Macroeconomics &

Business Environment

17
Economic Fluctuations
and Unemployment

PREPARED BY:
Pyare Lal Verma, Faculty
Economics/QM, INC Shimla
 17
Session

1 How do fluctuations in economic growth take place?

2 What is a business cycle and what are various phases of business cycle?

3 What are various theories of Business Cycle?

Multiplier Accelerator Theory of P.A. Samuelson
4 How can we explain Employment Fluctuations?
Concept of Full Employment

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17.1
Session
Fluctuations in the Economic Growth

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17.1
Session
Business Cycle & its Phases

A swing in total national output, income and

employment usually (lasting for over 2-10 years is a
business cycle) marked by widespread expansion and
contraction in many sectors of the economy.
Business Cycle is typically divided into four phases:
c)The recovery
d)The prosperity
e)The recession
f)The depression

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17.1
Session
Features of Business Cycles

a) The phases of business cycle recur with some sort of

regularity and are uniform in case of different cycles.
b) In case of developed countries the cycle length is
short (around 4.5 years) than the developing countries
(around 7.5 years)
c) Amplitude of a business cycle is the maximum extent
of departure from long run trend in either direction.
d) All economic variables are affected by the business
cycles.

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17.2
Session
Theories of Business Cycle: Multiplier Accelerator

• Multiplier Theory
Income depends upon Investment.
For a given level of aggregate output to be maintained,
investment activity must be maintained at certain level.
•Accelerator Theory
Current Investment depends upon the change in aggregate
output from previous year to this year.
For a constant level of investment to be maintained output must grow
at a certain rate.
•Accidental increase in investment set up cumulative
upward movement of output.
•To generate business cycle two more ingredients are
a) Ceiling: beyond which real output cannot grow.
b) Floor: Below which the gross investment cannot fall.
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17.2
Session
Business Cycles Indicators
a) Monetary and Fiscal Policies which seek to combat these
cyclical movements are called stabilization policies
b) Business Cycle Indicators
• Leading Indicators: includes measures that generally indicate
business cycle peaks and troughs three to twelve months
before they actually occur.
• Coincident Indicators: contains measures that indicate the
actual incidence of business cycle peaks and troughs at the
time they actually occur. The number of employees on payrolls,
industrial production etc are examples.
• Lagging Indicators: measures that generally indicate business
cycle peaks and troughs three to twelve months after they
actually occur. Labour cost per unit of output in manufacturing,
the interest rate, outstanding commercial and industrial debt,
the Consumer Price Index etc.

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17.3
Session
Employment Fluctuation

a) Used as a barometer to point out condition of economy

b) Unemployment is the result of deficiency of effective
demand
c) Nature of unemployment in LDC’s are different than
DCs
d) In LDCs unemployment is the result of inadequate
capital equipment while in DCs it is the result of
deficiency in effective demand

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17.3
Session
Unemployment Categories

• Frictional : Due to Imperfect Information

ii. Employer unawareness about available workers
iii. Workers unaware about job offerings
b) Structural: Due to structural changes
v. Leaving out not well qualified
• Cyclical: Due to general downturn
• There is inverse relationship between output and
employment.

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17.3
Session
The Concept of Full Employment

a) Full employment is the level of employment that

results when the rate of unemployment is normal.
b) At a given point of time there is some natural rate of
unemployment in the dynamic exchange economy.
c) Natural rate of unemployment is the long run average
of unemployment cause due to frictional and structural
changes in labor market.
d) Policies the encourage workers to reject job offers and
prohibit employer from offering appropriate wage rates
increase natural rate of unemployment.
e) Actually rate of unemployment generally rise above
the natural rate during recession and vice versa.

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Session

THANK YOU

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