Business Cycle: Unemployment

and Inflation
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GROWTH
PROSPERITY
DEPRESSION

BUSINESS CYCLE REFERS TO FLUCTUATIONS IN ECONOMY.
ALSO KNOWN AS THE PEAKS AND VALLEYS OF THE ECONOMY
Theories of Business Cycle
1.Exogenous theory
Forces outside the
economic system create
the business cycle.
Examples are political
developments, natural
disasters, wars etc.
2.Endogenous theory
The forces within the
economic system caused
the fluctuations in the
economy like accelerators,
multipliers, innovations or
monetary policies.
Phases of the Cycle
1. Prosperity the peak of
the business cycle, there
is full employment and the
national output is at full
capacity or close to it.
Price level tends to
increase due to increasing
demand for goods and
services. Output can no
longer be increased
because productive
resources are at full
capacity or fully employed.
Phases of the Cycle
2. Recession Both production
and employment fall. The price
level is likely to decrease only if
recession is of longer duration.
3. Depression both production
and employment are at their
lowest level. This is the valley of
the business cycle. Under such
condition no private
businessman is willing to invest
because demand for goods and
services is also at its lowest
point.
Phases of the Cycle
4. Recovery Both
production and
employment rise towards
full employment. During
this stage price level may
increase.

The strength and duration
of each phase is highly
changeable. Recession
does not always mean
prolonged unemployment
nor prosperity is always
equated with full
employment.
Effects of Business Cycle
1.Producers of capital
goods like trucks,
buildings, heavy
machinery and so forth
are greatly affected in
terms of production
and employment. Firms
have no reasons to buy
capital goods when
economic or business
activities are down.

Unemployment
It simply means that some
people are out of jobs.
Unemployment is a serious
and deep-seated problem
which affect both rich and
poor countries.
Some Causes:
1.Changes in technology
2. Renovations
3. Business Cycles
4. Changes in seasons
Effects of the Business Cycle
3. In the same manner,
industries which
produced consumer
durables like cars and
appliances are adversely
affected during bad
economic times.
Consumers tend to be
economical. Instead of
buying new ones, they
would just repair their old
and existing durables.
Effects of the Business Cycle

2. As a result
expenditures on capital
goods greatly declines.
Hence, the various
industries which
manufacture such
capital goods suffer
from low or negative
sales. Many of their
employees have to be
laid off due to a
tremendous fall in
production.
Effects of Business Cycle
3. However, in the case
of basic products like,
food, water, electricity
etc. they are less
sensitive to
recession. These
things are vital to the
consumers and its
purchases cannot
wait for a long time.
Types of Unemployment
1. Frictional this is caused
by interruptions in production
for technical reasons, or
when workers are temporarily
laid off due to renovation
works.
2. Structural a change in
technology renders the skills
and talents of some workers
obsolete. For example the
use of modern computers in
office reduce the number of
workers
Types of Unemployment

