Economic growth is a sustained increase in GDP, and the economy fluctuates from time to time. Many factors have been proposed as causes of economic fluctuations, including changes in investment spending by private companies, monetary policy, technological innovation, and rising oil prices. Lucas’s “Monetary Theory of Business Cycle” and “Real Theory of Business Cycle” are two of the most prominent. More recently, it has been suggested that economic fluctuations can be contagious due to increased international economic cooperation.
Economic growth refers to a sustained increase in Korea’s gross domestic product (GDP) over the long term. This indicates that people’s living standards are improving and the economic well-being of society as a whole is increasing. However, even in countries with steadily growing economies, there are good times and bad times. Economic fluctuations are short-term deviations from the long-term trend of real GDP, with ups and downs. There are different views on what triggers a business cycle.
Until the 1970s, the prevailing view was that fluctuations were caused by shocks to aggregate demand caused by changes in investment spending by private firms. This view is that fluctuations are triggered by changes in investment spending based on private firms’ expectations about the future, and that fluctuations can be contained if the government implements appropriate aggregate demand management policies in response to aggregate demand shocks. However, after the 1970s, it was criticized that aggregate demand could change and aggregate output could remain unchanged, leading to the argument that arbitrary monetary policy by financial authorities was the cause of fluctuations.
Lucas then argued for a “monetary theory of fluctuations,” which assumes that economic agents always have “rational expectations,” and that fluctuations occur because they make incorrect judgments due to imperfect information. Rational expectations means that when new information comes in, economic agents use it appropriately to form expectations about the future. However, because the information available to economic agents is incomplete, they may make incorrect judgments, which leads to fluctuations. Lucas explains this with a hypothetical example.
Imagine a firm that only knows the price of its product for a certain period of time. If the price of their product has increased, it could be the result of an increase in the overall price level due to an increase in the amount of money, or it could be due to a change in consumer preferences for this product. If the increase is due to an overall increase in prices, the firm has no reason to increase production. However, if a company only knows the price of its product for a certain period of time, it cannot accurately determine the cause of the price increase, even if it has reasonable expectations. Therefore, even if the overall price level has increased, the company may increase production of the product, assuming that it is due to a change in preferences. This increases workers’ wages and boosts the economy. However, after a period of time, when it becomes clear that the price increase is due to an increase in the overall price level, the firm realizes that it was wrong and reduces production.
However, Lucas’s view has been criticized for its inability to explain large-scale fluctuations in the economy. This has led some scholars to look to real-world factors, such as technological innovation and rising oil prices, as the main causes of fluctuations, which is known as the real-world theory of fluctuations. According to this theory, when a technological innovation occurs that allows firms to improve their productivity, they will be more willing to hire more workers. This results in an increase in employment and output, which in turn boosts the economy. On the other hand, if the price of oil rises, firms will use less energy in their production processes, resulting in lower employment and output.
Recently, some scholars have pointed to the foreign sector as an important factor in explaining a country’s economic fluctuations. They believe that as countries around the world become more economically interconnected, their economic fluctuations are highly correlated with each other, which can lead to international contagion. For example, in situations such as the global financial crisis, economic unrest that begins in one country can quickly spread to other countries, which can have a significant impact on the global economy as a whole.
Therefore, it is important to consider both international and Korea factors in understanding and predicting economic fluctuations, and governments and companies should try to minimize the impact of economic fluctuations by analyzing these complex factors and preparing for them. In the modern world, where economies are complex and interdependent, effectively managing economic fluctuations is essential for economic stability and sustainable growth.
