Chapter 9:Business cycles,

unemployment, and inflation

Business
cycles:fluctuations in economic
activity over time

duration intensityvary
X
Phases of a business
cycle

NN:
1. Peak / boom
prosperity
2 2. Recession

3. Trough/ Depression Bust

4. Recovery
-> X, W, V, I
>

Time

Immute / Not affected Vulnerable | More affected

Food Real Estate

Health care Auto

Education Travel & Tourism

Unemployment.Anyone who is over 15

years of age, is
currently jobless andis
actively looking
for a job.

population
labour age population under 15
don't want
labour force work
to

employedunemployed
full time parte

labour force
populationrate =

labour age population

x100 = 70%

of
# employed
unemployment rate =

labour force
x100 = 50
 ? Why official UR be
may not accurate?

1. Based on a random sample survey

2. Parttime workers looking for full time jobs are excluded

3.
Discouraged workers are excluded

4.
Underemployed workers are excluded

5. People working for cash/receiving EImay be wrongfully included

Types of unemployment
1. Seasonal unemployment:temporary
2. Frictional unemployment:between jobs
3. Structural unemployment:loss of jobs because skills becomes obsolete due to change in

technology
4. Cyclical unemployment:lay offs due to decline in economic
activity
1 +

2 3 +

Natural
=
Rate Unemployment
of (NRU)

If actual UR NRU, =
we call it FULLUNEMPLOYMENT

micro
↓revenue
costs unemployment
of
Government
macro ↑ expenditure

Economy:loss potential
of GDP

Okun's laws.Ifunemployment by 1%, GDP1 by 2 2.5%

to

Inflation.An increase in the average price level overtime

↳ Ipurchasing power value

& of
money
fixed basket of about
average prices of
the
CPI:measures the change in a 600
goods and

services consumed by average urban households.

7
groups
1. Food 3. Housing 5. Health & Personal care 7. Tobacco &

2. clothing 4. Transport 6. Education & Recreation Alcohol

Inflation Rate CPFCOC3-CPIC0 =

x 100
CPICOC2

Rule of 70:
of
#

P level
year
to
double
 Types of Inflation

1. Demand Pull Inflation:ifdemand exceeds production compacity, prices ↑

(buyers / consumers)

2. Cost Push Inflation:if of

cost
production it, producers push up prices

(sellers/producers)

Effects of Inflation

1. 'Real income

2. Fixed income earners suffer more

3. 'Financial' Asset owners lose value

4.
Physical Asset owers
gain value

5. Unanticipated inflation benefits to the borrowers/debtors at the expense

of lenders/creditors.

Actual Nominalinterest Real interest anticipatedinflation rate

7% 401 3