The economy is always changing, but it is not easy to know exactly when it is improving and when it is declining. We will look at the key factors that determine economic growth and stagnation, and examine the causes and effects of economic fluctuations.
When is the economy good and when is it bad?
If you watch the news or look around, the economy always seems to be in trouble. It is hard to hear that the economy is doing well, and there are only a lot of people saying that the economy is in crisis. But if you think about it, it is not true that the economy is always in a crisis. It is only when it is good for a while and then gets worse that it is a crisis. So when is the economy good and when is it bad?
Focus on the rate of economic growth!
In fact, there is a standard by which to judge this. It is the GDP. GDP is the economic power of a country, so if GDP is falling, you can say that the economy has deteriorated. Of course, GDP is a general statistic for the country, so even if my economic situation is bad, the national economy may be good, and both my economic situation and the national economy may be bad. However, if you know GDP properly, you can distinguish between the two cases.
Let’s take a closer look. First, we need to look at the inflation rate. GDP is the sum of production calculated at market value, so if the price of the same product doubles, GDP will double even if the production volume remains the same. However, this is not the true meaning of the size of the national economy. Therefore, the newly obtained GDP is called “real GDP” by excluding the part of the price increase. This real GDP is a standard for measuring the health of an economy.
Many countries, including Korea, release quarterly statistics, which are statistics for three months. Looking at the movements of real GDP, most of them continue to rise. However, at some point, they rise a little more, and at some point, the upward trend is broken, and they rise or fall a little less than usual. So, based on this real GDP, we can calculate the economic growth rate every year or every quarter. And this economic growth rate is the measure of whether the economy is good or bad. If the economic growth rate is higher than the usual level, the economy is good, and if it rises or falls slightly from the usual level, the economy is not good.
When the economy is doing well, production is active, so income increases, consumption is active, employment increases, and finding a job becomes easier. Conversely, when the economy is doing poorly, production and income fall, consumption shrinks, employment falls, and finding a job becomes difficult. In 2020, Korea’s economic growth rate turned negative by 0.7 percent compared to the previous year, which can be said to be a sign that the economy was doing poorly. As COVID-19 spread around the world, other countries experienced lower economic growth than South Korea. In the fourth quarter of 2022, from October to December, the economy recorded a negative 0.4 percent year-on-year compared to the July-September period. The economy was not doing well on an annual basis, but on a quarterly basis.
On the other hand, if we look at the changes in GDP per capita in the United States, we can see that although the growth rate is relatively high, there are periodic declines. For example, the economic downturn caused by the oil shock in the 1970s and 1980s, the economic crisis caused by the subprime mortgage crisis in the late 2000s, and the COVID-19 shock in 2020 all correspond to official economic downturns.
When the economy is in bad shape, it can be divided into two types. One is when it is gradually getting worse in the short run, and the other is when the long-term trend is getting worse. When the economy is in bad shape in the short term, it is when it is getting worse than the trend of about 10 years, and the trend itself may continue to get worse. It is difficult to judge the long-term movement of GDP because it takes several years to show up, but it can be understood to some extent by comparing the GDP of different countries. Some countries have a relatively steady increase in GDP, while others have a slow increase in GDP.
The issue of the long-term trend of GDP is called the “economic growth issue”, and the slowdown in economic growth itself is called the “low-growth issue”. On the other hand, the short-term movement of GDP is called “the problem of economic fluctuations”, and when GDP temporarily falls due to economic fluctuations, it is called “recession” or “economic contraction”. A recession officially refers to a period of two or more quarters of declining GDP.
The problems of recession and low growth are related but distinct. They are different in many ways, but especially in their solutions. To solve the economic downturn, central banks should lower interest rates and the government should increase spending through supplementary budgets and other measures to achieve a short-term economic recovery. In contrast, solving the problem of low growth requires a range of efforts, including business investment, innovation efforts by entrepreneurs, improvements in the education system, investment in promising industries and science and technology, appropriate restructuring, international trade, and improvements in inequality.
Because economic downturns are short-term problems, the effects of solutions are also relatively quick. However, the problem of low growth is a long-term problem, and the effects of solutions are slow. In particular, when there is a severe case of low growth, it is important to be cautious about lowering interest rates or increasing government spending, as this may have little effect on the economy or may even have negative effects.
What is an economic crisis?
Although the definition of an economic crisis varies slightly from person to person, most would agree that an economic crisis is when a serious problem arises in the economy, such as the Korean currency crisis in 1997 and the US subprime mortgage crisis in 2007. In any case, when a currency or financial crisis occurs, the economy often deteriorates rapidly and can even lead to a national default.
To prevent this, governments must properly manage financial markets, efficiently manage foreign exchange reserves, and strive to maintain high sovereign credit ratings. The overall strength and growth of the national economy is also related to the prevention of economic crises, as the management of foreign exchange and financial systems is more closely related to the problem of low growth or recession than to the problem of low growth or recession.
Thus, low growth, economic recession, currency crisis, and financial crisis all involve a process in which GDP declines or its upward trend is interrupted. However, if you look closely, the short-term and long-term trends of GDP differ in their degree of change, and most importantly, the background and causes of these problems are different, so there are differences in preventive measures and solutions. This is similar to how it is difficult to know what treatment to take just because you are sick. If your GDP is low, you are sick, but it is difficult to find the right treatment. The problem of low growth is similar to poor physical fitness or being overweight, so you just need to eat well and exercise regularly. However, if you have various illnesses such as a cold or hepatitis, you should find out the exact cause and treat it accordingly. A currency or financial crisis can be compared to an emergency situation such as a traffic accident or a brain hemorrhage.
Therefore, it is not good to overuse the term economic crisis. This word alone does not give enough answers about how to solve the problem and what measures are important and should be prioritized. And if this word is used frequently, the public will take the word economic crisis lightly, and it will be difficult to convince the public and get them to participate in overcoming the crisis when an urgent and huge crisis really occurs.
