A business cycle refers to the state of an economy. When times are good, production and consumption are stimulated, employment is high, and welfare increases. In a bad economy, production and consumption contract, unemployment increases, and welfare decreases.

 

If you’re curious about the business cycle, check what people around you are spending!

A business cycle can be understood as the state of an economy. More important than thinking about what the definition of a business cycle is, it’s important to try to express what you mean when you say “good times” and “bad times”. A good business cycle means that people around you are spending more, and a bad business cycle means that people around you are closing their wallets. To extend this a bit further, a good business cycle means that the owner of the restaurant I’m going to is doing well. This is because people with more money to spend are more likely to go to the restaurant and buy food. If the restaurant owner is making more money, the people who supply them will naturally make more money. So far, you’ve gotten a sense of what a good business cycle means to households and self-employed people.
Let’s broaden the scope. Many of the ingredients used in restaurants are domestic, such as rice, but many livestock and seafood are foreign. Meat, in particular, is so foreign that it is emphasized separately from domestic products. It’s unlikely that foreign livestock farmers would sell meat directly to restaurants in Korea.
Who is the middleman between them? In other words, the more you and the people around you spend, the more the importer or importer’s revenue increases. Notice the subtle difference in wording from the case of households and self-employed people: I said “increase sales” instead of “make more money”. As a business, you can now say “the business cycle is good”.

 

If my paycheck grows, so does the government?

Let’s switch things up a bit. Imagine you’re a regular employee. Your salary is fixed. However, the paycheck that arrives in your bank account each month is less than one-twelfth of your annual salary. There are a lot of concepts and terms to explain exactly what this means, but in a nutshell, the government has taken a cut. The money the government takes out of your paycheck is taxes. Technically, social security payments like pensions don’t count as taxes, but for the sake of argument, let’s just lump them together as “money taken by the government = taxes”. The government takes taxes not only from employees, but also from self-employed people and businesses. The more money you make, the more taxes you pay. So when people earn more, “the government gets more tax revenue”.
To recap: when the business cycle is good, individuals spend more, restaurant owners make more money, importers make more money, and government revenues increase. But where did individuals get the money to spend more? The individual could be a restaurant owner who makes more money, or an employee of an importer who makes more sales. A government that collects more taxes is able to provide more welfare. It fixes bad roads, adds more elevators to train stations, and increases funding for the disadvantaged. As a result, people are happier and more generous to each other.
Now imagine the opposite situation. What happens when the business cycle turns bad? First of all, people’s wallets close. They’ll eat out less, which means less revenue for restaurant owners, and less revenue for restaurants, which means fewer food orders. This means less sales for livestock importers. Fewer sales means higher inventory management costs and lower revenue. The government also has to collect less taxes. When individuals don’t spend money, self-employed people and businesses spend less, hire fewer people, and delay investments in facilities. With less tax revenue, governments reduce or stop spending on non-essentials. So when the business cycle turns bad, people’s faces harden and they turn on each other.

 

Numbers are more persuasive when describing the business cycle

The meaning of “good business cycle” and “bad business cycle” can be interpreted in different ways. To make it even easier, imagine that we are all sitting around a table sharing a loaf of bread. A “good business cycle” means that the size of the loaf has increased, and a “bad business cycle” means that the size of the loaf has decreased. This concept is enough to get by in a market economy.
An improving business cycle is usually expressed in numbers. Numbers have the advantage of being more reliable and comparable. Imagine that you have a crush on someone, and they seem to like you, but when you tell your friends, they say, “You’re mistaken!”. In this case, what can you do to make your friends believe that the other person likes you? Instead of describing your feelings in poetic terms, it’s better to explain them in numbers. The number of meetings or calls you’ve had, the duration or frequency of those meetings, etc. can be a good indicator. The same goes for the economy. It’s much more convincing to talk about “good” and “bad” with some metrics. You’ll also be less likely to rely on uncertainty.

 

The basics of the economy in terms of food

People usually perceive and express the economy in terms of “bread and butter”. We often say “it’s hard to make ends meet” when we’re struggling financially. In everyday life, this is enough, but when watching the news, you need to know a little more. Most news organizations use other expressions instead of “difficulty making ends meet”. One example is GDP. Consider these headlines

 

• Household Debt tops the world as a percentage of GDP in Q1…Corporate Debt Bombs!
• Corporate Debt as a Percentage of GDP Hits Post-Crisis High…Second Fastest Growth Rate After Vietnam!
• Domestic demand averted Q3 contraction…”Q4 -0.6% likely”
• The power of semiconductors…Taiwan to overtake Korea’s GDP per capita this year!

