Tiểu luận môn kinh tế học cho người ra quyết định kinh doanh đề bài business cycle in vn what are the impacts of business cycle on investments in vn

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KINH TẾ HỌC CHO NGƯỜI RA QUYẾT ĐỊNH KINH DOANH

ĐỀ BÀI: Business cycle in VN What are the impacts of business

Table of Contents

I Overview of the business cycle 3

1 Definition of business cycle 3

2 Phases of business cycle 4

5.Other external causes 8

4 How does the business cycle impact investment? 8

1.Employment rate and production/output 8

2 Vietnam's economic cycle from 2007 to 2019 15

2.1 Vietnam's economy before the financial crisis (2007-2008) 15

2.2 Impact of the global financial crisis (2008-2011) 17

2.3 Situation of development investment and financial investment in

III What we should do? 30

1 On the Government’s part 30

2 On the investors’ part 32

I.Overview of the business cycle

1 Definition of business cycle

● Business cycles are marked by the alternation of the phases of expansion and contraction in aggregate economic activity and the co-movement among economic variables in each phase of the cycle

● Business cycles are composed of concerted cyclical upswings and downswings in the broad measures of economic activity—output, employment, income, and sales.

● The alternating phases of the business cycle are expansions and contractions.

● Contractions often lead to recessions, but the entire phase isn't always a recession.

● Recessions often start at the peak of the business cycle—when an expansion ends—and end at the trough of the business cycle, when the next expansion begins.

● The severity of a recession is measured by the three Ds: depth, diffusion, and duration.

2 Phases of business cycle

There are four phases of the business cycle - Expansion, Peak, Recession, and Trough - offer valuable insights into the cyclical nature of economic activity By understanding these phases, businesses, policymakers, and investors can anticipate changes in the economic landscape and adjust their strategies accordingly.

1 Expansion

During expansion, the economy experiences relatively rapid growth, interest rates tend to be low, and production increases The economic indicators

associated with growth, such as employment and wages, corporate profits and output, aggregate demand, and the supply of goods and services, tend to show sustained uptrends through the expansionary stage The flow of money through the economy remains healthy and the cost of money is cheap However, the increase in the money supply may spur inflation during the economic growth phase.

2 Peak

The peak of a cycle is when growth hits its maximum rate Prices and economic indicators may stabilize for a short period before reversing to the downside Production levels are at their maximum, and employment is typically high However, signs of inflation and resource constraints may start to appear Peak growth typically creates some imbalances in the economy that need to be

corrected As a result, businesses may start to reevaluate their budgets and spending when they believe that the economic cycle has reached its peak

3 Recession

The recession stage starts as soon as expansion ends and economic activity begins to decline It lasts until the GDP returns to the point that marked the beginning of the expansion stage During a recession, demand begins to decline almost immediately, but producers fail to adjust their output until the market has excess supply Positive economic indicators like prices and wages start to fall at this point.

This often occurs after a series of expansion cycles Decreased production, increased unemployment rates, and decreased consumer spending are all key indicators of recession Monetary and fiscal policies are typically implemented to mitigate the negative effects and stimulate recovery.

4 Trough

The trough of the cycle is reached when the economy hits a low point, with supply and demand hitting bottom before recovery The low point in the cycle represents a painful moment for the economy, with a widespread negative impact from stagnating spending and income Economic activity bottoms out, and businesses may experience losses Unemployment rates are typically high, and consumer confidence is low.

The low point provides an opportunity for individuals and businesses to reconfigure their finances in anticipation of a recovery.

Conclusion: Understanding these phases is crucial for businesses,

policymakers, and investors to navigate economic fluctuations effectively

3 Causes of business cycle

1.Changes in demand

Economists argue that changes in the total demand for goods and services in an economy wield significant ìfnluence over economic activities When there is an increase in demand, firms scale up production to meet heightened consumer needs, leading to more output, more jobs, higher income and amplified profits This surge contributes to an economic boom However, an excessive demand can cause prices to go up, creating inflationary pressures Conversely, when demand drops, businesses produce less, leading to fewer jobs and less income, a tough time called a bust If this lasts a long time, it may cause a severe

economic slump, commonly identified as a depression The government should step in to manage these ups and downs by adjusting its spending or taxes to keep the economy stable.

