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MACROECONOMICS

Business Cycle,
Unemployment Rate and
Inflation Rate
Corpus, Kristine S.
Cruz, Martin Joseph S.
Del Rosario, Beatrice Camille G.
Estrada, Jemia Pearl A.
Franco, Juan Miguel L.

Overview
1.
2.
3.
4.
5.
6.
7.
8.

Business Cycle
Labor Force Concepts
Unemployment
Okuns Law
Misery Index
Consumer Price Index (CPI)
Inflation
Phillips Curve and Stagflation

SUCCESSFUL BUSINESSMEN

Business Cycle
Economic cycle or boom-bust cycle
Ups and Downs of the economy

Fluctuations that an economy experiences


over time resulting from changes in
economic growth.
Fluctuations are measured by considering
the real GDP and unemployment
Long term growth trend
Not recurring but periodic

Burns and Mitchell: Business


Cycle
1. Measuring commodity output,
income, prices, interest rates,
banking transactions, and
transportation services.
2. Business cycle divided into phases

Business Cycle Indicators


Leading Economic Indicators
Manufacters new orders for consumer goods and materials,
index of vendor performance, manufacturers new orders for
capital goods, new building permits, index of consumer
expectations

Coincident Economic Indicators


Industrial production, real personal income, real
manufacturing and trade sales, number of employees on
payrolls

Lagging Economic Indicators


Labor cost, average prime interest rate, Consumer Price
Index, Average duration of unemployment

Phases of the Business


Cycle

Contraction or the Slow Down


Peak
Trough
Expansion

Business Cycle

Contraction or Slow Down


Slowdown in the economic activity
Defined by: low or stagnant growth,
high unemployment and decreasing
prices
Accompanied by a bear market

Peak
Upper point of the cycle and
economy is defined as overheated
Expansion turns into contraction
irrational exuberance

Trough
Lowest point of the business cycle
Usually occurs in a period of
recession

Expansion
Speed up in the economic activity
Economy starts to grow again (bull
market)
Defined by: high growth, low
unemployment and increasing prices

GDP
GDP = C + I + G + (N-X)
GDP = Consumption + Investment +
Government spending + Net exports
(Exports imports)

GDP = C(Y-T) + I(r) + G + (N-X)


Y: income T: taxes
R: interest rate
As r increases, I decreases
As r decreases, I increases

Labor Force

Labor Force Concepts


Concept

Meaning

1. Labor Force

Population of 15 yo and over who


contribute to the production of
goods and services to the
country

2. Employed

Persons in the labor force who


are reported as either at work or
with a job

3. Unemployed

Persons in the labor force


reported as:
a. No work
b. Currently available for work
c. Seeking or or not seeking
work

4. Underemployed

Employed persons who desire to


have additional hours of work in
their present job or want an

Labor Force Concepts


Concept

Meaning

5. Labor Force Participation Rate


(LFPR)

Proportion of total labor force to


total household

6. Employment Rate

Proportion of employed persons


to the total labor force

7. Unemployment Rate

Proportion of underemployed
persons to the total labor force

Unemployment
Unemployment Rate
Types of Unemployment
Full Employment

Unemployment
Manapat, Olaguer and Pedrosa (2010) :
Scenario
15 years old and above
Available for work but without work
Seek/do not seek
At least 4 weeks

Unemployment rate

X 100

Labor force = Employed +


Unemployed
15 years old and above
Contributed goods and services
*** exemptions

Example
Question:
In December 2012, 143,060 Filipino
residents were employed and 11,844
were unemployed. Find the
unemployment rate for December 2012
Unemployment rate = 11,844
(143,060 + 11,844)

=
7.64%

Types of unemployment
Unemploym
ent
Unavoidable
unemployme
nt
1.Frictiona
l
2.Structur
al
3.Cyclical

Avoidable
unemployme
nt

Unavoidable unemployment
Gabay, Remotin, Uy and Pizarro-Uy
(2012) :
1. Frictional Unemployment
temporary, associated with the changes in
the economy

2. Structural Unemployment
location and qualification of labor
force do not match the available
jobs
technology

Unavoidable unemployment
3. Cyclical Unemployment
Caused by the recession phase of
the business cycle
Medina (2003) :

4. Seasonal Unemployment
Jobs that are seasonal in nature

Underemployment
Employed
Desire
additional working hours
Additional job
New job with longer hours

Underemployment

Invisibly
Underemploy
ed

Visibly
Underemploy
ed

Worked 40
hours

Worked less than 40


hours

Want
additional

Want additional
working hrs

Full Employment
Unemployment rate 0
Cyclical Unemployment = 0

Okuns Law
The inverse relationship between GDP
growth & unemployment
As GDP rises above its natural rate,
unemployment falls

For every 1% increase in theunemployment


rate, a country'sGDPwill
be roughly an additional 2% than
itspotential GDP.(EconedLink)

Formula of Okuns Law


2 (unemployment rate-natural
employment) =
X 100%
potential GDP-actual
GDP

potential
In other
words, when unemployment
GDP
rate goes up by 1%, GDP goes down by
2%

