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countries’ wealth in around three decades。 China and India； whose growth
rate routinely exceeds 8 per cent； will see average wealth double in less
than one decade。 All other things being equal； panies looking to set up
overseas will head for the countries with rapid growth in GDP。
Gross domestic product per person
Measuring a country’s total GDP misses an important consideration – the
population。 If the growth in both GDP and population were uniform there
would be no problem； but that is not the case。 Britain’s country GDP grew
at 2。75 per cent between 2003 and 2007； but as the population grew sharply
too； GDP per person grew at a rather slower 2。1 per cent。 Japan with its
shrinking population also grew its GDP per head by 2。1 per cent； matching
that of Britain and beating the United States whose growth measured in
this way was only 1。9 per cent as opposed to the 2。9 per cent the United
States reported for the economy as a whole。
Economics 201
Gross domestic product at purchasing power
parity （PPP）
GDP； usually referred to as nominal GDP； is arrived at by the simple process
of adding up expenditure and does not reflect differences in the cost of
living in different countries or the currency exchange rate prevailing at the
time。 The same amount of GDP； in other words； can buy a lot more goods
and services in one country than another。 China’s GDP per person is about
￡1；000 nominal but ￡3；500 at PPP。 Calculating PPP is fraught with problems
as people buy very different baskets of goods and services。 One way round
the imperfections is to produce light…hearted a。。empts at showing PPP using
an external product mon to most countries。 The Economist has published
a Big Mac Index （BMI） since 1986； with a few variations such the Tall La。。e
index and a Coca…Cola map that showed the inverse relationship between
the amount of Cola consumed per capita in a country and the general
standard of health。 In 2007； monwealth Securities； an Australian bank；
created the iPod Index with much the same aim of calculating a proxy for
PPP on a country…by…country basis。
BUSINESS CYCLES
Economies tend to follow a cyclical pa。。ern that moves from boom； when
demand is strong； to slump； economists’ shorthand for a downturn。 The
death of the cycle has o。。en been claimed as politicians believe they have
bee be。。er managers of demand； but the ‘this time it’s different’ school
of thinking have been proved wrong time and time again。
The cycle itself is caused by the collective behaviour of billions of people
– the unfathomable ‘animal spirits’ of businesses and households。 Maynard
Keynes （see above） explained animal spirits as： ‘Most； probably； of our
decisions to do something positive； the full consequences of which will
be drawn out over many days to e； can only be taken as the result of
animal spirits – a spontaneous urge to action rather than inaction； and not
as the oute of a weighted average of quantitative benefits multiplied by
quantitative probabilities。’
Added to the urge to act is the equally inevitable herd…like behaviour that
leads to excessive optimism and pessimism。 Charles Mackay （Extraordinary
Popular Delusions and the Madness of Crowds）； Joseph De La Vega （Confusión
de Confusiones） and the more recent Irrational Exuberance 2nd edition （Robert
J Shiller） between them provide a prehensive insight into the capacity
for collective overreaction。 From the tulip mania in 17th…century Holland
and the South Sea Bubble （1711–20） to the internet bubble in 1999 and the
collapse in US real estate in 2008； the story behind each bubble has been
unfortably familiar。 Strong market demand for some modity （gold；
202 The Thirty…Day MBA
copper； oil）； currency； property or type of share leads the general public
to believe that the trend cannot end。 Over…optimism leads the public at
large to overextend itself in acquiring the object of the mania； while lenders
fall over each other to fan the flames。 Finally； either the money runs out or
groups of investors bee cautious。 Fear turns to panic selling； so creating
a vicious downward spiral that can take years to recover from。
Categories of cycle
Economics is the science； in so far as it can be considered one； of the indistinctly
knowable rather than the exactly predictable。 Though all cycles； even
the one you are in； are difficult to understand or predict with much accuracy；
there are discernible pa。。erns and some distinctive characteristics。
Figure 7。2 shows an elegant curve； which depicts the theoretical textbook
cycle。
Figure 7。2 Textbook economic cycle
Four phases typically occur in each textbook cycle：
。 U1； where demand is picking up and toeing the line of the long…term
trend；
。 U2； where demand exceeds the long…term trend；
。 D1； where demand dips down to hit the long…term trend；
。 D2； where demand slumps below the long…term trend。
Boom
Boom
Slump
Slump
Log scale
D2
D1
U1
U2
10
5
3
2
1
0。5
0。3
GDP
D1； （D2） Down phases above （below） trend
U1； （U2） Up phases below （above） trend
Trend
Economics 203
To make things more plicated； there is not one cycle but at least four
that operate； each with different characteristics yet interacting one with the
others。
Kondratieff’s long waves
Kondratieff （kwaves/kond_overview。htm）； a Soviet economist；
who fell out with Russia’s Marxist leaders and died in one of Stalin’s prisons；
advanced the theory that the advent of capitalism had created long…wave
economic cycles lasting around 50 years。 His theories received a boost
when the great depression （1929–33） hit world economies and resonated in
Britain in 1980–81 when factory closures； high unemployment and crippling
inflation devastated the country。 The idea of a long wave is supported by
evidence that major enabling technologies； from the first printing press
to the internet； take 50 years to yield full value； before themselves being
overtaken。
Kuznet’s cycle
American economist Simon Kuznet； a Nobel Laureate （1971） working in
the University of Pennsylvania； made a lifelong study of economic cycles。
He identified a cycle of 15–25 years’ duration covering the period it takes to
acquire land； get the necessary permissions； build property and sell。 Also
known as the building cycle； this has credibility as so much of economic
life is influenced by property and the related purchases of furniture and
associated professional charges； for example for lawyers； architects and
surveyors。
Juglar cycle