2.Fluctuations in investment

Much like changes in demand, fluctuations in investments are a key factor driving business cycles Investment levels can shift due to factors, such as interest rates, entrepreneurial interest and profit expectations High interest rates can deter borrowing, while low rates stimulate economic activity Positive profit outlooks encourage investment, while uncertainties can hinder it Other factors, including technological advances, government policies, global economic

conditions, and consumer confidence, also shape investment trends Striking a balance between promoting growth and preventing excessive risk-taking is crucial for economic stability Policymakers, businesses, and investors must navigate these factors to anticipate trends and maintain a healthy business cycle.

3.Macroeconomic policies

Macroeconomic policies, encompassing both monetary and fiscal measures, exert significant influence on the phases of a nation's business cycle In the

realm of monetary policies, an expansionary approach seeks to invigorate economic activity This involves actions like lowering interest rates and increasing the money supply to encourage investment and spending Conversely, a contractionary stance, marked by higher interest rates and a reduced money supply, aims to cool down an overheated economy and prevent inflation On the fiscal front, an expansionary fiscal policy involves lowering taxes and increasing government spending to stimulate demand and economic growth during downturns Conversely, a contractionary fiscal policy, with raised taxes and reduced government spending, is employed to control inflation during economic upswings.Policymakers must carefully consider the specific economic context and potential trade-offs when implementing these policies.

4.Supply in money

Fluctuations in the money supply significantly impact economic activity, affecting interest rates, investment, consumption, and overall output and employment levels Expansionary monetary policies, increasing the money supply through measures like lowering interest rates, aim to stimulate economic growth However, an overly rapid increase can lead to inflation On the

contrary, contractionary monetary policies, reducing the money supply, tightening credit, elevate interest rates, and limit spending and investment While effective for controlling inflation, excessive use during economic downturns may worsen recessions or lead to deflationary pressures The business cycle's dynamics are closely tied to changes in the money supply, alongside factors like fiscal policies, technological advancements, consumer confidence, and external shocks The efficacy of monetary policy depends on contextual factors such as financial intermediation, the structure of the financial system, and the credibility of the central bank.

5.Other external causes

Various factors can significantly impact the trajectory of an economy During times of war and unrest, resources are diverted towards producing war-related goods, leading to a decline in income, employment, and economic activity However, post-war reconstruction efforts, such as rebuilding infrastructure, can stimulate economic growth and recovery The introduction of new technologies, like the modern mobile phone, often results in increased investment,

employment opportunities, and higher incomes, providing a boost to the economy Conversely, natural disasters such as floods and droughts can devastate the agricultural sector, causing food shortages, price surges, and reduced demand for capital goods Moreover, uncontrolled population growth can strain an economy if it outpaces economic expansion, leading to diminished savings, reduced investments, and economic slowdowns Recognizing and managing these factors are essential for promoting sustainable economic development and stability.

4 How does the business cycle impact investment?

1.Employment rate and production/output

As the economy expands, businesses generally see an increase in sales or demand for their products They will produce more goods and services to meet this increase in demand As businesses need to produce more goods and

services to meet demand, they need to hire more workers Consequently, the level of unemployment declines.

If there is speculation or rumours about a recession, mass layoffs, rising

unemployment, decreasing output, or other indications, businesses and investors begin to fear a recession and act accordingly Businesses assume defensive tactics, reducing their workforces and budgeting for an environment of falling revenues It is because businesses assume defensive measures and investor confidence falls during contractionary periods Many events occur before those

in an economy are aware they are in a contraction, but the stock market trails what is going on in the economy.

Fewer people in work means less money coming to the government, and

perhaps more going out (in the form of state benefits) Yet unemployment also means less money for people to go out and spend on products/services offered by businesses This means less sales and lower profits, which applies downward pressure to growth and, by extension, company valuations (unwelcome news for shareholders) In an economy with high unemployment, even those with jobs are often less likely to spend money After all, job security seems less certain in such an environment – so people tend to save more in case they come upon hard times Therefore investment could decrease

2.Inflation

Inflation is the annual rate of increase in the price level Inflation decreases during recessions and increases during expansions (recoveries)

During an expansion: As consumers demand more output (goods and services), businesses produce more output to meet this increased demand, but they will eventually reach their productive capacity (their maximum level of supply) There will be more demand for their output than output available This pulls prices up

During a contraction: As consumers demand less, businesses produce less output Some businesses may lower their prices or offer discounts to increase sales This leads to lower inflation or deflation.

