[Public Lecture Notes] Economics #8 Economic Growth and Business Cycles

Hello everyone.
Last time, we learned about the mechanism of GDP, which represents the "total earnings of a country," and the "limitations of GDP," such as housework and environmental destruction, which cannot be seen from that figure. As I mentioned at the end, today we will start by exposing "a major gimmick" hidden in those GDP numbers.
Today's theme is "Economic Growth and Business Fluctuations." We will get to the heart of inflation and deflation, which we hear about in the news almost every day, as well as the true nature of the waves we call "good or bad economic conditions."
At the start of class, let's consider this question that directly affects your wallets.
"Suppose your allowance has doubled from '5,000 yen a month' to '10,000 yen a month' starting this year. You would be incredibly happy just looking at that, right.
But, what if the prices of everything in the world (McDonald's hamburgers, convenience store drinks, smartphone bills, etc.) had simultaneously increased by 'three times'...? Can you say your life has become richer than it was before your allowance increased? Or has it become poorer?'
Even if the amount of money doubles, if the price of goods triples, the amount of things you can buy actually decreases.
In other words, the correct answer is that 'life has become poorer' than before.
By taking today's class, you will perfectly understand the economic biorhythms (our current position) that toy with our lives, such as "why life sometimes doesn't get easier even if wages rise" and "why the economy repeats cycles of improvement and deterioration."
Once you understand this, economic news will feel as familiar to you as a variety show.

1. "Nominal" and "Real": See through the price gimmick!
To measure the economy correctly, we cannot ignore the movements of prices, which are the average value of the prices of goods.
Here, let's simply organize the difference between nominal economic growth rate and real economic growth rate, which was also mentioned in the preview last time.
Suppose a country produced and sold ten "100-yen hamburgers" in one year.
The GDP for this year is "100 yen x 10 = 1,000 yen."
The following year, hamburgers increased in price to "200 yen." However, the number sold was the same "10." The GDP for this year becomes "200 yen x 10 = 2,000 yen."

• Nominal economic growth rate: A growth rate that compares the monetary amounts as they are. Since it went from 1,000 yen to 2,000 yen, a "twofold (100% increase)," it looks like it has grown significantly when viewed in nominal terms.

• Real economic growth rate: A growth rate that removes the influence of price fluctuations and compares purely by the "amount of goods produced." Since they produced "10" in both years, the economy has actually not grown by even a millimeter (0% growth rate).

• Tips for the Common Test:

In the Common Test, the difference between these two is frequently asked in data reading questions.
Whether or not you can have the perspective that "just because nominal GDP is increasing, it does not necessarily mean the citizens have become wealthier (prices might have just risen)" is a major point that will determine your score!

2. Inflation and Deflation: Impact on our lives
The phenomenon where prices continue to rise like this is called inflation, and conversely, the phenomenon where they continue to fall is called deflation.
Some people might think, "Isn't deflation, where things get cheaper, happier because it's easier to shop?" Actually, there is a trap here that modern Japan has suffered from for many years.Let's clearly organize the impact of inflation and deflation on our lives in a table.

*Note: In a mild inflation that occurs while the economy is expanding, corporate performance and everyone's wages tend to rise. However, be careful during inflation that occurs when the economy is not good but only the prices of raw materials skyrocket (cost-push inflation), as both companies and households will suffer.
When deflation occurs, shopping seems easier at first glance, but because corporate sales decrease, it eventually leads to your parents' wages or bonuses being cut, or future employment opportunities being reduced.
This triggers a terrifying vicious cycle (deflationary spiral) where "prices fall -> corporate profits decrease -> wages fall -> everyone refrains from shopping -> prices fall further."

3. Why does the economy grow? The power of innovation
So, once we strip away the gimmick of price levels, what is actually needed for a country to become truly wealthy (for the real economic growth rate to be positive)?
Simply continuing to produce the same things in the same way will eventually lead to a halt in market expansion (an increase in the number of buyers or regions), and economic growth will hit a ceiling.
This is where the genius Austrian economist Schumpeter enters the picture.
He argued that the driving force behind significant economic growth is the combination of new technologies and ideas, known as technological innovation, also known as new combinations.
Think about the 'smartphone' you use every day. How have our lives and the businesses around us changed before and after its creation?
With the emergence of this one technological innovation, not only did traditional feature phones disappear, but as digital cameras, map books, and watches became less popular, entirely new markets such as app development, video streaming, and social media marketing expanded rapidly.
Schumpeter called this process of the economy evolving dramatically as old things are dynamically destroyed and replaced by new ones creative destruction.
This is the true engine of economic growth.

4. The economy goes around: Four stages and the business cycle
Finally, let's learn about the 'business waves' that cause us to experience ups and downs in real-time.
Changes in the momentum of overall economic activity are called business fluctuations (or business cycles), and just like the four seasons, the economy cycles through four phases: boom → recession → slump → recovery.

