Business Cycle Unemployment and Inflation 2

Business cycle,
unemployment, and
inflation
By: Ms. Mimi Chua
INTRODUCTION
Every nation had gone through ups and downs in
their economy. Even the richest country in the
world like the United States of America has suffered
depression.
The biggest economic problems of business cycle
are unemployment and inflation. This topic will
provide basic explanation of business cycle,
unemployment and inflation. The topic of business
cycle will extend to its phases, causes and the
experiences in the Philippines to the phenomenon.
In unemployment, we will deal with its basic
concept such as definition, types and different
relationships to GDP and GNP.
Business cycle
Business cycle is the fluctuation in over all
economic activity, characterized by
simultaneous expansion on contraction of
output.
PHASES OF A BUSINESS CYCLE:

1.Peak/Prosperity. This is a phase where
business activities are in its temporary
maximum. The economy at this phase is at full
employment and the level of real output is at its
full capacity and there is a tendency for the
price level to rise.
Business cycle
2.Recession. This is a phase in business cycle that is
characterized by a decline in total output, income,
trade and ultimately employment. Therefore,
during this phase unemployment is induced.
3.Trough/Depression. It is the turning point of
recession, or when economic activity is at its
lowest. In this phase of the business cycle,
unemployment is so severe.
4. Expansion. In this phase, there is a recovery in
the economy wherein income, output, trade,
interest rate, wage and employment are rising,
meaning unemployment is low.
Business cycle
Business in the Philippines has been operating
even during the times of the Negritoes.
Primitive communitites considered bad harvest,
their hunting, farming which could also be
affected by bad weather.
A good amount of rain and sunshine would
improve farming and hunting outputs while
vagaries of depressed their output.
Today advancement of the Philippine economy is
correlated with the performance of other
economies due to openness to international
trade
Causes of business cycle
The following are some selected theories that
causes business cycle.
 Sunspot theory. This theory was advanced by
William Evans, who attributed the fluctuations of
business activity to climatic conditions. The
periodic recurrence prosperity and depression
was blamed to disturbances on the sun, known
as the sunspot. This caused changes in the
climatic conditions on the earth that affects
agricultural production and the entire business
landscape due to the dependence of industries
to agricultural production and the entire
business landscape due to
 Innovation Theory. This theory was based on the
ideas of Joseph Schumpeter.
This theory was defined as the enhancement of an
existing production system that leads to new and
better products.
Innovation brings higher profits for producers as
prices are reduced because of a more efficient
production.
Hence high profitability attract more producers in
the industry and in turn too many players will
reduce individual profit, making others withdraw
especially those who cannot meet with efficiency,
making the industry profitable again.
 SelfGenerating Theory. According to
Wesley Mitchell, this crisis develops into
depression and this condition will lead
recovery and eventually prosperity.
UNEMPLOYMENT
 Unemployment is a condition of people who
are able and willing to work but they cannot
find jobs.
 Here in the Philippines, the unemployment

rate is 11%, representing 4 million out of 35
million Filipinos who are willing and able to
work but cannot find jobs.
Types of unemployment
1. Unavoidable Unemployment
- Frictional unemployment
- Structural unemployment
- Cyclical unemployment
2. Avoidable Unemployment
 There are two types of unemployment:
1. Unavoidable unemployment: there’s three
types if unavoidable unemployment:
a. Frictional Unemployment: it is a
temporary unemployment associated with
changes in the economy. It happens for a
number of reasons: ex. A graduate with a
certain course will take a month to find a
job, shutdown of plant, renovation of
building etc.)
b. Structural unemployment: it occurs when the
location and qualification of the labor force do
not match the available jobs.
ex.1 California Marketing Corporation moved
from Sucat to Laguna, hundred of workers were
displaced because some were unwilling to be
relocated to its new location.
ex.2 During the 90’s was “pager”. With the
advent of Cellular phone, a lot of its operators
were displaced caused by advancement of
technology in the telecommunication industry.
c. Cyclical unemployment- Unemployment
caused by the recession phase of business
cycle. It is caused by inadequate total
spending. As the over all demand for goods
and services decreases, unemployment rises.
2. Avoidable unemployment – Unemployment
usually associated with insufficient demand for
workers is caused by many factors such as poor
performance in the economy.
How much is full Employment
Full employment does not mean that
unemployment rate is 0%. Full employment
is unavoidable or if cyclical unemployment is
zero.
The full employment rate of unemployment
is referred as the natural rate of
unemployment.
Who are underemployed?
 People are underemployed if:
 1.they are working on a part-time basis.
 2.
they are paid full-time but are not busy
because the demand of the product is low.
For example: a shoeshine boy at Escolta,

