International and Regional Business Cycles
Expert reviewed • 21 July 2024 • 7 minute read
In economics, the business cycle refers to the fluctuations in economic activity that an economy experiences over time. The business cycle is characterised by different periods, namely: expansions, peaks, contractions, and troughs. As such, policymakers can use knowledge of business cycle trends to design appropriate macroeconomic and microeconomic policies to stabilise specific economies.
Components of Business Cycles
As mentioned, the business cycle is characterised by different periods. These are defined below:
- Expansion: During an expansion, an economy experiences growth in GDP, employment, and income. Businesses invest in new projects, and consumer spending increases. For example, the global economy experienced a period of expansion from 2010 to 2019, with global GDP or GWP growing from $66 trillion to $87 trillion.
- Contraction: A contraction, or recession, occurs when the economy experiences a decline in GDP, employment, and income. Businesses cut back on investment and lay off workers, while consumers reduce their spending. The global economy experienced a contraction in 2020 due to the COVID-19 pandemic, with global GDP falling by 3.3%.
- Peak: The peak on a business cycle graph represents the highest point where economic activity reaches its maximum level. At this stage, the economy may experience inflationary pressures and asset price bubbles.
- Trough: The trough represents the lowest point of the business cycle, where economic activity reaches its minimum level. At this stage, the economy may experience deflation and high unemployment.
What is the International Business Cycle?
International business cycles refer to the synchronised economic expansions and contractions shared across multiple countries. These are influenced by global factors such as international trade, global financial markets, and large-scale geopolitical events.
Synchronised Business Cycles
As mentioned, international business cycles can be considered synchronised or unsynchronised. Synchronised business cycles occur when different countries or regions experience similar economic fluctuations at the same time. This can occur due to factors such as trade and financial integration. For example, Russia is one of the world's biggest fuel providers. As a result of the Russia-Ukraine war, the world's fuel prices spiked. With the invasion of Ukraine occurring in February 2022, the price of world crude oil increased from around $80 to $115 a barrel in May 2022.
What is the Regional Business Cycle?
Regional business cycles refer to the economic fluctuations experienced by countries within a specific geographic region. Similar to international business cycles, regional business cycles are influenced by the same factors but on a regional scale. For example, they are influenced by economic policies, shared resources, and regional trade agreements. For instance, the European Union (EU) is an example of a regional business zone, as many countries across Europe are linked by the same currency and trade agreements.
Additionally, regional business cycles are also susceptible to synchronisation and de-synchronisation. Influenced by factors such as economic structural differences, the Eurozone debt crisis of 2012 highlighted challenges of maintaining regional business cycles. Some member states such as Greece experienced severe recessions during this time, while other countries such as Germany maintained relatively stable growth.