Business Cycle,

Unemployment,
and Inflation
Group 5

Business Cycle

Business Cycle
Is defined as the diffusion of
fluctuation in aggregate economic
activities all over the economy and
not just on a single industry
Is a characteristic of industrialized
and developing capitalistic
economies; economic fluctuations
occurred long before modern
economies

Phases of a Business Cycle

1.Peak / Prosperity
- phase where business activities are
in their temporary maximum
. Economy is at full employment
. Level of real output is at its full
capacity
. There is the tendency for the price
level to rise

Phases of a Business Cycle

2.Recession
- phase that is characterized by a
decline in total output, income, trade,
and ultimately, employment.
. Unemployment is induced

Phases of a Business Cycle

3.Trough / Depression
- the turning point of recession, or
when economic activity is at its lowest.
. Unemployment is so severe

Phases of a Business Cycle

4. Expansion
- there is a recovery in the economy
wherein income, output, trade,
interest rate, wage, and employment
are rising
. Unemployment is low

Selected Classical Theories

Explaining Business Cycles
Endogenous Theories. These
theories explain the causes of business
cycle within rather than outside the
economy.

1.Real structural hypothesis

(RSH)
- based on the explanation that
aggressive investment plans, together
with import dependence, attain a

Selected Classical Theories

Explaining Business Cycles
2. Innovation theory
- holds that innovation is a
fundamental cause of business cycle.
Innovation is defined as enhancement
of an existing production system that
leads to new and better products.

Selected Classical Theories

Explaining Business Cycles
3. Self-generating theory
- According to Wesley Mitchell, one
phase of the business cycle grows out of
the preceding phase.

4. Underconsumption theory
- Economists subscribing to the
underconsumption view attribute the
deficiency in purchasing power.

Selected Classical Theories

Explaining Business Cycles
5. Monetary Theory
- If inflation is threatening the economy,
the Central Bank (CB) should slow the rate
of growth of money supply. But this action
of the CB will adversely affect economic
growth as recession will ensue. If inflation
is no longer a threat, the CB can now
accelerate money growth to promote
economic recovery.

Selected Classical Theories

Explaining Business Cycles
Exogenous Theories. These
theories explain the causes of
business cycle as disturbances
outside the economy.

Unemployment

Unemployment
Unemployed is officially defined as
all those who are 15 years old as of
their last birthday and during the
reference period, and are reported as:
1. Without work
2. Currently available for work
3. Seeking work

Unemployment
Unemployment rate is the
proportion in percent of the total
number of unemployed persons to the
total persons in the labor force.
Unemployed
Unemployment Rate = ---------------- x
100
Labor Force

Unemployment
Labor Force includes all persons 15
years old and over as of their last
birthday who contribute to the production
of goods and services in the country
whether employed or unemployed.

Labor Force = Employed +

Unemployed

Unemployment
Labor force participation rate is
the percentage of the total number of
persons in the labor force to the total
population of 15 years old and over
Total number of persons in the LF
LFPR = --------------------------------------x
100
Total Population 15 yrs old and
over

Types of Unemployment
1. Unavoidable unemployment
a. Frictional unemployment
- it is a temporary unemployment
associated with the changes in the
economy.
b. Structural unemployment
- occurs when the location and
qualifications of the labor force do not
match the available jobs.

Types of Unemployment
c. Cyclical unemployment
- unemployment caused by the
recession phase of the business cycle.
It is caused by inadequate total
spending.
As the overall demand for goods and
services decreases, unemployment
rises

Types of Unemployment
2. Avoidable unemployment
- refers to unemployment usually
associated with insufficient demand for
workers caused by many factors such
as poor performance of the economy.

Full Employment
How much is full employment?
Full employment is unavoidable
unemployment or if cyclical
unemployment is zero. The full
employment rate of unemployment is
referred to as the natural rate of
unemployment.

Underemployment

Underemployment
Underemployed are persons who are
already employed but they express the
desire to have additional hours of work
in their present job or in an additional
job, or to have a new job with longer
working hours.

Classifications of
Underemployed Persons
1. Invisibly underemployed
- person who already worked 40
hours during the reference week but
still want additional hours of work
2. Visibly underemployed
- person who worked less than 40
hours during the reference week and
wanted additional hours of work

Okuns Law

Okuns Law
Developed by Arthur Okun
He developed the relationship
between GDP and
unemployment.
He concluded that for every 23% movement in GDP,
unemployment changes by 1% in
both opposite directions

Inflation

Inflation
Inflation means there is a sustained
increase in the price level.
In economics, inflation is a persistent
increase in the general price level of
goods and services in an economy
over a period of time

What is CPI?
A measure of the overall cost of the goods and
services bought by a typical consumer.
It is used to monitor changes in the cost of living
over time

Example

CPI =

= 113.27

845
746

X 100

Kinds of Inflation
1. Headline inflation is calculated as
the change in the weighted overall
average prices of all goods and
services in the CPI basket.
2. Core inflation is an alternative
measure of inflation that is
calculated as the rate of change in
the CPI that excludes the items that
have transitory effects on the CPI.

Inflation Rate
Rate of increase in the average
prices of goods and services
typically purchased by consumer
Current CPI Previous CPI
Inflation Rate =
x100
Previous CPI

Imagine that we are calculating the inflation based on the price of

bread between 2010 and 2012. The price of bread in 2012 is
$3.67 and the price of bread in 2010 is $3.25.
Given: $3.25 Previous CPI
$3.67 Current CPI

Inflation Rate =
Prev. CPI

Current CPI Prev. CPI

$3.67 $3.25
=

x 100
$3.25

12. 9%

The price of bread in 2012

is 12.9% higher than it was =
in 2010.

Example:
The following table shows data extracted
from the source for 2011 and 2012:

NOVEMBER

DECEMBER

AVERAGE

2011

226.230

225.672

224.951

2012

229.601

230.221

229.911

CURRENT CPI
PREV. CPI
PREV.
CPI

X 100

BET. NOV 2011 & DEC 2011

2012

BET. NOV 2012 & DEC

225.672 226.230
=

230.221 229.601
X 100

X 100

226. 230
229.601
=
-0.246%

0.270%

If positive, there's an increase in price

EFFECTS OF INFLATION

 Inflation may reduce the real income or

purchasing power of an individual or individuals.
It results to redistributive effects, meaning, the
effects of inflation are redistributed to different
individuals.

LOSERS
1.
2.
3.
4.

Fixed Income earners

Savers
Creditors
Holders of Securities

GAINERS/WINNERS
1. Debtors
2. Fixed Asset Owners
3. Priducers

DEFLATION vs
INFLATION

DEFLATION
Deflation is a sustained decrease in the average
price level.
It is also a broadly based decline in the price
level, not just a month or two but for a period of
years.

DEFLATION vs
INFLATION
Deflation is no good than inflation, because
producers will lose and eventually shut down their
businesses.
It is still better to have an inflation rate of 2-3%
for both consumers and producers.

HYPERINFLATION
refers to a period of extremely high inflation
reaching 100,000% and above.

STAGFLATION
means that the economy is experiencing
increasing inflation and unemployment at the
same time.

SOURCES
Gabay, Remotin, Uy, and Anna D. Rizarro-Uy.
Economics Concepts and Principles. Manila, 2012.

https://en.wikipedia.org/wiki/Consumer_price_inde
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