Clement Juglar； a French economist； studied the rise and fall in interest
rates and prices in the 1860s； observing boom and bust waves of 9 to 11
years going through four phases in each cycle： prosperity； where investors
piled into new and exciting ventures； crisis； when business failures started
to rise； liquidation； when investors pull out of markets； and recession； when
the consequences of these failures begin to be felt in the wider economy in
terms of job losses and reduced consumption。
Kitchin cycle
In 1923； Joseph Kitchin published in the Harvard University Press an
article entitled ‘Review of Economic Statistics；’ outlining his discovery
of a 40…month cycle resulting from a study of US and UK statistics from
1890 to 1922。 He observed a natural cyclical path caused； he believed； by
movements in inventories。 When demand appears to be stronger than it
really is； panies build and carry too much inventory； leading people
to overestimate likely future growth。 When that higher growth fails to
204 The Thirty…Day MBA
materialize； inventories are reduced； o。。en sharply； so inflicting a ‘boom；
bust’ pressure on the economy。
Monitoring cycles
The National Bureau of Economic Research （nber/cycles。htm）
provides a history of all US business cycle expansions and contractions
since 1854。 The Foundation for the Study of Cycles （h。。p：//foundationfort
hestudyofcycles）； an international research and educational institution
established in 1941 by Harvard economist Edward R Dewey； provides a
detailed explanation of different cycles。 The Centre for Growth and Business
Cycle Research based at the School of Social Sciences； The University of
Manchester （socialsciences。manchester。ac。uk/cgbcr）； provides details
of current research； recent publications and downloadable discussion
papers on all aspects of business cycles。
Robert Wright； a former mercial pilot； started his first business；
Connectair； while on the MBA programme at Cranfield。 His aim was to
start a small feeder airline bringing passengers into the main UK airport
hubs such as Heathrow and Gatwick； where they would connect
with the major carriers’ flights。 He started out at the tail…end of the UK
recession in 1982； so to keep costs low； as well as being the MD he was
at times the pilot； steward and baggage handler as well as greeting
passengers at check…in。
Over the next few years he built the business up to the point where it
employed 60 people and made a modest profit。 He sold it at the height
of the Lawson boom in 1989 to Harry Goodman’s International Leisure
Group； which collapsed spectacularly in the 1991 economic downturn；
leaving crippling debts and thousands of people without jobs。
Wright bought the pany back for a nominal ￡1； financing working
capital with backing from 3i； the venture capital firm。 Over the next 8
years he and his team built the business up； now renamed City Flyer
Express； selling out in 1999； just ahead of the dot stock market
collapse； to British Airways for ￡75 million。
INFLATION
Inflation is defined as too much money chasing too few goods and if it
gets out of control it can devastate an economy。 Not all goods and services
have to experience price increases。 The inflation rate itself is measured
by defining a basket of goods and services used by a ‘typical’ consumer
Economics 205
and then keeping track of the cost of that basket using such indices as the
retail price index。 During the upswing stage of a business cycle there is a
tendency to overshoot； which can lead to the economy ‘overheating’。 As
there is usually a lag while production struggles to catch up with demand；
prices rise to ‘ration’ goods and services。 Inflation is generally seen being a
problem for a number of reasons：
。 ‘Inflation makes fools of us all’ is a truism about the misleading signals
sent by rapid changes in price。 Consumers and businesses like certainty；
and fluctuating rates of inflation make planning more difficult； which
in turns leads to a loss of confidence。
。 Inflation redistributes wealth in a haphazard and o。。en unfair manner。
For example； savers will find their purchasing power diminish as
their fixed sum saved will buy fewer goods and services in the future。
Borrowers will benefit as they are effectively paying back a capital sum
that is being eroded in value by inflation。
。 If the inflation rate is greater than that of other countries； domestic
products bee less petitive； so exports will be reduced and economic
growth will slow。
。 High inflation can lead to high wage demands； which can in turn lead
to an upward spiral in costs and so feed further inflationary pressures。
Current economic wisdom has it that a modest degree of inflation is healthy
provided that everyone knows what it will be and can factor it into their
decision making。 That is why central banks have as one of their functions
monitoring inflation rates and taking action to keep below a certain figure
– in the UK this is 2 per cent。 Three further aspects of inflation that need to
be considered are：
。 Deflation is the opposite of inflation and occurs when the general level
of prices is falling。 This can occur a。。er a major bubble collapses and
will lead to people pu。。ing off purchasing decisions in the expectation
of being able to buy later at even lower prices。
。 Hyperinflation is unusually rapid self…feeding inflation； in extreme
cases； this can lead to the collapse of a country’s monetary system。 This
occurred in Germany in 1923； when prices rose 2；500％ in one month
and in Zimbabwe in April 2008 when the annual inflation rate hit
165；000％。
。 Stagflation is the bination of high economic stagnation with inflation；
such as happened in industrialized countries during the 1970s；
when OPEC raised oil prices。
206 The Thirty…Day MBA
INTEREST RATES
Around half the money used to finance businesses is borrowed and private
individuals use mortgages； hire purchase and credit cards to fund many
of their purchases。 Governments too have to use debt through the sale of
bonds； when taxes are insufficient to meet their spending plans。 The ‘price’
of borrowed money is the interest paid。 Governments can stimulate both
business and consumer expenditure by lowering interest rates or choke off
demand （see ‘Micro vs macroeconomics’； above） by raising it。 Interest rates
are the favourite tool of central banks to control inflation as it can be used
to bring supply and demand back into balance。
Interest rates also have a direct bearing on a country’s exchange rate。 If
it is higher than that in othe