distinguish -
external and internal events
occurring
causes ,
significan t ,
trigger off ;
are likely to have
inventions and innovations
burst of business activity /
to provide
capital goods
tools and equipment
total production
generated
to give a nudge ;
power to tax and spend
the supply of money and credit in circulation - ,
fiscal policy (-)
monetary policy -
For many years economists struggle to find a theory that would explain all business cycles. In explaining business cycle fluctuations, todays economists often distinguish between external and internal events
External events are those outside the economic system that explain fluctuations in the business cycle. Internal events are those occurring within the economy itself.
External Causes. External factors which affect the economy are: population changes, inventions and innovations, and other significan t political and social events.
Population changes. Changes in population affect the demand for goods and services. Population increases can lead to increased production and employment levels that trigger off expansion and boom. Population decreases are likely to have the opposite effect.
Inventions and innovations. Major changes in technology, such as the development of the automobile, the airplane and the computer, have ledto bursts of business activity and investments. This, in turn, was followed by increased employment opportunities and a period of expansion and boom.
Internal causes. Internal causes of fluctuations are factors within the economy which are likely to start an expansion or contraction of the business cycle. Three of these internal factors have to do with consumption, business investments, and government activity.
Consumption. Business firms try to provide consumers with the goods and services they want. When consumer spending is on the increase, business firms hire additional help and increase their level of production. As production, employment and sales increase, the business cycle enters a period of expansion and boom. When consumer spending decreases, the opposite occurs. Production is reduced, workers are laid off, and the economy enters a period of contraction and recession.
Business investment. Investment in capital goods like plants, tools and equipment, creates additional jobs, thereby increasing consumer purchasing power. The increase in spending generated by the initial increase in investment leads to still further investment, consumption and total production. When investment decreases, the opposite occurs and the economy enters a period of contraction.
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Government activity. Governmental policies can give the business cycle an upward or downward nudge. Government does this in two ways. One is through the use of its power to tax and spend. The other is by reducing the supply of money and credit in circulation. Economists describe governments ability to tax and spend as its fiscal policy, and its ability to regulate the supply of money and credit as its monetary polic y.
