Business Cycles:

Unemployment and

Inflation

Topic Outline

I. Business Cycles• Theories of Business Cycles

• Phases of the Cycle

• The Business Cycle (Diagram)

• Effects of Business Cycle

II. Unemployment • Effects of Unemployment

III. Full Employment Defined• Theories of Employment

• Full Employment Policies

IV. Inflation• Types of Inflation

V. The Philippine Experience• Causes of the Recession

• Government Policies

• Economic Recovery depends on Government Officials

Business Cycles

Business Cycles

• John Maynard Keynes – “Father of Modern

Economics”

• Business Cycle- refers to fluctuations in the

economy.

• Unemployment and Inflation- biggest economic

problems of business cycles.

Theories of Business Cycles

• Exogenous Theories – forces outside the economic

system create the business cycle.

– Forces: wars, political developments, natural

disasters, or major innovations.

• Endogenous Theories – forces within the economic

system cause the fluctuations in the economy.

Forces : Accelerators , multipliers, innovations or

monetary policies.

Theories of Business Cycles

Phases of the Cycle

• Prosperity – peak of the business cycle.

• Recession - both production and employment fall.

• Depression – both production and employment are at

either lowest levels.

• Recovery – both employment and production rise

towards full employment.

The Business Cycle

Growth

Prosperity

Depression

Business

Activities

Time

Effects of Business Cycles

• During bad economic times like recession and

depression, various sectors are affected In different

ways:

– Those who produce capital goods are greatly

affected in terms of production and employment.

– Firms have no reason to buy capital goods when

economic or business activities are down.

• Industries which produce consumer durables are

adversely affected during bad economic times.

• Since consumers tend to be economical, both

production and employment fall.

• Basic products which are non-durables, they are less

sensitive to recession or depression.

Unemployment

Types of Unemployment

• Frictional Unemployment – caused by interruptions

in production, for technical reasons, or when workers

are temporarily laid off due to renovation works. It is

also a situation when workers left their jobs and are

looking for new ones.

• Structural Unemployment – A change in technology

renders the skills and talents of some workers

obsolete.

• Cyclical Unemployment - caused by the fall of

business activities in the economy.

• Seasonal Unemployment - during slacks period,

many workers in farming and construction are laid

off.

Effects of Unemployment

• The productive resources of the economy are not

fully used. This means less goods and services are

produced. On the part of the country, unemployment

means decline in national income or gross national

product. In such situation, government revenues

likewise fall. Evidently, the government has to put

side some of its important projects due to lack of

funds.

• Unemployment could lead to loss of self-confidence

or to more serious social crimes.

Full Employment Defined

• When there is an available job for every person who

is willing and able to work, it is full employment.

• Several Factors of unemployment during a period of

full employment:

– Sickness, dissatisfaction,

– Legal minimum wage is more than the value of the

output of many young workers.

– Old age, disabilities.

Theories of Employment

• Classical Theory of Employment states that

employment increases at lower wages. Employers are

willing to hire more workers because it is more

profitable.

• Keynesian Theory of Employment which is the

modern theory of employment states that employment

is determined by aggregate or total demand for goods

and services.

Full Employment Policies

• 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 by those

who proposed this policy that more workers would be

hired.

• Postponement of technological developments -

it is claimed that the use of time and labor-saving

devices decreases the number of workers.

• Public investment – the government should

utilize its resources to increase demand for goods

and services.

Full Employment Policies

Inflation

• There is an inflation when there is a rising

general level of prices. Nevertheless, it does not

necessarily mean that all prices are increasing. In

fact, some prices remain constant or even fall.

Other prices rise very suddenly. In short, there is

no even escalation of prices.

• Inflation adversely affects many sectors

of the economy, particularly the fixed income-

groups. Needless to say that their purchasing

power declines as prices rise. Inflation also

aggravates unemployment problems. Demand

for goods and services decreases when prices

increase.

• Unfortunately, inflation creates more

inflation. When prices keep on increasing, people

are inclined to spend their money before it loses

its value. It is to be noted that the tendency of

people to spend their money is of short duration.

Once they have exhausted their surplus money,

the natural demand for goods and services takes

place.

Types of Inflation

• Demand-pull Inflation – occurs when

demand for goods and services exceed supply.

This is based on law of demand and supply. When

all the productive resources re fully employed, an

additional demand for goods increases prices. It is

no longer possible to expand output or supply.

Another cause would be the excess of

Money supply. When money supply increases,

without corresponding increase in production of

goods and services, prices rise.

Types of Inflation

• 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 prices of raw

materials.

In addition, profit-push version of the

labor sector is the cause of inflation.

Types of Inflation

Structural Inflation explains that the inability

of some sectors of our economy to respond

immediately to demand for goods and services.

When supply cannot meet demand, prices increase.

If there are no obstacles or constraints (financial,

physical or institutional), whenever prices rise,

producers are encouraged to enter the market. This

increases supply and therefore prices fall.

The Philippine Experience

1984

• The Philippine Economy turned from bad to worse.

• Foreign loans did not come, dollars were difficult

to obtain and both domestic and foreign markets

declined.

•The average inflation rate for 1984 was 50 percent.

•As of the end of December 1983 to March 1984,

almost one million workers lost their jobs.

The Philippine Experience

• On the other hand, there were groups who reaped

economic benefits from our economic crisis.

• It has been claimed that a few rich Chinese

businessmen owned the black market and they

dictated the rates.

• Likewise, foreign banks at the beginning of the

crisis in 1983 realized a 79 percent profit on their

investments.

Causes of the Recession

•Economic recession in the industrial countries has

greatly affected our exports to said countries.

•Since exports of raw materials and primary farm

products are the main sources of our dollar

earnings, their reduction has a great impact on our

developing economy.

•Another reason was the increase in OPEC prices of

oil products.

Causes of the Recession

• The UP Report pointed out authoritarianism and

crony capitalism as the roots of the existing crisis.

• It can be said therefore, that economic

opportunities were not equal and the principle of

business efficiency was likely ignored.

• Everything depended on right connections

Government Policies

•The government has introduced economic

reforms or measures to reduce the problems of

inflation and unemployment and these have been

planned for economic recovery. Some of these

measures have been:

•To increase the production of short-gestation

crops and other small-scale industries.

•To reduce over-supply of money.

Government Policies

• To reduce government expenditures through

more economical use of its resources.

• To concentrate more on the development of less

expensive agricultural projects and have shorter

gestation than industrial projects.

• To encourage more foreign investments to

accelerate our economic recovery.

•To transform the people into more self-reliant

and productive groups.

Government Policies

Economic Recovery depends

on Government Officials

•Honesty is one main reason why other countries

experienced success.

•Attitudes and values should be favorable to the

economic growth.

•Economic programs are useless if they are not

properly implemented.

Group 1

Members:

Barroquillo, Paulo Yves

Dela Cruz, Ellaine Christine

Martinez, Karl Lester

Rendon, Jerome Junichi

La Valle, Adrian

III-CCSAD