As inflation soared, the value of the currency plummeted causing consumers and businesses to lose confidence and less likely to invest This could

potentially lead to recession Moreover, when inflation rises, people tend to save money for daily expenditures rather than use it to invest

3.Interest rate

When people/businesses borrow money from a bank, the bank charges them interest The interest rate is the percentage they are charged Example: Tia wanted to borrow $10,000 from her bank to buy a car If the interest rate was 5% per year and she took one year to repay the loan, she would have to pay back the $10,000 borrowed plus $500 in interest Banks also pay interest to people/businesses who save money with them (although the rates tend to be lower than for borrowers) Example: Eddy deposited $100 he received for this birthday in a savings account at his bank, which paid an interest rate of 2% per year After one year, Eddy had $102 in his account – the $100 saved plus $2 in interest

The Central Bank influences the economy by carrying out ‘monetary policy’ It sets the ‘cash rate’, which influences the interest rates offered by commercial banks to their customers Raising or lowering interest rates can stimulate or dampen economic activity if needed, helping to achieve a low and steady inflation rate.

If the economy is expanding too quickly The Central Bank is likely to raise the cash rate Commercial banks will raise interest rates, making it more expensive to borrow money, and more attractive to save money People will tend to save more and borrow/spend less

If the economy is growing too slowly The Central Bank is likely to lower the cash rate Commercial banks will lower interest rates, making it cheaper to borrow money People will tend to save less and borrow/spend more.

4.Investment behaviour

Business cycles have a material impact on firms' capital investment and that firms' investment outcomes perform differently at different stages of the business cycle.

The data shows that during the recovery phase of the economy, the scale of investment by companies is positively correlated with the macro GDP growth rate at the 1% level It indicates that during the recovery phase of the economy, as the economic growth, companies' investment will increase accordingly, and the scale of investment will expand This indicates that in a gradually improving economy, investors are confident in the market and will therefore choose to increase capital investment to expand the size of their firms.

During a period of high economic expansion, capital investment by firms not only does not increase correspondingly but also shrinks This is because the economic environment has stabilised, national income is above the level of full employment, the stimulating effect of increased demand on business investment has been gradually reduced, and firms prefer to seek stability in a volatile

economy

The regression results under the recessionary phase indicate that the scale of firms' investment is synchronised with the economic contraction and that during the contractionary phase, firms will reduce their business expansion as the economy declines due to the overall poor macroenvironment and their

pessimistic outlook This is demonstrated by the positive correlation between investment level INV and GDP growth at the 1% level.

by dividing the economic cycle into different phases, firms will also choose to expand in the economic recovery phase as the economy grows However,

during the economic expansion phase, due to the uncertainty of economic

fluctuations, companies instead choose to invest more cautiously, and this rapid economic expansion does not give companies much confidence to invest

During the recessionary phase, companies also invest in a gradual slowdown

However the circulation of the economic cycle depends on investment, and the investment decision depends on the entrepreneur's expectations for the future Anticipation is a psychological phenomenon, so it is uncertain When

expectations are optimistic, investment increases and the economy enters recovery and prosperity; when expectations are pessimistic, investment is reduced, and the economy falls into recession and depression This

interpretation of the business cycle is called the theory of mind

Investors flee to investments "known" to preserve capital, demand for expansionary investments falls, and stock prices drop.

It's important to remember that while stock prices tend to fall during economic contractions, the phase does not cause stock prices to fall—fear of a recession causes them to fall.

II Business cycle impacts on investment in Vietnam

1 Before 1990 - 2007

Economic growth and investment opportunities

During the years 1990 - 2007, Vietnam experienced a period of significant economic growth,Great and very important achievements have been obtained Implementing the innovation policy, with a general economic model of building a socialist-oriented market economy , our country has escaped the

socio-economic crisis, creating the necessary premises to move into a new period of development - a period of accelerated industrialization and modernization.

