<6.1 ECONOMIC ISSUES> 

Below is a jumbled up story that illustrates the impact of the business cycle using the international school industry as its subject. Your task is the copy and paste them and rearrange the sentences so that it shows the timeline from sentence number 4) to sentence number 1).

'THE IMPACT OF THE BUSINESS CYCLE ON INT'L SCHOOL INDUSTRY'

• END (1) By the next academic year, enrollments were picking up, and employment in the education sector started to rise. Schools began hiring again, and new teachers were brought in to meet the growing demand. Entrepreneurs felt confident enough to start opening new educational ventures, including private tutoring centers and language schools, sensing a fresh opportunity in the recovering market. The international school industry, once again, began to grow. Sales improved, and the sector slowly returned to contributing to the local economy. After weathering the storm, the industry emerged stronger, ready to embrace a new cycle of growth, buoyed by the lessons learned from the challenges of the past.

• (2) Parents were spending more, not only on tuition but also on tutoring, uniforms, and extracurricular activities. This increased spending propelled the sector further, creating a virtuous cycle of growth. With each new academic year, it seemed like there was no end to the optimism, and the international school industry entered what seemed to be a golden era.

• (3) As time went on, however, the industry reached its peak. Every school was operating at full capacity, with long waiting lists for students trying to get in. Even with tuition fees at their highest, schools were turning away families. The demand for education outpaced supply, and the cost of providing that education began to rise. Schools found it difficult to attract more teachers, and to fill critical positions, they had to offer higher wages. Costs of materials such as textbooks and educational technology also increased, squeezing school budgets.

• START (4) In a bustling city known for its international community, the demand for quality education was soaring. As more expatriates moved in, schools filled quickly, and parents were eager to invest in their children's future. Optimism filled the air as international schools became a top priority for families. Existing schools started expanding their facilities, offering new programs, and hiring more teachers to meet the growing demand.

• (5) Yet, even in the darkest of times, recovery was on the horizon. After months of hardship, the global economy started to improve. Families began returning to the city, and with them came renewed hope for the international school industry. Business and consumer confidence slowly recovered, and schools started seeing a gradual uptick in interest and enrollments. Though progress was slow, spending increased as parents once again felt confident about investing in their children’s education.

• (6) Despite the high enrollments, profits began to level off. There were only so many students that could be admitted, and there wasn’t enough capacity to expand further without significant investments. Families began to feel the pinch as tuition fees were being driven up due to increasing costs, and some were unable to keep up with the rising prices. Demand started to fall, and for the first time, the industry’s growth showed signs of slowing.

• (7) Soon, new international schools began to open all over the city, each catering to a diverse set of curricula and promising the best education. The industry was booming—enrollments surged, revenues climbed, and schools began competing to offer the most prestigious programs. The local economy was thriving too, with educational services contributing significantly to the city's output. Teachers, administrators, and staff found abundant job opportunities, and incomes started rising as the demand for skilled professionals in the education sector grew.

• (8) As the recession dragged on, the industry slumped into its worst phase. Many schools couldn't survive the continued decline in enrollments and had no choice but to close their doors permanently. The few schools that remained open were operating at a loss, struggling to keep up with overhead costs as profits hit rock bottom. Unemployment in the education sector soared, with hundreds of teachers and staff out of work, their living standards severely impacted. The government had to step in, providing welfare support to those who had lost their jobs and lowering interest rates in an attempt to encourage borrowing and spending.

• (9) With incomes shrinking, families were spending less on education, and the demand for educational services like tutoring and extracurricular activities collapsed. Suppliers of educational materials also suffered, reducing production as schools cut back on their orders. The once-thriving international school industry was now in recession. Schools that had previously been expanding were now in survival mode, offering discounts and financial aid to attract the dwindling pool of students. Prices for educational services began to stabilize, but the damage was done. The golden era of international schools was over.

• (10) Then, the unexpected happened—a global economic downturn hit, causing the expatriate population to decline as families left the city. The international school industry, once thriving, started to feel the pressure. Business activity declined as enrollments dropped, leaving schools with empty classrooms. Without the usual inflow of students, revenues began to fall, forcing schools to cut costs by letting go of staff and scaling back operations. Teachers who once had no trouble finding jobs were now facing unemployment.

• INFLATION refers to a SUSTAINED/PERSISTENT INCREASE IN THE GENERAL PRICE LEVEL. 

