Four Variables That Affect the Business Cycle

Economists continue to look for an explanation for fluctuations in the economy. These cyclical changes are reflected in the business cycle. Louis E. Boone and David L. Kurtz, authors of “Contemporary Marketing,” suggest the companies that survive turbulent times exhibit flexibility and the ability to change to meet consumer demand. The cause and effect of fluctuations continues to be an ongoing discussion in the world of macroeconomics, but understanding some of the variables can help business owners navigate the ever-changing fiscal environment.

At times of high unemployment, factories are underutilized, output is lowered and the economy can suffer to the point of recession. Conversely, low unemployment can result in higher productivity and an improved economy. Employment is just one variable, and its effect should be considered in conjunction with others. Roger Leroy Miller, author of “Economics Today,” reminds us that technological innovation can displace workers and increase unemployment, but it can also result in an increase in output.

Inflation occurs when the average prices of goods and services rise. The purchasing power of consumers is weakened as wages and salaries fall in relation to the cost of goods; people spend less and the economy suffers. Each country has its own level of inflation that in turn determines global exchange rates and the cost of imports. Holders of cash typically suffer during times of inflation as their money depletes in value. Times of high inflation have a negative effect on the business cycle.

Labor productivity is measured in terms of a country’s Gross Domestic Product, the output of goods and services produced by labor or the effectiveness of its workers. Some experts argue that there is a relationship between low inflation and high productivity and that when prices are low, manufacturers produce more. Other factors can also increase productivity; for example, better education and training can lead to a more efficient workforce as can improved health and resources. Technology also increases productivity, since it allows employees to work faster.

Governments often choose to change fiscal policy in an attempt to improve the business cycle; increasing taxes and changing interest rates are ways to do this. Fiscal policy can have an effect on other variables such as employment, prices and economic growth, which can in turn affect your industry or business. Changes in any one of the variables can result in changes in the business cycle, impacting your business.