used to understand economic cycle, but it is a permutation and combination of above mention macro economic factors governing economic cycle.

Stage of economic cycle is determined by measuring the combine impact of all the above four factors.

Economic cycle works in five stages and these stages does not necessarily move in sequence, as stages of cycle varies with the impact on the combination of economic factors.

Understanding the basic Concept

* Net Economic Growth = Economic Growth - Inflation

Inflation level can be measure by Consumer Price Index and level of growth can be measured by gross domestic products.

Once Net Economic Growth is determined the direction of the economy can be determined by considering price stability based on purchasing power parity in combination of level of employment.

* High unemployment level keeps inflation level within limits

Impact of Unemployment Level on Inflation in organized economy :

Where high level of unemployment refers to normal level of employment plus 5% and above, while inflation level bench mark would be close to 2%.

* Price Stability in organized economy is in reference to inflation with an objective of maintaining overall price level of goods and services

* Net Parity between organized economies helps in understanding the direction of nation economy and forecast the changes in modern economic cycle.

Following are the various combinations that determines stage of economic cycle in organized economies.

• If Net Economic Growth is Zero, Change in price level wouls be Zero:
  Inflation level would be zero with stability in price level
  Net parity against organized economies wound be between -1 to +1 range
  There will be no change in employment level.
  
  This would be ideal situation and not possible in globalize economies
  
  
• If Net Economic Growth is positive and Change in price level is greater then Growth:
  Inflation Level will rise relatively higher than that of Growth level
  Level Of Employment will increase.
  

• If Net Economic Growth is positive and Change in price level is less then Growth:
  Inflation Level will fall relatively lower than that of Growth level
  Level Of Employment will remain unchanged.
  
  
• If Net Economic Growth is Negative and Change in price level is Higher then Growth:
  Inflation Level will Increase as economy takes downturn to recession
  Level Of Employment will decrease.
  
  
• If Net Economic Growth is Negative and price level is less then Growth:
  Economy will experience Recession as Level Of Employment will decrease further

Economic Cycle in Organized Economy

Unstable Period in economic cycle:

Economic factors leading to unstable period could be in various permutation or combination, but the net impact on economy would be Economic yield will be negative.

• Net Economic Growth remains NEGATIVE in any combination
• Inflation rate would be tamed in this economic cycle
• Price level would be tamed
• Price Stability is inversely related to employment level
• In case of High Unemployment rate, price level will be moderate
• In case of Low Unemployment rate, Pressure on price level will be substantially high
• In case of Normal unemployment level, Pressure on price level will be in moderately high
• Purchasing Power Parity would be weak when compared to USD

Recovery Period in economic cycle:

Economic factors leading to Recovery period could be in various permutation or combination, but the net impact on economy would be Economic yield will be negative and moving towards Neutral.

• Net Economic Growth remains Neutral in any combination between -1% to 1%
• Inflation rate would be tamed, but with upward pressure, depending on level of unemployment
• Price level would experience upward pressure as economic growth reverse its trend
• Price Stability is inversely related to employment level
• In case of High Unemployment rate, Pressure on price level will drop marginally
• In case of Low Unemployment rate, Pressure on price level will be substantially high
• In case of Normal unemployment level, Pressure on price level will be in upward direction
• Purchasing Power Parity would be weak when compared to USD

Stability Period in economic cycle:

Stability period is the most desired period of economic cycle by the government. Economic factors leading to Stability period in economic cycle could be in various permutation or combination, but the net impact on economy would be Economic yield will be Neutral in upward positive direction .

• Net Economic Growth remains Positive and Stable in any combination between 0.1% to 2.50%
• Inflation rate would be High and tamed with upward pressure, depending on level of unemployment level
• Price level would experience upward pressure as economic growth trend stabilize and remain less volatile
• Price Stability is inversely related to employment level
• In case of High Unemployment rate, price level will be moderate
• In case of Low Unemployment rate, price level will be substantially high
• In case of Normal unemployment level, price level will moderate
• Purchasing Power Parity would be neutral when compared to USD depending upon US economy

Productive Period in economic cycle

Productive period in economic cycle signifies growth through increasing productivity and efficiency within the economy. Economic factors leading to Productive period in economic cycle could be in various permutation or combination, but the net impact on economy would be Economic yield will be Positive in upward direction.