• Boom: A state where goods sell well, corporate profits increase, everyone's wages rise, and the world as a whole is in a bright state.

• Recession: A state where shadows begin to appear in sales, and the momentum of the economy begins to slow down.

• Slump: A difficult state where goods do not sell, unsold inventory piles up, and corporate bankruptcies and unemployment increase.

• Recovery: A state where companies finish clearing inventory, new capital investment begins, and the economy gradually starts to improve.

A panic state where a slump becomes extremely severe, stock prices crash, and banks and large companies go bankrupt one after another is called a depression.
The 'Great Depression' of 1929, which you learn about in history class, is a prime example. This Great Depression had an extremely large impact on Japan, and it leads directly to the tense political and social movements of the early Showa period that you will learn about in detail in your 'History General' class later.

• Modern Trends (Current Status):

You might be wondering, "So, which of the four stages are we in right now?" In modern economics, the government and the central bank (Bank of Japan) work behind the scenes to apply the brakes or step on the gas to keep the amplitude of these waves as small as possible, preventing the economy from getting too bad or becoming so overheated that inflation goes unchecked (we will cover this in detail in the later unit on "Fiscal and Monetary Policy"!).

In modern economics, it is believed that these economic waves (business cycles) consist of "four waves with different cycles (lengths)." This is a very common target for questions on the Common Test regarding "who discovered which wave," so let's clear that up here!

The "Four Waves" that drive the economy
Economic waves range from short ones lasting a few years to ultra-long spans lasting several decades, depending on their causes. I will introduce them in order of shortest cycle to longest.
1. Kitchin Wave (Cycle: approx. 3-4 years)

• Cause: Corporate "inventory" adjustments

• How to remember: This is the shortest wave. It is a familiar mini-cycle created by companies adjusting their production, such as "we made too much, so let's cut production" or "inventory is low, so let's make more."

2. Juglar Wave (Cycle: approx. 7-10 years)

• Cause: Corporate "capital investment"

• How to remember: This is the true nature of what is called the "main business cycle" in economics. It is a wave that occurs in line with the timing of companies building factories or introducing new large-scale machinery all at once (the replacement cycle of about every 10 years).

3. Kuznets Wave (Cycle: approx. 20 years)

• Cause: "Construction investment" such as rebuilding

• How to remember: Buildings like houses, offices, and factories generally reach a stage for large-scale renovation or rebuilding about every 20 years. This is a slightly longer wave created by this cycle of "construction rushes."

4. Kondratiev Wave (Cycle: approx. 50-60 years)

• Cause: "Technological innovation" that fundamentally changes society

• How to remember: This super-massive wave that occurs roughly once every half-century is most deeply connected to the theory of Schumpeter mentioned earlier. Every time a massive technological innovation occurs—such as the invention of the steam engine, the opening of railways, the development of electricity and chemistry, or the spread of the internet—the entire global economy grows in a massive, 50-year-scale swell.

Common Test Preparation: Mnemonic Device In order of shortest cycle, let's memorize them like a spell using the first characters of the names: 'Ki-Ju-Ku-Ko'!

• Ki (Kitchin = 3 years, inventory)

• Ju (Juglar = 10 years, equipment)

• Ku (Kuznets = 20 years, construction)

• Ko (Kondratiev = 50 years, innovation)

On tests, trick questions that shuffle the names and causes—such as 'The cause of the Kitchin wave is equipment investment'—are standard, so if you master these combinations, you'll be perfect!

Today's 'Current Location' and Summary
Let's organize the current location of today's lecture. We tend to get caught up in the ups and downs of 'monetary (nominal)' amounts, but what is truly important is 'real' prosperity, which is determined by identifying the movements of
prices. And what drives that prosperity upward in every era is the technological innovation (innovation) that Schumpeter spoke of. We are required to have the ability to calmly identify which phase we are in without being swayed by the waves of the economy (business cycles). Important points for Common Test preparation!

1. Values that include price fluctuations as they are are called 'nominal,' while those that remove the effects of price fluctuations are called 'real' (the basics of data problems on the Common Test!).

2. When prices continue to rise, it is inflation, and when they continue to fall, it is deflation. Deflation carries the risk of triggering a vicious cycle of falling wages.

3. The essential driving force of economic growth is the 'new combination' advocated by Schumpeter, which is new combinations, or in other words, technological innovation (innovation).

4. The economy loops through four phases: expansion, contraction, recession, and recovery (known as the business cycle), and a severe recessionary panic is called a depression.

When you see a news report stating that the "real economic growth rate is positive," if you can realize, "Ah, the actual volume of Japanese production has increased without being fooled by the magic trick of price fluctuations," then the knowledge from today's lesson is completely yours!
That is all for today's lesson. Thank you for your hard work!