Economy Moves in Cycles. There

¶ … economy moves in cycles. There are different models, but all are characterized by periods of growth followed by periods of contraction (Sorensen and Whitta-Jacobsen, 2010). The different approaches to the recession may define the various stages using differing terms, but they tend to reflect similar stages, most will identify the first stage as boom which may also be referred to as growth or late recovery, slowdown which may also be referred to as early recession, recession or full recession and recovery or early recovery (Schiff and Schiff, 2010). To assess the current stage of the economic cycle it is necessary to look at the current economic performance of the economy and assess its alignment with the different stages.

If the current period were boom or growth there would be string growth in the GDP, with strong aggregate demand and expansion of both the output and labor market and employment and interest rates may be high (Sorensen and Whitta-Jacobsen, 2010). In a slow down, or early recession, the previous growth decelerates, but the trends is still one of growth; it is just at a slower rate (Sorensen and Whitta-Jacobsen, 2010). The full recession is the stage where there is a decline in the national output, and a contraction the economy with a decrease in the aggregate demand, accompanied by increasing unemployment levels, low interest rates and falling consumer and business confidence levels, usually characterized by at least two quarters of negative growth (Sorensen and Whitta-Jacobsen, 2010). The recovery, or early recovery, is characterized by a turnaround from a contracting economy to a one where there is positive growth, although it may be highly constrained, and the rate of recovery can vary (Sorensen and Whitta-Jacobsen, 2010). The different stages are not totally separate, one merges into the next.

Looking at the U.S. In 2013 some of the leading indicators may be assessed to look at the overall patterns to assess which of the stages is most closely matched. The main leading indicator is the GDP. The GDP for the 4th quarter of 2012 is estimated to have increased by 0.1% in the preceding quarter (BEA, 2013). This was a slight decrease on the preceding quarter where the increased in GDP was 3.1% (BEA, 2013). Overall, for 2013 the GDP grew by 2.2% on the previous year. This indicates a low rate of growth, but we need to look at whether this is an improvement of a deceleration; in 2011 the growth rate was 1.8% which itself was an improvement on 2010 (BEA, 2013). There is a slow rate of growth which appears to be showing improvement on previous years.

The unemployment rate for January 2013 was 7.9%, in December it was 7.8%, this appears to be a deterioration; however, it is usual for unemployment to increase in January as seasonal jobs disappear. Looking at the rate in January 2012 it was 8.3% and in January 2010 it was 9.1%, therefore unemployment rates are decreasing slowly (BLS, 2013). The consumer prices index also shows an increase; in 2012 it rose by 1.6%. Overall, there is an improvement, from a time that has been defined as a recession, the growth is slow and constrained, but expected to improve further, therefore the current economic stage is that of a recovery, or early recovery.

Question 2

The traditional method of assessing the economic growth is by measuring the GDP, with the underlying assumption that where there is growth in the GDP there will be an increase in welfare, with the measure usually being the GDP per capita. The basic idea is that when an economy is growing there will be benefits to all segments of that economy; the increase will result in increasing wages and increasing taxes. The theory of the multiplier effect and the trickle down effect are also assumed to increase welfare throughout a society, even if not all members are able to benefit proportionately. The benefit is also believed to occur as the increased government income may then be used to increase the welfare of citizens, supporting spending on areas such as healthcare and education, which have a direct impact on welfare.