• Net Economic Growth remains Positive and volatile in any combination between 2.51% to 5.00%
• Inflation rate would be High with upward pressure, depending on level of Productivity and efficiency level
• Price level would experience upward pressure as economic growth increases with volatile
• Price Stability is inversely related to employment level
• In case of High Unemployment rate, price level will be moderate
• In case of Low Unemployment rate, price level will be substantially high
• In case of Normal unemployment level, price level will moderate
• Purchasing Power Parity would be Strong when compared to USD depending upon US economy

Unsettled Period in economic cycle

Unsettled period in economic cycle refers to over heating of economy through increasing growth with falling productivity and efficiency within the economy.
Economic factors leading to Unsettled period in economic cycle could be in various permutation or combination, but the net impact on economy would be Economic yield will be a Movement from Positive to negative yield.

• Net Economic Growth moves from Positive to negative with high volatile in any combination between 05:00% to -0.01% and will lead to unsettled growth rate
• Inflation rate would be High with upward pressure as level of Productivity and efficiency level decreases
• Price level would experience upward pressure as economic growth increases without increasing productivity
• Price Stability is inversely related to employment level and will lead to high volatility
• In case of High Unemployment rate, price level will be high
• In case of Low Unemployment rate, price level will go up to extreme
• In case of Normal unemployment level, price level will high with upward pressure
• Purchasing Power Parity would be weak when compared to USD depending upon US economy

Economic cycle in un0rganized economy is more unpredictable and highly volatile due to following factors:

Inherit disadvantage in defined current economic cycle:

Economic Cycle means Predictable long-term pattern changes in national income. Traditional business cycles undergo four stages:
Expansion, Prosperity, Contraction, and Recession.
The phases of the business cycle are characterized by changing employment, industrial productivity, and interest rates.

Inherit disadvantage in current economic:

• Economic cycle from 20th century focus on individual economy and does not relate to global economy
• Economic cycle does not have concept of globalization and how it economy works in 21st century
• Economic cycle does not explain difference between recession and depression
• Although economic cycle are affected by political and financial factors, there is no concept to explain such phenomena. Financial meltdown in 2008-2009 cannot be explained by current economic cycle

• Global Economies are Classified as:
  
  Organized Economies that are previous know as developed countries
  
  Unorganized Economies were previously know as developing countries
  
  
• Level of inflation is actual inflation includes impact of monetary policy and should not be considered as equivalent to any indicator like Consumer price index.
  
  
• Inflation is associated with Growth
  
  
• Increase in inflation affects Price Stability
  
  
• Increase in price due to inflation weakens convertible currency
  
  
• Increase in price due to inflation in case of nonconvertible currency (pegged currency) or by countries where government regulates the exchange rate of the currency strengthen the currency in short run due to subsidization.

• Un stability in Price Leads to Reduction in Productivity and leads to profiteering as employment increases due to demand being higher than supply
  
  
• Profiteering leads to increase in supply through competition from global market
  
  
• Competition leads to fall in prices as supply exceeds demand
  
  
• Fall in prices or competition leads to restructuring of business to increase productivity or failure to increase productivity may lead to closure of business.
  
  
• Lower productivity leads the market to cut employment through Technological enhancements
  
  
• Ultimately, Unemployment adjust demand o stabilize prices

Economic Yield:

Net Economic Growth is Growth minus Inflation, Net growth is also know as Economic Yield.
If growth is greater than inflation, economy is said to be have positive yield,
If growth is greater than inflation, economy is said to be have negative yield.

Economic Yield explains the direction of organized economies.

Economic Yield is positive and level of unemployment is high, then economy is poised for slow growth
Economic Yield is positive and level of unemployment is Low, then economy is poised for slow growth

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