 

In both of the above headlines, we see the phrase “relative to GDP”. You can see that GDP is the benchmark. In the third headline, the GDP is hidden, and in the fourth headline, it’s “per capita”. To find the hidden GDP and interpret the content of the article, we need to understand what GDP means.

GDP = the size of a rice bowl

In layman’s terms, GDP is “the sum of the value added by all economic agents in a country”. A simpler way to put it is “the size of a country’s rice bowl,” i.e., it is the sum of all the output (value added = money = rice) produced within a country’s borders. It doesn’t matter if the value is created by foreigners. It’s the borders that matter, hence the name Gross Domestic Product.
The bigger the rice bowl, the more people can eat enough. If your neighbor’s rice bowl is bigger than yours, chances are they eat more rice than your family. We’ve used the word “bowl,” but it could be the amount of rice or the size of a pie. Because of this intuitive description of the economy, GDP is often used as a proxy for the economic strength of a country.
A country’s well-being is not the same as my well-being. Imagine two countries with the same size rice bowl (same GDP). One country has a population of 10 people, and the other has a population of 100 people. Which country’s people will eat better (live better)? Obviously, the country with 10 people. If the rice bowl is the same size, 10 people can eat more rice than 100 people if they share it. Therefore, while the overall GDP of a country is important for individuals, GDP per capita is also an indicator that cannot be ignored.

GDP = the total value added within a country over a period of time.
GDP per capita = total GDP ÷ number of people in the country

South Korea’s GDP per capita has been rising for a while, but it’s now slowing down. But strangely enough, my pocket is always lighter, whether it’s rising or falling. Why is that? There are many reasons for this, the first of which is the illusionary effect of exchange rates. For example, $30,000 when the exchange rate is 1,000 won to the dollar and $30,000 when it’s 2,000 won to the dollar are completely different values. Another reason is that individuals do not share exactly the same proportion of the overall GDP. It’s like sharing rice in a bowl, some people take one scoop with a rice spatula and some people take one scoop with a teaspoon. The amount of rice that goes into your mouth (your perceived income) is a separate story from the size of your country’s rice bowl. In general, it’s true that rising GDP per capita is a good thing. But sometimes the rise in GDP per capita has nothing to do with me. That’s why you need to read the news carefully.

Economic growth = rice bowl size increase

Economic growth refers to the growth rate of GDP, which in turn shows how much the size of a country’s rice bowl has increased. So, when looking at a country’s economic strength, we usually look at its GDP growth rate (or GDP per capita). There are two ways to look at a country’s economic growth over time: by comparing it to its historical GDP figures, and by comparing it to the GDP figures of other countries at the same time.
I don’t need to explain further why so many countries are obsessed with economic growth rates. It matters to everyone whether our plate is getting bigger, smaller, or no different.

Debt = the amount of food we have to give to others

GDP is the sum of all the new value created in a country. Conversely, if someone in a country has created debt, or liabilities, we need to add that up as well. An increase in GDP is a good thing. If GDP is the size of a rice bowl, then debt is the amount of rice you owe to someone else (the person who lent you the money). Even if I have 100 servings of rice, if I have to give 90 servings to someone else, I only have 10 servings left to eat. This is debt.
Debt is called different names depending on who owes it. If the government owes money, it’s called “government debt” (national debt). This includes both central and local government debt. There is some debate as to whether or not it should include debt owed by other public organizations. If a company owes money, it’s called corporate debt, and if a household owes money, it’s called household debt. The size of this debt is often compared to GDP. If a country has a high GDP but a lot of debt, the business cycle is likely to be bad in the long run. The same is true for companies and households.
To understand the overall business cycle, we need to look at the “offense” and “defense”. The offense is GDP and the defense is debt. If your defense is bad, it’s hard to win no matter how good your offense is. If you’re scoring a lot of goals and your opponent keeps scoring, it’s imperative that your defense is solid. Therefore, to achieve steady economic growth, you need to reduce your debt. The size of debt is just as important as the size of GDP.