• It is BAD for BUSINESSES for the following reasons:

  • • • • Higher prices mean the REAL INCOME of consumers FALLS, in other words, the PURCHASING POWER of incomes FALL, therefore they can't afford the same quantity of goods, hence SALES/PROFITS FALL.

        • Higher prices mean HIGHER RAW MATERIALS COSTS which in turn LOWER PROFIT MARGINS which may mean FURTHER PRICE HIKES TO COMPENSATE, furthermore workers may ask for more wages so that their real incomes stay the same, further INCREASING COSTS and LOWERING PROFITS.

        • Finally, if your INFLATION RATE IS HIGHER THAN YOUR COMPETITOR COUNTRIES' then your EXPORT SALES may also FALL as other countries' exports are now comparatively cheaper and hence more competitive.

• Imagine the general price level in Taiwan increased, explain in the context of TES why this would be bad using the three impacts listed above:

• "If the general price level rose unexpectedly in Taiwan then the real income of....would fall..., furthermore the higher prices would mean that the prices of the raw materials and inputs that TES use would..., meaning,....finally, inflation would make TES's price, comparably....potentially causing..."

• An economy's FACTOR OF PRODUCTION includes its stock of LABOUR, which is needed to produce goods and services (REAL GDP), hence THE MORE WORKERS EMPLOYED, THE GREATER THE LEVEL OF OUTPUT & INCOME.

• (+) MORE EMPLOYMENT, LEADS TO GREATER INCOME AND SPENDING POWER and therefore DEMAND INCREASES, leading to GREATER SALES & PROFITS.

• (-) HIGH LEVELS OF EMPLOYMENT, may mean it is DIFFICULT TO FIND AVAILABLE WORKERS making it DIFFICULT TO INCREASE YOUR OUTPUT and ultimately LIMIT POTENTIAL SALES and PROFITS. 

• (-) HIGHER WAGES may be NEEDED to ATTRACT NEW WORKERS, which in turn RAISES THE COSTS OF PRODUCTION which if prices are kept fixed will result in REDUCED PROFIT MARGINS or IF PROCES RISE, will make your product LESS COMPETITIVE LIMITING FUTURE SALES.

Note that the pros and cons of LESS EMPLOYMENT (MORE UNEMPLOYMENT) are the opposite of those listed above. 

• Imagine the unemployment rate fell (employment rose) in Taiwan, explain in the context of TES the consequences using the impacts listed above:

"If the unemployment level fell dramatically in Taiwan general incomes would rise, and this could lead to....for TES, however high levels of employment would possibly make it difficult for TES...., which could result in increased...which would ultimately make them....ultimately leading to..."

• ECONOMIC GROWTH refers to INCREASES in the level of REAL GDP. In other words the $-Value of ALL FINAL GOODS & SERVICES DOMESTICALLY PRODUCED ('Made in Taiwan')

• The business cycle above plots the real GDP over time.

• Economic growth implies greater output of goods and services which in turn likely implies GREATER LEVELS of EMPLOYMENT, so if we include all the positive and negative impacts on business of 'LOW & STABLE UNEMPLOYMENT' listed above we can see how Economic growth and low unemployment are linked.

• "Economic growth refers to...., as such..."

THE BALANCE OF PAYMENTS refers to the value of....

$-EXPORTS minus $-IMPORTS. 

If $-EXPORTS > $-IMPORTS = BOP SURPLUS

If $-EXPORTS = $-IMPORTS = BOP BALANCED

If $-EXPORTS < $-IMPORTS = BOP DEFICIT

Favourable refers to either a surplus or a balanced BOP

• As we have seen the government's main objectives are related to unemployment and growth as this likely reflects BETTER STANDARDS OF LIVING, as such they MUST ATTEMPT TO STIMULATE SPENDING ON DOMESTICALLY MADE GOODS IN THE ECONOMY as this will RAISE DOMESTIC INCOMES.

"WHY IS SPENDING IMPORTANT?" 

"Well if your parents stopped spending on TES, the teachers would lose their income, which in turn would mean the 7-11 where Mr. Bounous buys his daily Red Bull would have less income, and as such 7-11 clerks may lose their income and so on..."

"CAN THERE BE TOO MUCH SPENDING?" 

