Question

3. Briefly discuss the performance of the following industries along the economic cycle: (a) Housing construction (b) Metal

4. Briefly describe the behavior of the following economic variables along the economic cycle: (a) New jobless claims (b) Consumer sentiment

5. Are the following economic variables rising or falling around the economic cycle turning points? (a) Inventory level (b) Short-term interest rate

6. Rank the performance of machine producers, beverage producers, and restaurants in each of the following situations:

(a) Production growth is accelerating and capacity utilization has risen to high level during early stage of economic expansion.

(b) The economy has just started a recession.

Answer 1

3. (a) Economic Cycle or as alternatively known, Business Cycle basically reflects the periodic fluctuations or alterations in the overall economic performance of any country with Peak being the highest and the Trough representing the lowest point. Now, during the peak in the economic cycle, the demand for real estate and private residential properties would be usually high in general with a boom in the overall housing market. Hence, the housing or real estate prices would also be consequently higher, considering that it would take relatively more time to increase the supply of residential or real estate properties and estates. However, the price would adjust in the long-run accordingly as the supply of new residential or real estate properties increases eventually. As the economic cycle moves from the peak to trough position or experiences a contraction, the demand for the residential or real estate gradually begins to decline and again given a fixed supply of residential or real estate properties in the market or industry, the price would start to decrease accordingly and as the economic cycle of any country ultimately reaches the trough stage, the housing market or industry would be at its lowest as the demand of new residential or real estate projects would be considerably low and the housing prices would plummet significantly which basically signifies a difficult time for the real estate agents and the homeowners as much of the real estate agencies and suppliers would experience a possible economic or commercial downturn. The housing market or industry would expectedly recover once the economic cycle again moves from trough to the peak stage or experiences an expansionary phase.

Now, considering that metal is mostly an intermediate good or a major factor input which is used in the final production in other industrial sectors such as manufacturing, construction, transportation, and so on, any impact of the periodic changes or fluctuations in the economic cycle on these industries would also consequently affect the economic performance of the metal industry. During the peak stage in the economic cycle, it can be reasonably assumed that due to higher overall consumer demand in the economy, most of these industries such as manufacturing or construction would flourish and the respective firms or companies would employ more productive resources and factor inputs to increase the overall production level. Thus, consequently, the demand for metal as a raw material or intermediate good would also increase among the manufacturing firms or companies, and the metal industry as a whole is expected to flourish. Further, as the economic cycle experiences a contractionary phase, the consumer demand for finals manufacturing goods or commodities would gradually start declining which would practically entail relatively lower demand for metal as a raw material or productive resource by the manufacturing firms or companies. As the economy enters into a recessionary stage or trough position, the metal industry would be hard hit as the general consumer demand for finished manufacturing products and commodities would be significantly low and consequently, the manufacturing firms and companies would begin to reduce the existing amount of the resources and factor inputs usually used in the production process as a retaliatory adjustment to their overall production costs or expenses, and the metal industry, being a major intermediate market for manufacturing sector would be also significantly affected in this sequential process. During the economic recovery or expansionary phase, as the overall consumer demand gradually begins to stabilize, the manufacturing firms or companies would again begin to employ higher resources, raw materials, and factor inputs thereby, leading to a gradual increase in the demand for metals as an intermediate good or commodity and the price of metal would again start to increase, holding everything else as constant.

4 (a) During the period of economic growth or prosperity or at the peak stage of the economic cycle, as the aggregate consumer demand and expenditure for and on goods and services is considerably high in the economy, the firms or companies would try to increase the overall production level or aggregate supply of goods and services in the economy and increase employment of productive resources, raw materials, and factor or inputs of production. Therefore, as a result, the labor demand would increase among the firms and companies thereby, potentially reducing the overall unemployment rate or jobless claims in the economy. However, as the economy moves towards the trough stage or goes through a contractionary period, the consumer demand and aggregate consumption expenditure on goods and services would take a dip and consequently, the labor demand among firms or companies begins to gradually decrease thereby increasing the unemployment rate in the economy and the jobless claims as well. Further, as the economy enters into a recessionary phase or reaches trough, the consumer demand and aggregate consumption expenditure is significantly low and so will be the overall labor demand by firms or companies. The wage rate or the salary level in the economy that the firms/companies would be willing to pay also consequently decrease and the overall unemployment rate and the jobless claims would increase in the economy. The labor market would subsequently begin to stabilize as the economy moves towards the growth stage or expansionary phase and the consumer demand for goods and services and aggregate consumption expenditure in the economy gradually begins to rebound.