a watch repairman in Recto,
a factory worker for only 5 hours due to cost
cutting of the company and others.
inflation
 Inflation
is a sustained increase in the average
price level, or it is the rate of change of the
consumer price index (CPI). Mathematically it
can be expressed as follows:
 Inflation = __CPI – CPI x100

2 1__
CPI 1
Consumer Price Index (CPI) A measure that examines

the weighted average of prices of a basket of consumer
goods and services, such as transportation, food
and medical care. The CPI is calculated by taking price
changes for each item in the predetermined basket of
goods and averaging them; the goods are weighted
according to their importance. Changes in CPI are
used to assess price changes associated with the cost of
living.
Causes of inflation
1. Demand-pull inflation- “too much spending
chasing too few goods” is an description of
demand-pull inflation. It occurs when the level
of spending in the economy exceeds the
amount firms are capable of producing.
2. Cost push and supply shock inflation – both

refers to similar situations, when factors on the
supply side of the economy push up cost of
production and force firms to raise prices. Cost
push inflation is the term frequently used when
labor unions demand for higher wages. Supply
shock inflation is when a vital resource
becomes scarce, causing its prices to rise and
raising costs of production for firms.
Losers in inflation
1. Holders of Securities – people who have
invested on stocks and bonds lose during
the time of inflation.
2. Pension holders – the elderly also lose in
inflation, because they are receiving fixed
monthly pension: any increase in inflation
will reduce the amount of goods and
services it can purchase.
3. Fixed Income earners – Laborers and office
workers who are getting a fixed monthly
income cannot keep up with the
accelerating inflation.
Winners of inflation
1. Windfall to Fixed Asset owners –
Landowners gaining during inflation as the
value of land and other fixed asset
appreciate.
2. Producers – The income of producers
increases when inflation takes place as the
price of commoditites increase, it results to
a higher returns for business firms.
Deflation is better than inflation
 Deflation is a sustained decrease in the average
level of price. This is a sharp contrast to
inflation. Is deflation good for the economy?
 No, because producers will lose the capital of
their business and will eventually shut down.
Because adverse decrease in price will affect
their income. The effect is, higher
unemployment, lower outputs, lower taxes, and
low national output.
 An inflation rate of 2-3% is good for both
consumers and producers. It will give incentives
for producers to produce, and at the same time a
2-3% increase inflation is not burdensome to
consumers because it is very minimal.
hyperinflation
 Hyperinflation refers to a period of
extremely high inflation reaching 100,000%
and above.
 In economics, hyperinflation is inflation that
is very high or "out of control". While the real
values of the specific economic items
generally stay the same in terms of relatively
stable foreign currencies, in
hyperinflationary conditions the general
price level within a specific economy
increases rapidly as the functional or internal
currency, as opposed to a foreign currency,
loses its real value very quickly, normally at
an accelerating rate.
stagflation
 Stagflationcomes in two different words,
stagnant and inflation, The word stagnant is
used to depict dormancy of the economy
with the simultaneous occurrence of inflation.
This simply means that the economy is
experiencing increasing inflation and
unemployment at the same time.

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Business cycle,

PHASES OF A BUSINESS CYCLE:

 Here in the Philippines, the unemployment

For example: a shoeshine boy at Escolta,

 Inflation = __CPI – CPI x100

Consumer Price Index (CPI) A measure that examines

2. Cost push and supply shock inflation – both

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