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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 cy