3. Cyclical this is caused by
the fall of business activities
in the economy
When aggregate demand
decreases, production
subsequently declines. Some
workers have to be laid off.
4. Seasonal change in
seasons leads to
unemployment. During slack
periods, like in tourism
industry many workers are
laid off
Effects of Unemployment
1. The productive
resources of the
economy are not fully
used, this means less
goods and services are
produced.
2. It is a loss of income on
the part of individuals
and would deprive him
of the chance to
improve his economic
conditions.
Effects of Unemployment
3. On the part of the
country, unemployment
means a decline in
national income or gross
national product and a fall
on government revenues.
4. The government has to
put aside some of its
important projects due to
lack of funds.
5. Unemployment leads to
the commission of social
crimes
Full Employment
When there is available
job for every person
who is willing and able
to work it is full
employment. It does
not mean that
unemployment is zero.
If about 6% of the labor
force is unemployed, it
is still considered full
employment
Reasons fo unemployment in the
period of full employment
1.Some people are sick and
therefore are unable to work.
As long as they have chance
to recover and regain their
jobs they are considered part
of the labor force.
2.Many workers left their jobs
because of dissatisfaction.
They hope to find
employment at better terms in
the future.
3. In rich countries, minimum
wage is so high. In this regard
employers refused to hire
workers.
4. Because of old age or other
personal handicaps, some
groups stand at the borderline
between employability and
unemployability. As long as
their status has not been
settled definitely, they are still
considered part of the labor
force.
Reasons for unemployment in the
period of full employment
Theories of Employment
1. Classical theory
states that employment
increases at lower
wages. Employers are
willing to hire more
workers at lower wages
because it is more
profitable, because this
means that the cost of
production is lower and
more profits for the firm.
2. Keynesian theory this
is a modern theory of
employment states
that employment is
determined by aggregate
or total demand for
goods and services.
When purchases of
goods and services
increase, production also
increases and more
workers are needed to
produce more goods and
services.
Theories of Employment
1. Shorter work week A
reduction of work week
from 44 to 40 hours
would increase the
number of workers. If
working hours are
shortened, it is believed
that more workers will
be hired. Other
companies scheduled
their workers on a three-
day-a-week basis rather
than lay off a large
number of workers.
Full Employment Policies
Full Employment Policies
2. Postponement of
technological
advancement This is
another way of
increasing demand for
workers. Instead of
using modern
technology, which could
render workers out of
jobs, industries go
labor-intensive to reduce
their unempoyment
problems.
3. Public Investments
The government
should utilize its
resources to increase
demand for goods
and services.
Government can
engaged in massive
public works to create
employment and
income for the
people.
Full Employment Policies
There is inflation when
there is a rising
general level of prices.
It does not necessarily
mean that all prices
are increasing. In fact
some remain constant
or even fall. Other
prices rise very
suddenly. In short
there is no even
escalation of prices.
Inflation
Inflation
Inflation adversely
affects many sectors of
the economy, particularly
the fixed-income groups.
Inflation also aggravates
unemployment problem.
Demand for goods and
services decreases
when prices increase.
This cuts down
production and therefore
causes reduction of
workers.
Inflation
Unfortunately inflation
causes more inflation.
When prices keep on
increasing, people are
inclined to spend their
money before it losses
its value.Clearly inflation
encourages more
consumption and less
savings. However this
does not stimulate
further invesment
because the cost of
production is also high.
Types of Inflation
1. Demand-pull inflation
This type of inflation
occurs when demand for
goods and services
exceeds supply. When all
the productive resources
are fully employed an
additional demand for
goods and services
increases prices. It is no
longer possible to expand
output or supply.
Types of Inflation
Another cause of demand-pull
inflation is the excess money
supply. When money supply
increases without corresponding
increase in production of goods
and services prices increase.
Based on the equation of
exchange, the value of goods
and services in the economy is
equivalent to the quantity of
money in circulation. More
money supply is created when
government prints money or
when foreign loans are not used
for production.
Types of Inflation
2. Cost-push inflation An
increase in the cost of
production results to an
increase in prices. Cost
increases whenever there is
an increase in wages, oil
prices or raw materials. In
addition, the profit-push
version of the labor sector is
the cause of inflation.
Capitalists want mor profits,
so they have to increase the
prices of their products.
Types of Inflation
3. Structural inflation this
view explain the inability of
some sectors of our
economy to respond
immediately for demands for
goods and services. When
supply cannot meet demand,
prices increase. Examples
are: When goods cannot be
produced because there are
no available dollars for
importing raw materials of
such products or, the
inadequate transportation
facilities in some parts of the
country.
Economic Reforms to Reduce
Inflation and Unemployment
1. To increase the production of short-gestation
crops and other small-scale industries. These
produce goods within a few months. Thus
incomes are immediately generated.
2. To reduce over supply of money, the Bangko
Sentral has actively engaged in the open
market sale of Treasury and Bangko Sentral
bills.
3. To encourage more foreign investments to
accelerate economic recovery.
Economic Reforms to Reduce
Inflation and Unemployment
4. To reduce government expenditures through more
economical resources, such as the shutdown of losing
government corporations, unnecessary travel abroad
of top government officials etc.
5. To concentrate more on the development of more
agricultural projects which are less expensive and
have shorter gestation than industrial project.
6. To transform the people into more self-reliant and
productive groups. They have been encouraged to
engage in backyard gardening, poultry, piggery and
other income-generating projects.