Referat TRADE CYCLE - Methods of the governments activities

TRADE CYCLE

Everyday we read in newspapers, that the unemployment in Austria increases or falls, that the government has to do "Sparpakete" because they can not afford so much social costs anymore. In a TRADE CYCLE you can see how well the economy is.

As you see in the graph the trade cycle begins with revival, recovery and expansion of a depression time period, where the economie wasn't so well. The business activities start to increase, people find jobs and therefore the number of unemployed people drops, and entrepreneurs start to invest.

This will go on until a boom is reached which is the highest level that can be aimed. People are satisfied with their job because salaries and wages are high and they can afford more products. Therefore the capacity of production is raised to fulfil the great demand. Profits of firms reach a top level. And because economy is running well, interest rates have to be raised because that high inflation must be slowed down.

After a boom there comes a slowdown, contraction, downswing and recession. First employers are fired and the firms aren't going well either. Although there are so many definitions how to describe a recession all in one you can say that recessions lower the level of the GNP of a country.

The lowest level in the trade cycle is a depression, trough or slump. Production is slowed down because consumption isn't high. The number of unemployment increases and so does the number of closed firms. Government has to offer credits with low interest again.

Indices show how the economy is running. There are, for example, plant/equipment orders, average workweek, new consumer goods order, manufacturer's unfilled orders, unemployment claims, raw materials prices, consumer confidence, vendor performance, money supply and stock prices. Because of those indices you can see daily in newspapers whether the index you are interested in has gone up or down. Housing construction and home sales have became very important because on those it depends if things like heating oil and construction equipment will boom which would have an enormous effect on the economy.

Inflations:

Inflation is known as a typical appearance of economic systems. It depends on many sources and is often influenced by home or foreign economic effects.

Inflation has positive and negative aspects. If a single person is loaning money for a certain period, he may take advantage of the loss of value of his credit rates. Having in mind working and retired people inflation continuously threatens the value of their income. This development may end in a disaster.

In this case there will be more creditability and confidence for the currency of a certain country and a foreign currency ma be used instead of it. If this should be not possible, people may be forced to exchange their goods avoiding any more usage of their own currency. A further result would also be poverty and distress.

A mirror of the typical needs of the people is called RPI (Retail Prices Index) in the UK and CPI (Consumer Price Index) in the USA. It contains the main products and services of an average household for a month. According to the countries ecological developments and changes of customs or the introduction of new products, this RPI must be adapted every decade. So it is able to reflect the actual spendings and needs.

Trade unions are taking an eye on these effects, because they are responsible to safeguard the value of the wages and salaries of their members. Forced to negotiate about the consequences of inflation of the wages and salaries, entrepreneurs try to minimize demands of the trade unions.

If a government is not really able to manage right measures it may live in fear of losing the next general elections. If economy is sound and the conditions stable a government may be sure of being respective and favoured.

A government is expected to have an effective economic performance which means having a remarkable GNP and positive exports. More goods should be exported than imported.

A very important item is the balance of payment. It contains the visible and the invisible parts. The visible ones are the goods and the invisible ones are the services. One of the may invisible ones is referring to tourism. Austria is happy in advertising her natural beauty and attractiveness. Thus tourism is focusing all endeavour of successful marketing. Tourism furthermore is essentially improving and promoting the nation's budget.

Inflation shows the ups and downs in prices. There exist several forms of inflation:

l     creeping inflation: means a low inflation rate over a long time. That means that any single-digit rates are considered low.

l     hyper inflation: is also called runaway inflation. It can reach 200% or more.

l     hidden inflation: If you replace a high value item by an item of a lower quality in order to avoid an increase in prices you talk about hidden inflation.

l     suppressed inflation: Inflations which would be more effective if government didn't control the economy and if there weren't so many barriers.

l     imported inflation: If prices of some goods rise that will have a negative effect on the importer country. A good example of such an imported inflation is oil.

l     demand-pull inflation: are inflations where, as the name already says, inflation rises if demand pulls up prices, for example, if governments run high budget deficits, when taxes are reduced, when a country exports successfully

l     cost-push inflation: are inflations where consumers have to pay more for goods because, for example, imports have become more expensive

Methods of the governments activities:

Restrictive government spending:

The positive effects are the reduction of the deficit and the lover inflation, but the other side is that the people might get less benefits from the state and the demand will fall.

Expansionary government spending:

The advantage is that more people will find a job, but this form of acting by the government will lead to more inflation and an higher deficit.

Tax cuts:

Of course the government will earn less revenue and the deficit will get higher. But the positive effects are that the demand will increase and the people will buy more things.

Tax increases:

The government will get more revenue and will reduce the deficit, but the demand will fall, because of the higher prices.

Increases in base rate:

People will get higher interest an their savings, but credits will get more expensive and that will be not good for the investment of companies.

Base rate cut:

That will lead to more investments, because if you save the money you will get only little interest.

Devaluation:

That means that export goods will be more competitive. Of course tourism will also benefit from devaluation. The home currency will be cheaper for foreign countries.

Revaluation:

This method will lead to deflation and will support the imported goods. But the disadvantage is that the exported goods will become more expensive and so the balance of payment might be negative.