1. The Business Cycle, Economic Growth and Development
Unit 8
The Business Cycle, Economic Growth and Development

2. Objectives Identify the four phases of a business cycle.
Discuss the causes of a business cycle.
Distinguish between economic growth and economic development.
Explain how economic growth can be measured.
Explain how economic development can be measured.
Identify the major sources of economic growth.

3. 1. The Business Cycle Definition:
The business cycle can be defined as the rise and fall of economic activity that occurs around the growth trend.
It is the upward and downward movement of production (GDP), employment and inflation.
The growth trend is the direction in which the economy moves over a long period of time such as 20 to 30 years.

4. The business cycle

5. Four phases of the business cycle
Peak: A peak is the highest level of economic activity in a particular cycle. The economy is doing great and real GDP is high and employment and profits are usually good. A very high peak is sometimes called a boom.
Downswing (contraction): A downswing occurs when the level of business activity or real GDP decreases noticeably.
When real GDP decreases for two consecutive quarters (6 months) economists say the economy is in recession. A depression is a very large recession. It lasts longer and is more severe than a recession.
Trough: A trough is the lowest level of real GDP. Unemployment and idle productive capacity are at their highest level.
Upswing (expansion): An upswing is the expansionary phase during which real GDP rises. Output expands, profits usually increase and the employment situation improves.

6. Measuring business cycles
Economists have developed a set of indicators to give us an idea of when a recession is about to occur or when the economy is in one. They give an indication of what is likely to happen 12 to 15 months from now. 
Leading indicators:
1. The number of new cars sold
2. The number of new companies registered
3. Exports
These indicators are combined into an index that economists use to make forecasts about the economy.

7. Causes of business cycles
Many forces are responsible for the changes in the level of business activity in a country. But the following factors may have an influence on the economy:
Consumption: If households decide to buy more or less it will affect the economy. 
Weather: Changes in the weather will influence the level of agricultural output; this in turn will influence business activities.
Money supply: Changes in the business cycle may be caused by a change in the money supply. Too much money in circulation may trigger inflation while too little money may cause a contraction and unemployment.
Capital investment: Changes in capital investment may cause upward or downward changes in total production.
Government expenditure and taxes: Government purchases may have a contractionary or expansionary effect on the economy. Taxes affect the ability of the household and business sectors to buy production.
Resource supply: Changes in resource supply such as energy prices, technology and wages may cause expansions or contractions.
In general we can say that business cycles are caused by shifts in aggregate demand and aggregate supply. 
Monetary and fiscal policies can be used to modify the duration and intensity of these fluctuations.

8. 2. Economic Growth
Definition: Economic growth refers to an increase in a country’s real GDP during a period of one year.
In simple terms economic growth means an increase in the quantity of goods and services produced in a country during a period of one year.
Graphically it is shown by an outward shift of the country’s production possibilities curve. It is caused by increased productive capabilities that are made possible by either an increase in inputs (production factors) such as labour, capital or technological innovations.
To make comparisons over time when prices are increasing, we must adjust the nominal GDP so that it reflects only changes in production and not price changes. In other words, we have to convert the nominal GDP into real GDP.
Nominal GDP is the GDP measured at current prices.
Real GDP is the GDP adjusted for inflation – it is measured at constant prices.

9. 2. Economic Growth Formula: Nominal GDP
Nominal GDP
Real GDP = x 100
Price index
Example:
Nominal GDP 2006 = N$ million
CPI 2006 = 130.7
Nominal GDP 2007 = N$ million
Consumer price index 2007 = 136.5 N$
Real GDP 2006 = x 100
130.7
= N$ million N$
Real GDP 2007 = x 100
136.5
= N$ million N$
Real GDP 2006 = x 100
130.7
= N$ million N$
Real GDP 2007 = x 100
136.5 
= N$ million 
The economic growth rate is calculated on a yearly basis. 
Formula:
Real GDP last year – Real GDP first year
Growth rate = x 100
Real GDP first year  –
GDP growth for 2007 = x = 9%
 This example shows that this country’s economy grew by 9% during this period.

