Question

Explain relationship between production, income, and expenditure in a mechanism of business cycle. What are “virtuous” and “vicious” business cycles? Discuss the current situation of Japan’s economy in terms of such business cycles, compare with the past pattern, and/or show your own projection or desirable path of Japanese economy.

*This is an essay question, so please write this in detail and at length please.
*I'm looking for other opinions so DO NOT answer this question if you already did.

Answer 1

Production is the creation of goods, products or services by a firm or an individual. When there is production, there will be the profit accrued from the product. This profit will generate income for the ones involved in the production process. The income generated will result in to spending or expenditure in the market (may be the same good or may be for different goods). When there is expenditure in the market, there is profit or income for the producer, which in turn motivates or influences more production. Thus production, expenditure and income constitute a business cycle in the market flow.

  A Virtuous cycle is the self-propelling cycle whereby the result of one action triggers another action and the other action triggers another. All these actions are regarded as successful actions. If we explain this, the above scenario of the production, expenditure and income cycle would also be a good example. When there is good amount of production, this results in a huge number of products in the market, the huge number of products in the markets generates profit to the producer, who thereby generates income from the production of goods. This generated income is distributed among the workers who were involved in the production process as wages. This wage constitutes the income for the people. This income is spending in the market as their expenditure for maintaining livelihood, whereby the either buy the same or different products. This large amount of purchases brings further profit for the producer and incites more investment in his further production, this increased production results in to increased income for the workers and increased expenditure. The increased expenditure results in increased profit and so on. A vicious cycle on the other hand, is the self- limiting cycle whereby an incident and its negative effects results in to another incident which further increases the negative impact of the first incident. For example, if due to market forces, the production of a firm goes down drastically, this will result in to lesser production and hence lesser income for the workers. This reduced income will result in to lesser expenditure in the market, and which will further result in to decreased profit for the producer, which will further reduce his production ability.

  The Japanese economy has been on its boom for a long period of time. The virtuous cycle discussed above was totally applicable in to the Japanese economy for a very lone period of time. There was huge level of production in the Japanese markets, which induced a lot of income for the workers in the Japanese firms. The workers further spent the money as expenditure, which further resulted in to increased profit for the producer. This virtuous cycle applied to many of the Japanese firms. Since most of the Japanese firms enjoyed the virtuous cycle, this led to the Japanese economy earning huge profits and thereby getting more and more self-sustainable. The more the economy became sustainable, Japan had turned in to one of the fastest developing economies in the world. Japan had very limited trade deficit and the quality of the products were commendable. However, recently, Japan had in turn been slightly affected by the vicious economic cycle, which has resulted in to one negative market impact being directly resulting in to another negative impact. Many of the Japanese firms have had the same situation where, due to global and external forces, and due to increase competition, many of the Japanese firms had a very low demand in the market for their products. This led to lesser production, and thereby lesser income for their workers. The lesser income resulted in to lesser expenditure capability and hence lesser further lesser profit for the production units. In the recent past, many of the Japanese well known firms have had to face the vicious impact of economic cycle. However, the Government of Japan has been very proactive, and initiatives have been taken by the Government to end these vicious impacts on the economy. These initiatives are bearing their fruits and most of the firms that were not making any profit have now started to regenerate their market space.