During this period,The annual GDP growth rate reached a stable and high level, the average GDP increase ranged from 4.4% (1986-1990) to 8.4% (2005) This growth has created many investment opportunities in many fields, from

manufacturing to services Specifically, in the early years of the renovation process(1986-1990), our country has successfully implement three development target programs on food and consumer goods including total production value Agriculture increases by an average of 3.8 - 4%/year; Industry increased by an average of 7.4%/year, in thereConsumer goods production increases by 13-14%/year; The value of export turnover increased by 28%/year and especially exported goods production has been restored.And in the following years (from 1990-2007), our country began an important development step of a new period: promoting industrialization and modernization of the country Despite being affected by the regional financial and economic crisis (period 1997 - 1999) and serious natural disasters occurring consecutively, putting our country's economy before fierce challenges, however, Vietnam Nam still maintains a good growth rate About Agriculture, Forestry, and Fishery has slowed down from an

increase of 4.5% (1991-1995) to only an increase of 3.8% (2000-2007); industry increased from 7.4% -13.3%; Services increased from 5.2% to 12%.

From a country lacking food, each year having to import from 500,000 to 1 million tons of food, Vietnam has become a major rice exporter in the world In 2005, Vietnam ranked first in the world in pepper exports; ranked second in rice, coffee, and cashew nuts; 4th in rubber; These achievements also show that Vietnam at that time was a country with great potential for economic development because of its stability and rapid economic growth.

Attract foreign investment capital

Since reforming from a centrally planned economy to a market economy model, socialist-oriented, with State management and regulation, Vietnam has become a potential destination of foreign investors due to political stability, abundant human resources and cheap labor costs FDI capital helps boost exports, contributing to Vietnam's trade balance surplus, thereby promoting GDP

growth These contributions are increasingly enhanced.In 1991, the amount of registered FDI capital in Vietnam was 2.07 billion USD, of which the amount of realized FDI capital was 428.5 million USD, reaching over 20% of registered capital The export value of goods of the FDI enterprise sector accounted for 27% in 1995 and has tended to increase gradually from 2005 to present In 2005, The FDI sector contributed 15.16% to GDP growth Notably, the event of Vietnam joining the World Trade Organization in 2007 has sharply increased registered FDI capital in Vietnam from 21.35 billion USD in 2007 to 71.73 billion USD In 2008 alone, this shows that expectations are huge This number is still increasing steadily despite a slight decrease in 2009 and 2010, but then continued to increase again and gradually increased to 20.35% in 2019 The results show that, since reform, Vietnam Nam has attracted a lot of foreign investment Firstly, because investors see the growth potential of this country Second is becauseVietnam has opened its doors to foreign investment through favorable policies and continuous improvement of the business environment.

2 Vietnam's economic cycle from 2007 to 2019

2.1 Vietnam's economy before the financial crisis (2007-2008)Results of implementation of major targets in 2007 compared to the

situation reported to the National Assembly

Targets20062007

Report to the National

- Trade deficit compared to total

- Attract foreign investment capital according to registered capital

- Job creation (million people) 1,65 1,68 1,68

Industrial production value is higher than planned; The quality and competitiveness of some industrial products are improved.

Agricultural production has overcome many difficulties and challenges due to natural disasters and continues to develop.

Import-export activities continued to achieve many positive results In general, in 2007 there was10 export products with turnover of over 1 billion USD → 2007 – a successful year for exports

Investment and development have been quite good, especially capital mobilized from abroad and capital from the population Foreign investment capital reached a record high (20.3 billion USD); ODA commitment from donors is the highest ever (5.4 billion USD) Total social investment capital in 2007 was estimated at 462.2 billion VND, equal to 40.5% of GDP.

2.2 Impact of the global financial crisis (2008-2011)

Financial crisis of 2008 was considered a black spot for the US economy in particular and the world in general.The main cause of this crisis stems from the boom of the US financial market, especially the real estate market, in which financial institutions provided unsecured and easy loans to borrowers home buyers with poor ability to pay As home prices fell and the number of borrowers defaulting on their loans increased, the US housing market collapsed, creating a series of financial and consumer problems around the world→ spreading to