Economic Cycle and Its Participants
Previously, we have learned that sector rotations are linked to economic cycles. Now in this section, let us elaborate on this concept and also discuss the participants in the economic cycle. But before we go further in this module, let us get a grasp of some basic concepts on economy & liquidity for better understanding. Sector rotation and analysis is a top-down approach. The philosophy behind sector rotation strategy is that we can earn profits by keeping a tab on the economic cycles. We can also choose to buy or sell stocks based on their performance in each cycle. Let us try to understand the economic cycle in detail because it is a pivotal factor behind sector rotation and its identification. The key participants of an economic cycle are listed below.
There are many parties involved in an economic cycle but the most important party which is involved in this cycle is the Household/Consumer Sector. This sector comprises common people like us who principally are the drivers of consumption. We generate the majority of the consumption demand in our economy. Household sector is also the primary supplier of labor and capital in our economy.
Businesses produce the goods and services which meet the needs of its consumers and households i.e., businesses utilize the resources which are available in an economy and make them into productive goods and services which the consumers will ultimately consume. They allocate capital efficiently to its most productive uses and create wealth for their stakeholders.
The government plays a pivotal role in our economy by allocating resources to the underdeveloped regions & weaker sections of the society. Some of its functions include:
A.Reducing Income Inequality- between the rich & poor is one of the principal objectives of the government.
B.Stabilizing an Economy: We shouldn’t forget what happened to countries like Argentina where hyperinflation led to a major fall in the value of money or Japan where the growth has flattened since the late 1980’s.
C.Collection of Taxes: This is perhaps the most important part where the Government collects taxes and re-distributes to the weaker sections of the society in the form of tax sops, subsidies, etc.
In an ideal situation, all three participants actively participate in generating revenue and growth in the economy.