4. (b) Hence, based on this discussion, note that the consumer confidence or sentiment will be positive or relatively higher during the expansionary or peak stage of the economic cycle which will eventually induce higher consumer demand for goods and services and aggregate consumption expenditure in the economy. On the other hand, during the contractionary phase, consumer confidence or sentiments would gradually decline to reach a considerably low or declining point during the trough or severe recessionary stage in the economy, signified considerably lower consumer demand and overall consumption expenditure.

5. (a) As the economic cycle moves from the peak to the trough stage or experiences a contractionary period and the consumer demand and aggregate consumption expenditure on goods and services fall significantly, the sales revenue and economic profitability of the firms or companies are severely affected. The consumption expenditure in the economy begins to decline gradually during the contractionary period and the value of the inventory held by the firms or companies also starts decreasing during this time as attributable to relatively lower demand for business suppliers and distributors along the supply chain sequence. During the recovery stage or the expansionary stage under the economic cycle, the value of inventory held and acquired by the firms or companies begins to rise as the demand for new products and commodities increases along the supply chain stage due to gradually increasing aggregate consumption expenditure in the economy.

5. (b) Usually, during the contractionary stage and recessionary period, the Central Bank reduces the interest rate to induce higher private business and capital investment by firms and companies in the economy with the subsequent objective to stimulate the overall economy. A relatively lower interest rate at these stages of the economic cycle would expectedly facilitate an increase in the aggregate demand in the economy through higher private investment levels and consumption expenditure on long-term goods and commodities such as housing, education, luxury expenditures, etc. Alternatively, during the expansionary and peak stage under the economic cycle, the interest rate is generally kept relatively higher by the Central Bank to avoid any redundant or additional increase in the aggregate demand which can potentially lead to inflationary effects in the economy or an increase in the overall or general price level of goods and services, again holding everything else as constant.

6. (a) As the production growth gradually starts to accelerate and capacity utilization also begins to increase during the early or initial stages of economic expansion, the machine producers would be significantly benefitted as machines and heavy equipment are widely used as an intermediate product or commodity in many of the industries and markets within the secondary sector in the economy. Many of the products and commodities produced and supplied by the secondary sector of the economy practically constitute essential and necessary items for individual and household consumptions. As the economy moves through the initial stages of recovery or expansion, the consumption demand and expenditure on these items or products would increase more rapidly compared to other luxury or high-end consumer goods or commodities. Hence, initially, the demand for machines and equipment would increase among the manufacturing firms or companies in the economy as the economy gradually starts moving towards the expansionary stage, considering that these are essential resources or factor inputs widely used in the production process in manufacturing industry or sector.

Now, secondly, considering that beverages or liquid drinks are not considered as a necessity item for most of the households or consumers, it will be gradually affected by the initial stages of economic recovery as the consumer income begins to gradually increase. During the initial stages of economic recovery, consumer confidence or sentiment is relatively lower compared to the later stages or during the absolute peak stage in the economic cycle. Therefore, consumers in the early stages of economic expansion, would be relatively more cautious and conservative about their consumption patterns or behavior and mostly increase the consumption of regular items or products that are mostly necessary or essential. Later on, as the economy reaches closer to the peak or growth stage and consumer disposable income is considerably high, the consumption pattern or trends would likely to change and consumers and households can now consider buying an expensive beverage or having more frequent meals in an expensive restaurant compared to the previous scenario, depending on the marginal propensity to consume of the consumers and households in the economy.

6. (b) On the other hand, as the recession begins to loom over the economy, the consumer confidence or sentiment would gradually begin to dip as they would become more cautious about their overall expenditure level. Generally, during the initial periods of economic contraction, the domestic consumers and households begin to spend conservatively on various goods and services, and the overall domestic savings level increases in the economy. Under this scenario, the consumers and households usually start to cut down on spending or expenditure on luxury products and services such as having meals on expensive restaurants, having expensive beverages, beauty spa, and salon services, going on a vacation or expensive trip, and so on. However, considering the lower elasticity of demand and lower responsiveness to economic downturns for necessity and essential commodities and products driven by their importance in regular day to day life and respective market prices of these items, the consumers and households would still continue consuming most of their regular necessary and essential items such as food, groceries, regular utilities such as electricity and water, regular household items such as soaps, hair combs, etc. Now, the production or manufacturing of many of these regular and essential commodities or items involves the use of machines and light and heavy machinery and equipment by the firms or companies at the industrial level.  Therefore, based on this line of theoretical argument, at least during the initial stages of the recessionary phase or contraction, the machine industry won't be affected as severely as the beverage and restaurant industry.