In this discussion, you will explain the role of the business cycle in governmen

Question

In this discussion, you will explain the role of the business cycle in government and private sector decisions. Data on GDP and economic growth are considered lagging indicators because they report information on what is already known. What sources of forward looking data exist to help individuals, firms, and governments to anticipate changes in the business cycle? How reliable are these indicators? Should wages and salaries be indexed to the economic performance? What effect would such a measure have on the economy?

Explanation / Answer

1).The business cycle is a period of stages that starts with growth and peak and runs through contraction, trough, and recovery. The role of the business cycle in economics is to help private sector companies and governments understand how to make decisions. For example, the growth stage often leads to higher production output. This decision and others need input from the external economy. Governments often use the role of the business cycle in economics to drive tax and spending decisions in order to maintain economic growth. (Comments by John Maynard Keynes, source: http://www.wisegeek.com/what-is-the-role-of-the-business-cycle-in-economics.htm.) In growth phase, the government might tempt to increase taxes to increase its tax revenue base. However, in contraction and through phase of business cycle, the government geneerally cuts the taxes and roll back other regulation to boost the economy. It can also boost spending to get businesses out of the contraction phase. On the other side, businesses increase spending to gain more market share in the growing industry, while, they cut spending and pay the debt in the contraction and through phase.

2). Forward looking indictaors can be unemployment numbers, housing starts data, Consumer confidence index and purchasing managers index. These indicators can give investors a sense of where the economy is headed in the future, paving the way for an investment strategy that will fit future market conditions. Leading indicators are designed to predict changes in the economy, but they are not always accurate so reports should be considered in aggregate, as each has its own flaws and shortcomings.

1).The business cycle is a period of stages that starts with growth and peak and runs through contraction, trough, and recovery. The role of the business cycle in economics is to help private sector companies and governments understand how to make decisions. For example, the growth stage often leads to higher production output. This decision and others need input from the external economy. Governments often use the role of the business cycle in economics to drive tax and spending decisions in order to maintain economic growth. (Comments by John Maynard Keynes, source: http://www.wisegeek.com/what-is-the-role-of-the-business-cycle-in-economics.htm.) In growth phase, the government might tempt to increase taxes to increase its tax revenue base. However, in contraction and through phase of business cycle, the government geneerally cuts the taxes and roll back other regulation to boost the economy. It can also boost spending to get businesses out of the contraction phase. On the other side, businesses increase spending to gain more market share in the growing industry, while, they cut spending and pay the debt in the contraction and through phase.

2). Forward looking indictaors can be unemployment numbers, housing starts data, Consumer confidence index and purchasing managers index. These indicators can give investors a sense of where the economy is headed in the future, paving the way for an investment strategy that will fit future market conditions. Leading indicators are designed to predict changes in the economy, but they are not always accurate so reports should be considered in aggregate, as each has its own flaws and shortcomings.

3). Wages and salaries should be indexded to workers productivity. If a worker is more productive, he should get higher pay. So in case if all the workers wages and salaries are linked to the economic performance, this would be disadvantged to the more productive workers as all workers will get the equal share irrespective of their individual contribution.

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