 

An economy is a Lego building of blocks called people

Population is essential for economic growth. This is especially true for countries like South Korea. The first reason is that Korea does not produce any major resources (especially crude oil) and has a very weak base for primary industries (agriculture, livestock, fisheries, forestry, etc.) due to its small land area. So it’s no wonder that “people are the resource”. The second reason is the rapidly changing demographics. With a declining birthrate and aging population, the crisis of the “population cliff” (a phenomenon in which the proportion of a country’s population between the ages of 15 and 64 that is of working age is rapidly declining) is becoming a reality. This makes South Korea’s demographic change much more severe than other countries, and so important that it could change the course of the entire economy.
It’s easy to imagine why population matters in the economy and how it affects the economy. But because it’s a human issue, we’re more likely to respond emotionally than with numbers and logic. But there’s not much room for emotion in a money-driven economy, so we need to be a little more dispassionate when looking at population issues to properly evaluate them.
Think of a building made of Lego blocks. There are hundreds or thousands of blocks in a single piece. If we think of a country’s economy as a “great Lego building,” then each person in the population is like a Lego block. To have a basic economy, you need to have the right amount of Lego blocks. To illustrate the relationship between population and economy, we’re going to use Lego.
When we talk about China or India, we call them “mega markets”. That’s because they have more than a billion people. If you’ve been paying attention to the articles that talk about the positive economic growth potential of Southeast Asia, you’ll notice that they all mention the large population of these countries as a driving force for growth. This suggests that the region has tremendous potential, even if it hasn’t reached its full potential yet. If one person has enough LEGO blocks to fill a room and another has only a handful of LEGO blocks, who do you think will be able to build something more spectacular? Obviously, the one with more blocks. That’s why population is the key to understanding a country’s economic growth.

 

• India is headed to 1.6 billion people, making it the third largest economy!
• South Korea’s ‘population cliff’ threatens to sink the country… Signs of loss of growth momentum are evident!
• Musk surprised by Japan “South Korea, world’s fastest population collapse”

 

Looking at these headlines from the same perspective, it becomes clearer why population matters in the economy. Fewer babies being born is a “Lego block shortage” situation. In this case, even if you have a great Lego creation now, it’s harder to build something even better and more colorful (a richer economy). That’s why a falling fertility rate (a shrinking population) weakens the engine of economic growth.

 

Things to keep in mind when building the population block

If there are not enough LEGO blocks, building will be difficult. If the blocks are people, then building means employment. So, can we buy people from elsewhere, just like we buy extra blocks to build the blocks? Yes, we can buy people from elsewhere. We can bring in foreign labor to fill the gap, which can lead to immigration policies and issues with foreign workers. But there are limits to using foreign labor. In the end, the solution is to increase the population. We need to produce LEGO blocks domestically. That’s why the government is strongly promoting policies to increase the birth rate. This is why the Korean government has recently introduced various policies to increase the birth rate.

 

• Discussion on establishing an alternative to the population cliff begins…’Social rejection’ is a challenge!
• Expanding tax and financial support for young people who marry and give birth… Considering improving national pensions!

 

Let’s go one step further than just thinking about the number ‘population = number of heads = number of Lego blocks’. What would happen if you changed the type of Lego blocks that make up the whole building? The whole building would look different. What about the economy? The rise in the number of single-person households means that we’re seeing a huge increase in the number of 1×1 or 1×2 blocks, as opposed to 4×6 blocks. South Korea has seen a surge in single-person households, and the economy has shifted from a three- or four-person family to a one-person household. This is also related to the proliferation of meal-kit foods in supermarkets. The same is true for the downsizing of people’s preferred home sizes and the purchase of products for fewer people. These demographic shifts change the economic structure.
Let’s say you have a large number of old LEGO blocks. LEGO blocks are meant to be put together, and if they’re old and loose, it’s harder to build elaborate creations. You’d be more likely to break your creations, and some blocks would be too damaged to use. This is the problem of aging. If we were to compare an aging society to LEGO, it would be like having a lot of blocks that are in a state of disrepair that makes it difficult to build. In the same vein, we can think of poverty as faded or broken Legos. Like the old blocks, they are unfit for use in your creations. If you were a Lego block, you could just pick out the old and broken ones and buy new ones, but you can’t do that with people. So aging becomes a problem that a country has to deal with.

 

Aging↑ / Birth rate↓ ⇨ Productive population↓ ⇨ Production rate↓ ⇨ Foreign workers↑ ⇨ Discontent of the domestic class competing with foreign workers↑ ⇨ Social problems arise

 

Of course, it’s not appropriate to compare people to Lego. Nevertheless, it’s a good analogy because when it comes to thinking about solutions to economic problems, it’s best to look at them from a distance. One final point: it’s not just about the Lego blocks and what you can build with them, but also about whether the people who will use them are useful or not. Even if that person claims to be healthy.