This blog post introduces the concept of economic growth, the various factors that cause business cycles, and the major theories that explain them.
Economic growth means the continuous increase of gross domestic product (GDP) in the long term. This indicates that the standard of living of the people is improving and the economic well-being of society as a whole is increasing. However, even in countries with steadily growing economies, the economy is sometimes good and sometimes bad. Business cycle refers to the phenomenon in which the trend of real GDP shows a long-term trend, but deviates from the line in the short term, showing rises and falls. There are various views on the main causes of business cycles.
Until the 1970s, the prevailing view was that the main cause of economic fluctuations was shocks to aggregate demand caused by changes in private sector investment spending. Economic fluctuations were triggered by changes in investment spending based on private sector expectations for the future. Therefore, it was believed that economic fluctuations could be suppressed if the government implemented appropriate aggregate demand management policies in response to aggregate demand shocks. This was a period when the influence of Keynesian economics was strong. However, when criticism arose in the 1970s that total output might not change even if total demand changes, the argument was raised that the arbitrary monetary volume control of financial authorities was the cause of economic fluctuations.
Since then, Lucas has argued that economic agents always have “rational expectations,” and that economic fluctuations occur because they make incorrect judgments due to incomplete information, which is the “monetary business cycle theory.” Reasonable expectations mean that economic agents make proper use of new information to form expectations about the future. However, because the information available to economic agents is incomplete, they may make incorrect judgments, which in turn leads to economic fluctuations. Lucas uses a hypothetical example to illustrate this.
Let’s say there is a company that knows only the price of its own products for a certain period of time. If the price of the company’s products rises, it may be the result of an increase in the overall price level due to an increase in the money supply, or it may be due to a change in consumer preferences for this product. If it is due to an increase in the overall price level, the company has no reason to increase production. However, in a company that knows only the price of its own products for a certain period of time, no matter how rational expectations are, it is impossible to determine the exact cause of the price increase. Therefore, even if the overall price level rises, the company can increase its production volume, assuming that the increase is due to a change in preference. This will increase the wages of workers and the economy. However, after a certain period of time, when the company realizes that the price increase is due to an increase in the overall price level, it will realize that it has made a mistake and reduce its production volume.
However, Lucas’s view has been criticized for being unable to explain all large-scale fluctuations in the economy. As a result, some scholars have begun to look for the main causes of economic fluctuations in physical factors such as technological innovation and rising oil prices, which is called the “physical economic fluctuation theory.” According to them, when technological innovations occur that can improve productivity in a company, companies will try to hire more workers. As a result, employment and production will increase, and the economy will rise. On the other hand, when oil prices rise, companies will use less energy in the production process, so employment and production will decrease.
Recently, some scholars have pointed out the overseas sector as an important factor in explaining the economic fluctuations of a country. They believe that as economic cooperation between countries becomes closer, the economic fluctuations of each country are highly correlated with each other, and that economic fluctuations can be transmitted internationally. For example, in a situation such as a global financial crisis, economic instability that begins in one country can spread quickly to other countries, which can have a significant impact on the entire global economy.
Therefore, it is important to consider both international and domestic factors in understanding and predicting economic fluctuations. In addition, governments and businesses need to analyze these complex factors and prepare countermeasures to minimize the impact of economic fluctuations. In today’s complex and interdependent economy, effectively managing economic fluctuations is essential for economic stability and sustainable growth.
