Tanzania Business Cycle

Topics: Inflation, Economic growth, Recession Pages: 7 (2485 words) Published: October 22, 2012
Tanzania Business Cycle.
Tanzania is one of the poorest countries in the world. According to the United Nations’ data approximately 36% of the global population (43.7 million people) lives below the poverty line. This signifies that the per capita income of Tanzania is relatively low. The Tanzanian economy depends highly on agriculture, which makes up 40% of the Gross Domestic Product (GDP), provides 85% of exports and employs about 80% of the labour force. The remaining 20% is employed either in tourism, construction, mining or the service sector. Although agriculture has boosted Tanzania’s economy, hurdles still exist due to the poor infrastructure of the country. However, the World Bank and International Monetary Fund (IMF), together with private foreign companies are adopting measures to develop the country in order raise its GDP, and have a sustainable growth rate. (Roubin Global Economics 2012). The business cycle represents four phases that the economy of a country goes through over a period of time, moving away from it actual growth trend as suggested by Grant 2000. These include a) depression, b) recovery, c) boom and d) recession. The graph (1) in Appendix A shows, how a economy moves through the four stages, moving away from the actual growth trend. At each stage the economic activities and the total output produced by the economy fluctuate. In addition to that, at each stage the macro economic variables, which include inflation and unemployment, also fluctuate. The wealth of the country also fluctuates at each stage signifying that at each phase of the business cycle the level of consumption, investment, government expenditure, exports and imports fluctuate. (Gant 2000). Below the graph represents Tanzania’s business cycle from 1960 to 2011. The graph represents the four phases of the business cycle according to Tanzania’s economy, also represents how the economy moves away from its actual growth trend.

Graph 1: Bigsten and Danielsson(2011)
This essay will firstly describe Tanzania’s progress through the four economic phases over the time frame of 1960-2011. Thereafter it will discuss how the various macro economic variables fluctuate during each stage. In particular, this essay will focus on the macro economic variables of unemployment, inflation, investment, output growth (including the components of aggregate demand and supply) and will also consider exports. Depression is the period that falls between recession and recovery. This is the period when the economy faces high rate of unemployment, negative net investment, low levels of exports and falling demand for consumer goods and services, as well as capital goods. (Grant 2000) This is the period when the output level falls over a period of time and the economy of the country is at the lowest level of growth. This implies that the aggregate demand for commodities produced will be relatively low. At this stage the economy will experience a negative growth rate, thus the country will not experience economic development. Instead the country will experience poverty as the circular flow of income in the economy is at a minimum. (Grant 2000) As shown in the graph above, according to the Tanzania economic business cycle, it shows that during the period of independence in 1960’s, the economy experienced a negative growth rate of -4.2% and had a per capita income rate of 7.1%. In addition to this the inflation rate was relatively high at 7.8% as stated by Bigsten and Danielsson (2011). The situation in which the rate of inflation is relatively high and the country’s growth rate is negative is known as hyperinflation. Hyperinflation occurs when the economy highly depends on imports and the country’s currency has lost its value. (Investopedia 2012). This occurred because Tanzania had just been freed from the colonial British rule and, had been taken over by the father of the nation, J.K.Nyerere. The country therefore had to adopt various reform policies in order...
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