Practice Questions
Q According to Okun's law, when cyclical
unemployment changes from -3% to -2%, the
output gap changes from _____, measured
relative to potential output.
A. -6% to -4%
B. -3% to -2%
C. -1% to 0%
D. 3% to 2%
E. 6% to 4%

Okuns Law in the United States

-Okuns law in the short can only be used in the


short run
-law must be regarded only as a rule of thumb
and not as a structural feature of the economy

Practice Questions
QAccording to Okun's law, when cyclical
unemployment increases from 2 to 4%, the
output gap increases from ___%.
A. -4 to -8
B. -2 to -4
C. 0 to 2
D. 2 to 4
E. 4 to 8

GDP Growth and Unemployment Rate in The


Philippines

Misery Index
A measure of economic well-being for a specified
economy
computed by taking the sum of
theunemployment rateand theinflationrate for
a given period
Unemployment rate + Inflation rate
An increasing indexmeans a worsening
economic climate for the economy in question,
and vice versa.

Example

Philippines as the 80th miserable


country out of 108 countries--2014

Factors contributing in World Misery


Index

Inflation rate
Unemployment rate
Interest rate
GDP per capita

Consumer Price Index (CPI)


It indicates the average prices paid by
consumers for a market basket of goods
and services from a base period.
Examples of goods and services:
transportation, food and medical care
Market basket is the term used for
commonly purchased goods and services
by an average household

Consumer Price Index (CPI)


Measure of changes in the
purchasing-power of a currency and
rate in inflation (increase in prices)
CPI: Index that expresses the current
prices of a basket of goods and
services in terms of the prices during
the same period in a previous year
Shows the effect inflation rate on
purchasing power

How is the CPI used?


1. As an economic indicator
2. As a deflator of other economic
series
3. As a means of adjusting the value of
the peso

Solving for the CPI


Sample Problem

Consumer Price Index CPI in Philippines increased to


142.60 Index Points in March from 142.50 Index Points
in February of 2016. Consumer Price Index CPI in Philippines
averaged 42.94 Index Points from 1957 until 2016, reaching
an all time high of 142.90 Index Points in January of 2016 and
a record low of 1.30 Index Points in February of 1957.
Consumer Price Index CPI in Philippines is reported by the
National Statistics Office of Philippines.

Inflation
When the general prices of goods and
services increase
As inflation happens, the purchasing power
of peso decreases
The purchasing power of peso indicates
how much peso in the base year is worth
in the current year
Measured using CPI

Inflation rate
Annual rate of change of the
consumer price index (CPI)

Types of Inflation
1.
2.
3.
4.

Wage Inflation
Cost-Push
Price Power Inflation
Sectoral Inflation

Wage Inflation
Also known as demand-pull or excess
demand inflation
Total demand for goods and services
> supply of goods and services
Less supply; higher prices

Cost - Push
Increases in production cost push the
increase of increased prices
Increase in wages = Increase in the
overall price of the product

Pricing Power Inflation


Administered Price Inflation
Business houses and industries
increase price to increase profit
margins
Cannot happen at times of
economical crises and economic
depressions
Oligopolistic Inflation

Sectoral Inflation
Whenever a certain sector of
industries increase prices, increases
the prices of other industries related
to it
Layoffs will happen whenever this
happens at times of economic
recession

Effects of Inflation:
Two Types of Effects
Pros
Labor Market
Adjustment
Room to
Maneuver
Mundell-Tobin
Effect
Instability with
Deflation

Cons
Cost-Push
Inflation
Hoarding
Shoe Leather
Cost
Social Unrest
and Revolt
Hyperinflation

Labor Market Adjustments


Results in high employment
Enables labor markets to reach
equilibrium
Room to Maneuver
Liquidity Trap
Moderate level of inflation = nominal
interest rates stay sufficiently above 0

Mundell-Tobin Effect
Moderate inflation = induce savers to
substitute lending for money holding
Fall of market clearing interest rates
Increase in investments due to lower
interest rates

Instability with Deflation


Deflation is expected
Happens only after deflation occurs
Continual fall of prices
Long term deflation followed by periodic
spikes in prices

Cost-Push Inflation
Demand of an increase in wages =
increase in price
Continual increase in prices due to
increasing demand for more pay
Hoarding
Creates shortage in hoarded goods
Caused by fear in a decrease in the
buying power caused by inflation

Shoe Leather Cost


Increases the opportunity cost in
holding cash balances in interest
paying account
More transaction will be needed
slowly depleting the cash
Social Unrest and Revolts
Revolutions caused by underpaid,
underemployment, etc

Hyperinflation
An extremely rapid period of inflation
Caused by a rapid increase in money
supply
Menu Costs
Constant changing of menus by firms
to keep up with the increase in prices

Phillips Curve

Phillips Curve
Simply states that employment
rates are directly related to the
inflation rate

Wt - Wage in last period


Wt-1 - Wage in current period
E - Response of wage change to employment
rate
U - U* - Employment Gap
U - Actual Employment
U* - Natural Rate of Unemployment
Wt-1 = Wt[1 - E(U-U*)]

Stagflation
Persistent high inflation combined with
high unemployment rate and stagnant
demand in the country's economy