"Yes!! If spending grows faster than output, then prices will rise too quickly (Inflation) as price will be bid-upwards, and the purchasing power of wages will fall in the short term lowering the standard of living. Therefore, the government also has to actively slow down spending to allow supply to catch up"

• Thankfully the government (and central bank) have THREE TOOLS to control spending. The size and direction of these changes depends on the position of the economy on its business cycle, be it in a recessionary stage, or a boom stage for example.

--GOVERNMENT ('PUBLIC') EXPENDITURE--

--TAXATION--

--INTEREST RATES--

• GOV'T SPENDING refers to spending by GOVERNMENT AUTHORITIES usually FINANCED BY TAX REVENUE & GOV'T BORROWING.

  • • They generally spend money on goods and services that they believe are 'MERIT GOODS' which create POSITIVE BENEFITS FOR SOCIETY, such as HEALTHCARE, PUBLIC PARKS, and EDUCATION. but also to industries that EMPLOY a large number of workers.

    • Therefore any business involved in these types of industries may benefit through being given GRANTS (Payments to lower costs).

• WHEN THE GOV'T SPEND it directly leads to MORE ECONOMIC ACTIVITY which leads to GREATER DEMAND and EMPLOYMENT.

• DIRECT TAXES refer to TAXES collected DIRECTLY BY THE GOVERNMENT from the INCOME OF INDIVIDUALS AND FIRMS It is PROPORTIONAL, in that YOU PAY A HIGHER RATE as YOUR INCOME GROWS. The main types are:

  • PERSONAL INCOME TAX on people's income.

    • • HIGHER PERSONAL INCOME TAXES = LOWER DISPOSABLE INCOME = LESS SPENDING

      • LOWER PERSONAL INCOME TAXES = HIGHER DISPOSABLE INCOME = MORE SPENDING

  • PAYROLL TAXES which are contributions given to a PENSION FUND.

    • • HIGHER PAYROLL TAXES = LOWER DISPOSABLE INCOME = LESS SPENDING

      • HIGHER PAYROLL TAXES = HIGHER COSTS TO BUSINESS = LOWER PROFIT/REVENUE

      • LOWER PAYROLL TAXES = HIGHER DISPOSABLE INCOME = MORE SPENDING

  • CORPORATION TAXES on business profits.

    • HIGHER CORPORATION TAXES = LOWER PROFITS = LESS REINVESTING/ENTREPRENEURSHIP

• • INDIRECT TAXES refer to TAXES collected INDIRECTLY BY THE GOVERNMENT from the CONSUMER of certain GOODS & SERVICES, in other words, they are a TAX ON SPENDING. 

    • • • • GENERAL SALES TAXES, which are placed on nearly all goods and services in the country, such as GST (8% in Singapore) VAT etc...

          • EXCISE DUTIES on certain demerit goods such as cigarettes and alcohol, etc...

          • IMPORT TARIFFS which all imported goods must pay.

          • USER CHARGES are taxes on usage usually n the form of TOLLS, such as motorway usage, or CONGESTION CHARGES.

HIGHER INDIRECT TAXES = LESS SPENDING

• Imagine you are the Chancellor of the Exchequer in the UK, who is in charge of setting TAX RATES. You have decided to increase BOTH DIRECT & INDIRECT TAXES and REDUCE GOVERNMENT SPENDING and need to justify it In your news briefing. Complete the speech below, explaining how the pros outweigh the cons. (Tip: mention that the economy is in the BOOM stage of the business cycle and needs a 'COOL-DOWN PERIOD', also comment on the FALLING COMPETITIVENESS OF UK EXPORTS).

"We the government of the United Kingdom have decided to directly increase all forms of taxation and cut our direct government spending. We feel that this is an appropriate time as we are currently experiencing a...., which means..., furthermore inflationary pressure has made our exports uncompetitive compared to foreign alternatives so..."

• INTEREST RATES refer to the COST OF BORROWING MONEY, as they refer to the % increase in the money you have to repay when you BORROW. 

  • • • • For example a 10% interest rate on a LOAN of $1000, means you will need to repay $1100, in the future, hence the cost of borrowing is the 10% of your loan.

• The HIGHER THE COST OF BORROWING, the HIGHER THE REPAYMENT

• The CENTRAL BANK can INFLUENCE INTEREST RATES and thus they can CONTROL THE LEVEL OF SPENDING IN THE ECONOMY.

