Economies are getting increasingly interconnected, technology-driven, and complex. With the growing interdependence and collaboration among various economic factors, there can be several reasons for economic fluctuations. The reasons for variations can be demand-side constraints, supply-side irregularities, external and foreign elements, natural events, technological breakthroughs, etc. Hence the analysis of reasons for economic fluctuations should be done in a broader perspective and a macroeconomic manner.
As we know that demand-side constraints have a propounding and immediate impact on the economy. Any change in demand-side variables will lead to economic fluctuations. Some of the critical demand-side reasons for economic fluctuations are as follows:
· Fiscal spending and budgetary regulations
The government is at the helm of managing economic activity, and as such, any fiscal and monetary fluctuations by the top brass can lead to economic changes. The government's ability to control the economy and implement policies are of the critical reasons for economic fluctuations.
Moreover, since the government decides the tax level for corporations and individuals, it directly says purchasing and spending power in the economy. In essence, the government plays a pivotal role in deciding the real disposable income with the masses. Hence by changing tax levels and providing subsidies, government fiscal and monetary policy are essential reasons for economic fluctuations.
· Banking sector and economic cycle moderation
The banking sector serves a guardian of natural populations deposit and hence provides them with an opportunity to earn passive income. On the other hand, it lends to the corporate sector, enabling them to be more productive and kickstart economic activities.
Hence, the banks' ability to align their lending and borrowing activities win sync with the country's economic environment is one of the factors that influence economic fluctuations. If the banks turn greedy and start lending indiscriminately, it may lead to inflation and bad loans in the long term. On the other hand, if the banks become overly cautious and stop lending and thus reduce the deposit rates, this might lead to erosion of wealth, leading to massive swings in the economy.
The banking sector's products and services play a pivotal role in determining the fate of the economy over the long run. Hence the policies, activities, and performance of the economy. Therefore, the banking sector's performance, balance sheets, and approach is one of the most significant factors for fluctuations in the marketplace.
Supply has to be in sync with the demand to ensure smooth economic progress. However, when the same does not happen, it leads to economic fluctuations. Some of the supply side reasons for economic changes are as follows:
· Availability and longevity of factors of production
The availability, interaction, and application of production factors is the main reason for fluctuations in the economy. The elements of production, namely land, labor, capital, and human resource, if not available in the right quantity and competitive rates, can hamper production or push the input cost of production. This would either make the goods costlier or scarcer, thus affecting demand.
In essence, demand-side constraints can also impact the demand for any product or service. This would hence drive economic fluctuations as the lack of goods and services would lead to capital outflow. Moreover, since supply-side factors take time to align, any changes in the factors mentioned above can lead to long term economic fluctuations.
· Human capital and infrastructural support
Human capital and the skillset of the working class plays a significant role in economic fluctuations. As technology plays in crucial in determining the fate of the economy, an abundance of qualitative human capital can lead to technological innovation. This technological innovation can then drive the production of better goods and services at cheaper rates or open up new sectors.
In many cases, technological leaps have helped economies increase their bargaining power and usher in an era of economic development. Hence the availability of the right set of people to drive innovation is one of the critical factors for economic fluctuations. In a similar vein, physical infrastructure and logistics support also plays a crucial role in economic fluctuations. The initial state of infrastructure might lead to dampened production and cause financial volatility.
With economies, getting interconnected, any economic fluctuation in one part of the globe is bound to resonate in other sectors. The external factors can push up the cost of imports hence leading to currency fluctuations, thus leading to profound economic volatility. Moreover, with certain commodities not being available due to lack of imports, the cist pf production of certain goods and services might go down, thus leading to fluctuations in the domestic economy.
On the other hand, external factors can also lead to fluctuation in exports, thus reducing the country's economic wealth. External factors play a pivotal role in determining global import and export and impacting imports and exports in a particular country.
This leads to fluctuation in the exchange rates, change in prices of the imported and exported commodity, variation in the interconnected supply chain, change in government policies, and spending in the long run and plethora of other factors. The culmination of all these driven by changes in the external environment is one of the critical reasons for economic fluctuations.
Natural events can dramatically change the economic landscape. Regular monsoons can lead to a bumper economic output, thus driving agricultural productivity leading to economic growth. On the other hand, lack of timely rains can lead to famine or floods, thus having a devastating impact.
Moreover, natural factors like the availability of raw materials, favorable geography, along the sea coast, etc., play a pivotal role in ins having the policy's economic outcomes. Hence natural events like a monsoon, deposits of mineral and metal ores, availability of fertile land, etc., are among the critical reasons for economic fluctuations.
Hence economic fluctuations can be due to several factors. This demands higher analysis and scrutiny while evaluating the reasons for economic changes.
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