Every economy has its ups and downs at one point or another called business cycles. Government and private institutions focuses and creates tools to deal with the growth and contraction of an economy. In the following paragraphs, I will briefly summarize the different frame works that economist generally use to analyze macroeconomics. In addition, I will also explain, how two separate group of economist define and create concepts of why an economy contracts and how it grows.
Prior to the great depression, economist focused on supply or Long Run growth. During this period of time, classical economist believed that short run problems where a temporary glitch and that the economy could self regulate through the invisible hand. As a result of the great depression, a new for of thinking emerged. The Keynesian economics evolved. Keynesian focused on spending as away to push the economy out of the depression. There are two frame works of economic studies. First is the Long Run framework also known as Supply Side Economics, which focuses on growth issues. Moreover, the key is that by incentivizing businesses whether is through tax brake or other form of incentives, business will hire work force to promote and increase supply, which in turn will create growth, capital accumation and technological advancement. The second is the Short Run framework, which emphasizes business cycles as a way to best study economics. Also known as demand economics, the key is aggregate expenditures. Meaning, in order to support economic growth, government and businesses must focus in consumer spending.
Economist use real GDP (Real Gross Domestic Production) to measure the health of an economy and determine at what stage of a business cycle is the economy in. GDP is defined as the market value of final goods and services in a giving year. Business cycles happen due to periods of fast economic growth and stagnation. A business cycle is the upward or...
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