Question-   Assignemnt on Business Cycle

Solution-

Business Cycle

            In this paper, we review the Business Cycle Dating Committee of the Economic Research (NBER) and its various functions. Moreover, we will also explain the 2007-2009 recession in the united states its important aspects as well as the effects of the recession on the economy.

Business Cycle Dating Committee

            A business cycle may be defined as the comovement to the aggregate economic variables of a given country. A business cycle mainly comprises of expansions occurring at one cycle and followed by recessions and revivals in the next cycle. Recession refers to an economic period characterized by a significant reduction in economic activities such as a decline in employment, income, and output. Expansion on the other hand may be described as the normal economic conditions of the state. The severity of the recession period is measured according to its depth, diffusion, and its duration while the strength of an expansion is measure by how persistent, pronounced, and pervasive it turns out to be.

            The Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) formed in 1979 determines the business cycle of the united states. Before 1978, the business cycle periods were determined by Dr.Geoffery Moore on behalf of the NBER. The committee focuses on two main measures of activity across the economy to determine the monthly peaks and troughs. The first measure is Gross Domestic Income (GDI) which includes personal taxes fewer transfer payments. The second measure is the Payroll employment from the Bureau of Labour Statistics. The committee however considers other factors such as industrial production and household payments to determine the monthly business cycle chronology.

 

Recession, its starts and end dates and how long it lasted

            The NBER considers a recession as a huge drop in the economic activities that cover the majority of the country’s economy that may last for more than a few months. The NBER dates recession by following standard procedures that assure the continuity in the chronology. This happens once the committee is confident that a recession has occurred to reduce the chances for major revisions. In the ascertaining of the date of a peak in activity, the committee considers the use of sufficient available data. The recession started in December 2007 and ended in June 2009. Many observe however believe that the recession began in the early months of 2007 and end in the second quarter of 2009.

Important aspects and effects of the 2007-2009 recession

            Many observers believe that the united state's recession had begun in the early months of 2008. The NBER in march 2008 stated that the country was in a severe recession at that time. The first signs were in 2006 when housing prices began falling. According to the labor department, approximately 8.7million jobs were lost begging February 2008 to February 2010, and that the real GDP was reduced by close to 4.2% between 2007 and 2009. The reduction made it to be among the worst economic downturns (Schwandt& Von Wachter, 2019).  The debt level by household and non-profit making organizations also increased by approximately 8 trillion dollars during the recession period. Some of the important aspects and effects of the 2007-2009 recession are explained below

 

United States Housing Bubble

            This is considered as one of the causes of the great recession. This is a type of economic bubble that occurs periodically and typically following a land boom. The housing bubble occurs mainly in real estate markets and is mostly characterized by an increase in the valuation of the property. The underlying causes of the housing bubble range from a various tax policy that exempts housing from capital gains to low interest and failure of government regulators to intervene. The collapse of the united states housing bubble had an impact on house owners, mortgage markets, lending institutions, and real estate companies. the government in 2008 had to allocate over 900 billion in form of a special loan to try to salvage the situation of the housing bubble during the recession period. The conditions were however reversed during the real estate market correction of 2006-2007,

Subprime Mortgage Crisis

            The subprime financial mortgage crisis occurred during the recession period and was mainly caused by a drop in house prices after the collapse of a housing bubble that leads to foreclosure as well as a devaluation in housing-related securities. This was followed by a reduction in investment spending as well as household spending. Many financial institutions that offered mortgage-based lending eventually collapsed in September 2008 due to the intercepted flow of credit to the business and this was the beginning of a devastating financial crisis. Some of the major triggers of the financial crisis were the increase in subprime lending and an increase in housing speculation .when the united states house prices finally declined during mid-2006, it was incredibly difficult for the borrower to refinance their loans .securities backed mortgages including subprime mortgages which were held by many global financial markets around the world were no longer willing to risk any further in the housing markets in the united states.

                                This meant that there was a record of slow economic growth in the united states and Europe. The crisis had a prolonged and severe effect on the unites states which entered a deep recession with almost 9 million jobs lost during the period. The number of jobs increased however from May 2009 after the post-crisis. The government also pumped approximately 626 billion to bail out the country.

Automotive Industry Crisis

            The automotive industry crisis of 2008-2010 formed a great part of the global financial crisis of 2007-2008 and the recession. This particular crisis affected both European and Asian automobile manufactures but it was hugely felt by the automobile manufacturers in America. The crisis would later be weakened by an increase in prices of automobile fuel prices linked to 2007-2008 which discouraged the Sports Utility Vehicle (SUV) and the pickup trucks had low fuel consumption. The big three American automakers there decide to set this as their primary focus since it had a higher profit margin. During the recession period, many American consumers turned to smaller, cheaper, and fuel effective imports from Asia and Europe.

Effect of the Recession on Employment

            The global financial crisis saw the United States record steep job losses in almost all the industries. Employment rates dropped by about 6.8 million jobs between 2007 and 2009, while the rates of unemployment increased significantly. Furthermore, very few people among those that lost their jobs during the recession period were re-employed as of 2010 - a noticeably lower rate of reemployment than in the recoveries from the three previous recessions. (De Fusco& Mondragon,2020).

 

Financial Markets

            There was a great reduction of non-United States stock market prices on Monday, January 21 2008 which is commonly referred to as “Black Monday”. The effect was felt worldwide during 2008 including the months January, august, and September.

Trade and Industrial Production

            During mid-October 2008, the amount of shipping volume fell by 50% in one week. This, therefore, meant that exporters could not obtain credit due to the prevailing financial crisis. In March 2009 it was reported that many countries including Japan, Korea, and Russia recorded a decline in industrial output from January 2008 to January 2009.

Travel

            There was also a decrease in the travel rate into the united state according to Zagats 2009 U.S Hotel, Resort and Spas Survey due to the effects of the recession. This was due to the high airline ticket prices, personal economics, and economic uncertainties. According to the World Tourism Organisation, beginning in June 2008, the international travel suffered a slowdown and this this trend persisted resulting in a decline of 4%. This decline was mainly attributed to the recession.

Conclusion

           In conclusion, the great recession of 2007 -2009 greatly affected the economy of the United state and lead to effects such as job losses and a decrease in production. however, the united states have been able to conquer this effect over time through various government interventions put up tto boost the economy.

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