10. Reasons for economic growth
The inputs used by businesses as well as the production methods determine the GDP or output of a country.
Businesses can increase their output by using more inputs or by the more efficient use of the available inputs.
Human capital: The first pillar of economic growth is improvements in human capital. These are the knowledge, skills and experience of the labour force.
Natural resources: The availability of natural resources in a country.
Physical capital:Increases in physical capital will enable workers to become more productive. Workers can be educated, but they still need computers, tools and equipment to produce goods and services.
Greater economic efficiency: Greater economic efficiency through technological advancement. Technological advancement requires new inventions, such as the discovery of a new product or process, as well as technological innovations.
An important determinant of the above factors is the saving and investment decisions that people in the economy make. Investment in research and development, education, factories and equipment will determine future economic growth of a country.

11. 3. Economic Development Definition:
An improvement in the position of the average person, e.g. if the GDP per capita increases.
All countries of the world are classified into different groups. The most general classification is the distinction between developing and developed countries.

12. Developing countries:
This includes all countries in Africa, South and Central America, some countries in Asia and eastern European countries. Namibia is, therefore, a developing country.

13. Developed countries:
This includes the United States, Britain, Canada, Japan, Australia, New Zealand and most western European countries.

14. Features and Problems of Developing Countries
Population growth
The population growth in developing countries is much higher than in developed countries and this creates a number of problems.
Many new jobs must be created for the many babies that are born.
The growing population puts pressure on housing, education and health services. If these services are inadequate, the result may be a low quality labour force.
HIV/Aids have a negative impact on the labour force due to the loss of skills and experience and the cost of treating Aids sufferers.

15. Features and Problems of Developing Countries
Natural resources:
Some have natural resources and other may not have any, but all of them lack capital goods. 
Agricultural practices
A large percentage of the labour force is in agriculture, but farming methods are primitive in many cases and productivity is low.
Capital
Most developing countries do not have their own manufacturing industries and have to import all capital goods. They rely on foreign investment.

16. Features and Problems of Developing Countries
Infrastructure
Most developing countries have poorly developed infrastructures. Roads are often in a poor condition and there may be a lack of communication systems, electricity, education, health and housing facilities. This makes it difficult for businesses to access markets.

17. What is economic development?
Economic development is associated with developing countries and refers to an improvement in the standard of living of the population as a whole. It allows everyone in society, on average, to have more.
Economic development should be focused on people:
Development of people: Money should be invested in the education, health and nutrition of the people of a country to enable them to contribute to economic, political and social structures.
Development by people: The people of a country should participate in the planning and implementation of development strategies.
Development for people: Development should meet everyone’s needs and create opportunities for everyone.

18. What is economic development?
Economic growth is a prerequisite for economic development. Economic development occurs after economic growth has taken place. We can see development in the following:
More and better health and educational services that will result in a higher life expectancy and higher literacy rates.
A larger middle class.
A fairer distribution of income
Agricultural development to promote food production.
Industrialisation to create more jobs and make the country less dependent on imported goods.
Export growth and diversification, in other words not only agricultural products and raw materials but a variety of manufactured goods

19. The measurement of economic development
A yardstick that we can use to compare the standards of living across nations is the GDP per capita. Economic development occurs if there is an increase in the GDP per capita, in i.e. if the position of the average person in the community improves. The GDP per capita is the average amount produced by each member of the population.

20. The measurement of economic development
Example:
Real GDP = N$ million
Total population 2006 = 45 million
Real GDP = N$ million
Total population 2007 = 50 million
GDP per Capita 2006 = / 45 = N$
GDP per Capita 2007 = / 50 = N$N$
The above example shows that the GDP per capita is lower in 2007 than in This means that the position of the average person deteriorated in spite of an increase in the total production.
The reason for the lower GDP per capita is the fact that the population increased by 11% while GDP growth was about 6% so that the available resources had to be divided among more people.

21. Shortcomings of GDP per capita
It does not reflect the unequal distribution of income.
It does not reflect expenditure on public goods and services.
It does not reflect the value of leisure time and social advantages.
Since 1990 the UNDP has used another index in their Human Development Report. This index is called the human development index (HDI). The advantage of this index is that it reflects life expectancy, literacy and the standard of living