--A LOWER-INTEREST RATE = MORE BORROWING & SPENDING--

--A HIGHER-INTEREST RATE = LESS BORROWING & SPENDING--

• Imagine you are the BANK OF ENGLAND, who are in charge of setting out INTEREST RATES. You have decided to LOWER THE RATE OF INTEREST and need to justify it In your news briefing. Complete the speech below, explaining how the pros outweigh the cons. (Tip: mention that the economy is in the RECESSIONARY stage of the business cycle and needs a chance to recover)

"We the Central Bank in consultation with the Government of the United Kingdom have decided to lower the interest rate. We feel that this is an appropriate time as we are currently experiencing a...., which means..."

• Now go back to your sketch of the business cycle and annotate where you think the government would use each type of policy.

In a bustling city known for its international community, the demand for quality education was soaring. As more expatriates moved in, schools filled quickly, and parents were eager to invest in their children's future. Optimism filled the air as international schools became a top priority for families. Existing schools started expanding their facilities, offering new programs, and hiring more teachers to meet the growing demand.

Soon, new international schools began to open all over the city, each catering to a diverse set of curricula and promising the best education. The industry was booming—enrollments surged, revenues climbed, and schools began competing to offer the most prestigious programs. The local economy was thriving too, with educational services contributing significantly to the city's output. Teachers, administrators, and staff found abundant job opportunities, and incomes started rising as the demand for skilled professionals in the education sector grew.

Parents were spending more, not only on tuition but also on tutoring, uniforms, and extracurricular activities. This increased spending propelled the sector further, creating a virtuous cycle of growth. With each new academic year, it seemed like there was no end to the optimism, and the international school industry entered what seemed to be a golden era.

As time went on, however, the industry reached its peak. Every school was operating at full capacity, with long waiting lists for students trying to get in. Even with tuition fees at their highest, schools were turning away families. The demand for education outpaced supply, and the cost of providing that education began to rise. Schools found it difficult to attract more teachers, and to fill critical positions, they had to offer higher wages. Costs of materials such as textbooks and educational technology also increased, squeezing school budgets.

Despite the high enrollments, profits began to level off. There were only so many students that could be admitted, and there wasn’t enough capacity to expand further without significant investments. Families began to feel the pinch as tuition fees were being driven up due to increasing costs, and some were unable to keep up with the rising prices. Demand started to fall, and for the first time, the industry’s growth showed signs of slowing.

Then, the unexpected happened—a global economic downturn hit, causing the expatriate population to decline as families left the city. The international school industry, once thriving, started to feel the pressure. Business activity declined as enrollments dropped, leaving schools with empty classrooms. Without the usual inflow of students, revenues began to fall, forcing schools to cut costs by letting go of staff and scaling back operations. Teachers who once had no trouble finding jobs were now facing unemployment.

With incomes shrinking, families were spending less on education, and the demand for educational services like tutoring and extracurricular activities collapsed. Suppliers of educational materials also suffered, reducing production as schools cut back on their orders. The once-thriving international school industry was now in recession. Schools that had previously been expanding were now in survival mode, offering discounts and financial aid to attract the dwindling pool of students. Prices for educational services began to stabilize, but the damage was done. The golden era of international schools was over.

As the recession dragged on, the industry slumped into its worst phase. Many schools couldn't survive the continued decline in enrollments and had no choice but to close their doors permanently. The few schools that remained open were operating at a loss, struggling to keep up with overhead costs as profits hit rock bottom. Unemployment in the education sector soared, with hundreds of teachers and staff out of work, their living standards severely impacted. The government had to step in, providing welfare support to those who had lost their jobs and lowering interest rates in an attempt to encourage borrowing and spending.

Yet, even in the darkest of times, recovery was on the horizon. After months of hardship, the global economy started to improve. Families began returning to the city, and with them came renewed hope for the international school industry. Business and consumer confidence slowly recovered, and schools started seeing a gradual uptick in interest and enrollments. Though progress was slow, spending increased as parents once again felt confident about investing in their children’s education.

By the next academic year, enrollments were picking up, and employment in the education sector started to rise. Schools began hiring again, and new teachers were brought in to meet the growing demand. Entrepreneurs felt confident enough to start opening new educational ventures, including private tutoring centers and language schools, sensing a fresh opportunity in the recovering market.

The international school industry, once again, began to grow. Sales improved, and the sector slowly returned to contributing to the local economy. After weathering the storm, the industry emerged stronger, ready to embrace a new cycle of growth, buoyed by the lessons learned from the challenges of the past.