Business cycle for Russia for the period of 1995-2008

Bizning Vakil By Bizning Vakil, 26th Jun 2012 | Follow this author | RSS Feed | Short URL http://nut.bz/9m9923-v/
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In this report, macroeconomic performance of Russian economy for 1995-2008 period is analyzed. Questions regarding phases of business cycle in 2008 is answered, national statistics of real GDP growth, unemployment and inflation rates are provided using relevant data and graphs. Additionally, expansion and recession phases of the business cycle for the period are identified and described. Finally, the GDP structure in 2007 is discussed and compared to that in 1995.

Peaking Out Phase

The most suitable phase of business cycle for Russia in 2008 is peaking out phase. As can be seen from the theory given in Sloman (2003), in this phase governments experience slows down or ceases in GDP growth rates. As shown in the data, Russian GDP reached 5.6% and this slows down compared with the previous year’s 8.1%. It can be seen that the speed of growth slowed. However, the growth is in positive, and we can not describe this period as recession where no growth or even decline in output occurs.

The graph 1 illustrates the Russian GDP, unemployment and inflation rates over the period 1995-2008. As shown in the graph, there are noticeable changes during the period 1995-2000. For example, in 1995 the inflation rate was about 197.7%, unemployment rate 9.2% and GDP rate -4%. The line showing the GDP is more fluctuated than other lines in the chart. Moreover, it should be mentioned that GDP rates in the period between 1995 and 1998 were negative in some years; we can see a growth in 1997 by about 1.7% but in 1998, there is a decline in output by -5.3%. The line which illustrates the unemployment rate is more stable than other two lines. There are no sharp decreases or increases in the rate of unemployment. It changes steadily over the period from 9.2% to 6.3%. In the first half of the period from 1995 to 2002, the line illustrating the rate of inflation fluctuated more than the other half of the period. For example, inflation rate is 197.7% in 1995 and it sharply decreased to 47.8% in 1996, or it showed 27.6% in 1998 and it sharply increased to 86.1% in 1999. In the period 2002-2008, it changes little by little every year, about 15.7% in 2002, and 13.0% in 2008.

The trend line in the graph 1 illustrating GDP rates is rising. It means that the economy booms over the given period. The trend line of unemployment shows a decrease in the percentage rates and it is fully appropriate to the theory of macroeconomics which we studied in our lectures and tutorials that in the period when economic GDP rate grows the unemployment rate declines. However, the trend line of inflation rate shows the complete opposite of the theory; it declines over the given period where it should increase because of economic boom. It is because the Central Bank of Russia tried to control inflation rate artificially.

Okun’s Law

All these macroeconomic factors: real GDP growth, unemployment and inflation have relationship among one another. Firstly, the relationship between GDP and unemployment will be explained. As Mankiw explains, “employed workers help to produce goods and services and unemployed workers do not, increases in the unemployment rate should be associated with decreases in real GDP” (2003). This relationship is also called Okun’s Law.

In the graph 2, the horizontal axis illustrates changes in the unemployment rate from the previous year, and the vertical axis represents the percentage change in GDP. The graph clearly confirms that year-to-year changes in the unemployment rate are fully associated with year-to-year changes in real GDP growth.

Philip’s Curve

Inflation and unemployment also have a certain relationship. As Sloman (2003) mentioned, it is logical to think that if inflation tends to be higher when economy is booming and if unemployment tends to be higher in recessions, it means that there is a “trade-off” between inflation and unemployment which is also known as Philips curve.

Nevertheless, in our case, we can see the total opposite of the theory of Philips curve in the graph 3. The reason is that there were some years during which the inflation rate was high with respect to high level of unemployment so that this contradicts to the rule of the Philips curve.

Inflation and GDP

As we mentioned above, according to the theory, if the economy of country is booming, the inflation tends to be higher.

As illustrated in the scatter chart, we can see total opposite of the theory in the Russian economy in the given period. GDP is growing but the inflation rate is declining. The reasons for that were some policies made by the government. For example, after tightening the flow of money early in 1994, the Government loosened its restrictions in response to demands for credits by agriculture, industries in the Far North, and some favored large enterprises.

Changes in GDP

The graphs above shows the GDP rates of the Russian economy over the period 1995-2008. As can be seen from the graph, in 1995, 1996 and in 1998 Russian Federation was in its recession phase of the business cycle. In the years 1999-2000, 2002-2003, 2005-2007, there were expansion phases of the Economy of Russian Federation. In the mid 1990s, Russia was still in transition period, i.e. it was moving from commands economy to free market economy. Due to this fact, much of the industries suffered a decline. 1998 recession in Russia was caused by the “famous” Asian 1998 crisis because 80% of Russian goods were exported to Asian countries. As a result, a fall in exports led to general decline in AD and thus, a fall in national output. Expansion phases in the Russian economy over the given period were completely achieved because of reforms of President Putin in the sectors of industry, investment, agricultural production and construction (Wikipedia, 2009).

In these expansion and recession phases of the Russian economy, the unemployment and GDP rates behaved with respect to upturns and downturns of the business cycle. For example, during the recession in the economy in 1998, GDP rate was -5.3%, in according with this the unemployment rate was high - about 11.9%. In expansion phases, the GDP was higher in the Russian economy and accordingly, unemployment rate was lower comparing with years when there was a recession: in 2005, GDP was 6.4%, unemployment was 7.1%.

GDP Structure

The pie chart demonstrates GDP structure of Russia in the year 2007. As illustrated in the chart, services comprised 56%, industry 20%, manufacturing 19% and agriculture 5% of GDP.

To compare Russian GDP by category of product in 2007 with that of 1995, some differences can be noticed. First of all, agriculture sector fell in 14 years from 9% to 5%. This decrease may be caused by the transition from centrally planned economy to free market economy. Therefore, services replaced much of the agriculture. The same pattern can be seen in the industry. This sector declined, especially, heavy industry was cut by significant level (Wikipedia, 2009). So, it was reduced from 28% to 20% over the 1995-2007 periods. However, the manufacturing sector grew due to the increase in privatization of manufacturing businesses. A rise by 3% implies that Russia was manufacturing more in comparison to that of in 1995. A striking feature of the pie charts above is the considerable increase in services sector. From 1995 to 2007, it went up by 9% again reflecting the transition from centrally planned economy.

Conclusion

To conclude, it can be said that Russia underwent significant fluctuations in its economy. Firstly, it started with a recession in 1995 which continued till the late 1999. After the onset of Putin’s period, Russian economy achieved unprecedented high results such as rapid economic growth, quite stable inflation and decreasing unemployment. However, owing to world financial crisis in the late 2008, the country is experiencing a economic downturn.

Bibliography

The World Bank group, 2008, Russian Federation at a glance, viewed April 21, 2009, <http://devdata.worldbank.org/AAG/rus_aag.pdf>.

Gregory, P & Stuart, R, 1998, Russian and Soviet Economic Performance and Structure, 6th edn, Addison-Wesley Educational, USA

Tags

Business Cycle, Gdp, Gdp Structure, Inflation, Okuns Law, Philips Curve, Russia, Russian Economy, Unemployment

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author avatar Bizning Vakil
An economist by definition, a teacher by practice, a journalist by nature, I find it hard to find any one permanent place to settle down...

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author avatar Md Rezaul Karim
26th Jun 2012 (#)

Great share. Thanks.

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author avatar MyShoh
14th Jul 2012 (#)

yeah, russia did experience many ups and downs

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