Over the recent past, many analysts have argued from the opportunity cost models of growth that recessions are the best times when firms should engage in productivity and improving activities due to the temporal substitution. In this essay, we will look at the characterization of the business cycles; recession and expansion, and the best time to invest in the two cycles. We will closely analyze the implications of the financial cycles to the Canadian economy.
A recession is defined as a period of time when there’s an extended period of significant decline in economic activities of a country resulting to even a negative GDP growth. During this time, there is also falling of real incomes, weakening sales and production and faltering confidence by not only consumers but also businesses. On the part of investments, there is a heightened risk aversion by investors thus waiting to see. But again, recessions does lead to recoveries later follow a predictable pattern of behavior.
We will focus on the importance of investing in productivity in Canada’s economy during recession and expansionary periods focusing especially on some of the elements that have or will greatly contribute to the productivity growth in Canada. Productivity is crucial as it helps to measure each unit of input and the resultant output from that input. The reason why productivity is important is that its measures will tell how much output has been produced from using tangible and intangible inputs. The tangible inputs include skilled workers and capital equipments while intangible inputs include technological advances as well as entrepreneurial and managerial know-how. By finding new and more efficient ways to use these inputs, then productivity will increase over time (Claessens S., Kose A. and Torrones M. 2008).
During the recent financial turmoil in the US, it led to decline in house prices which later turned into a credit crunch with big losses in the equity markets. This problem then spread to other countries and Canada was not spared. This then led to a crisis debate on the impact it had on the real economy. These developments led to questions on how the financial sector is linked to the real economy during recession times. And so, how do financial variables and macroeconomic behave during recessions and asset price busts. Then what is the best time to invest in these two scenarios? We will answer the question by analyzing the between key macro-economical and financial variables in the business cycles in Canada. We will thus analyze implications during recession and during expansionary periods (Claessens S., Kose A. and Torrones M. 2008).
A business cycle as viewed by Keynesian interprets recessions as those periods in which the utilization of productive resources is inefficiency is low. For expansions, they are viewed as time when the level of economic activities of a country approaches its social optimum. This will mean that business cycles will be associated with in a way with variations over time in order to evaluate the efficiency of the average resources allocated (Jenkins P. 2010).
Canada has experienced a total of three recessions since 1960-2007. We can have a great insight if we describe the macro-economic variables during recessions and compare them with those during expansion periods. The quarterly median decline in output during the recession periods is approximately -0.5% and during expansionary periods is 0.9%. Thus from the above declines, it means that during recession there is a 105% decline in output per quarter as compared to the expansion periods.