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 CHAPTER 14
MACROECONOMIC
PROBLEMS

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 BUSINESS CYCLE

 DEFINITION
– Business cycle refers to wave-like fluctuations in
aggregate economic activities particularly in
national income, employment and output.
OR
– Business cycle is composed of periods of good trade
with rising prices and low unemployment percentages
and followed by periods of bad trade with falling
prices and high unemployment percentages.

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 BUSINESS CYCLE (cont.)

 CHARACTERISTICS
1. An economy-wide phenomenon
2. A wave-like movements in economic activity
3. Business fluctuations that occur periodically and tend to
be recurrent in nature
4. Expansion and contraction are self-reinforcing and
cumulative in effect
5. Upward and downward movements

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 PHASES OF BUSINESS
CYCLE
PEAK OR BOOM
 The period where the economy is at full employment.
 Maximum output and lowest unemployment rate.

RECESSION
 The period where real GDP declines.
Real GDP  Output decreases and unemployment rate
increases.
 A deep and long recession is known as depression.
PEAK TROUGH
PEAK  The period where the output is minimum
RY

and unemployment rate is maximum.

VE
CO
RE

RECOVERY
RE
CE

 The period where the output

SS

level increases and

IO
N

unemployment rate declines.

TROUGH

Year

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 UNEMPLOYMENT
 DEFINITIONS
– LABOUR FORCE
• Defined as people from the total population above the 16 years
of age, not in any institutions and who are either employed or
unemployed but actively seeking for jobs.

– UNEMPLOYMENT
• Defined as labour force participants being available and willing to
work but unable to find jobs.

– UNEMPLOYMENT RATE
• The percentage of the labour force that is unemployed and
actively seeking jobs.

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 UNEMPLOYMENT (cont.)

– A DISCOURAGED WORKER
• An individual who wants to work but has been unsuccessful
for a long period in finding a job and has given up seeking
jobs.

– UNDEREMPLOYMENT
• An individual who works part-time or who are in jobs below
their capability, but who are seeking full-time employment.

– FULL EMPLOYMENT
• The situation in the economy where all available resources
are employed to produce goods and services.

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 UNEMPLOYMENT (cont.)

CALCULATION
UNEMPLOYMENT = NUMBER OF UNEMPLOYED X 100%
RATE LABOUR FORCE

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PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved
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 Effects
Effects on
on
Individuals
Individuals and
and Society
Society

EFFECTS OF
EFFECTS OF
UNEMPLOYMENT
UNEMPLOYMENT

Effects
Effects on
on
the
the Economy
Economy
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 Job creation

ning Development of new

Provi
vidding trai
ain
on
attiio land
and educ ca

Lowerin
Ope
enn ma ke
arrk ett ing reserv
e
ion requirem
ope
op attio
erra ent

Low
Loweerrin
ing ing
Lowerin
at e
discount rate
cou interest r

Increase in
Decrease in tax government
expenditure
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 INFLATION

 DEFINITIONS
– INFLATION
• A continuous increase in the general price level of goods and
services in the economy.
– DEFLATION
• A decrease in the general price level of goods and services in
the economy.
– STAGFLATION
• The condition in an economy where it experiences high
unemployment and rapid inflation simultaneously.
– DISINFLATION
• A reduction in the rate of inflation.

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 INFLATION (cont.)

CALCULATION
INFLATION RATE = CPI 2007 – CPI 2006 X 100%
CPI 2006

where,
CPI = Consumer Price Index

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 Demand-pull
Demand-pull inflation
inflation

CAUSES OF
CAUSES OF
INFLATION
INFLATION

Cost-push
Cost-push inflation
inflation

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 DEMAND-PULL INFLATION

Demand-pull inflation occurs

OYF is the full employment aggregate output.
when AD exceeds AS

General Price Level

AS Increase in AD above full
employment from AD1 to
AD2, increases price to P2
but output remains constant.
P2
Increase in AD
from AD0 to AD1
P1 will increase the
price from P0 to
P0 AD2 P1 and output ,
Y0 to YF.
AD1
AD0

0 Y0 YF Real Output

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 COST-PUSH INFLATION

AS0 , AS1
General Price Level
OYF is the full employment
aggregate output.

Increase in cost will shift

P1 the AS curve to the left,
P0 AS1. General price level
AS1
increases from P0 to P1.

AD1

0 Y1 YF Real Output

Cost push inflation occurs when AS shift to the left.

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 GAINERS
• Businessman LOSERS
p
• Property Distribution • Fixed income grou
Distribution • Holders of govern
ment
owner of
• Shareholders ofincome
income bonds, fixed depo
sits
• Debtors • Creditors

EFFECTSOF
EFFECTS OF INFLATION
INFLATION

Balance
Balance
Savings
Savings Production
Production of
oftrade
trade

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 ompuls
so y savin
orry gs
ngs
Com

Anti-hoarding
Price control
campaign
and rationing
an

Raising
Ope
enn ma ke
arrk ett rese
ion requirem rve
ope
op attio
erra ent

Raising Rais ing

isin
at e
discount rate
cou interest r

Decrease in
Increase in tax government
expenditure
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