All countries that participate in world trade impact on the international business cycle. The further an economy is 'integrated' into the world economy, the more the international business cycle will affect that economy. Globalization is leading toward further and deeper economic integration and as this happens, the international business cycle will have even more of a dramatic effect on domestic economic growth, performance, and policy settings. A rise in the international business cycle tends to increase demand and output in trading countries whereas a fall in the international business cycle tends to decrease demand and output in those countries. Fluctuations in the business cycle will have an effect on domestic economic performance and domestic economic policy should be aimed at moderating the effects of the international business cycle on the domestic economic cycle.
The international business cycle is defined as being an increase in world GDP over time. The general trend is for world output to grow over time and since world war two, industrialized countries have averaged growth between 3-4% per year. From 1990 to 1998, Australia was the only OECD country to sustain a growth of over 3%. The international business cycle can be drawn graphically as seen in the diagram below.
The international business cycle is characterized by four phases in the cycle. These are:
• Expansion (Primarily caused by an increase in demand)
• Peak (Demand-pull inflation setting in, demand falls off)
• Contraction (Further falling demand and rising unemployment)
• Trough (Fall in output and demand reach their minimum point)
Influences on the International Business Cycle
Many factors can lead to alterations in the business cycle. No matter what factors affect the cycle, however, it can usually be defined as being either a money shock or a real shock. Real shocks involve a change in real variables leading to varying consumer and industry confidence...