Principles

Of

Topic 7 : Macroeconomics Problems (Part 1)

 Learning Objectives

7.1) Business Cycle

7.2) Unemployment

7.3) Inflation

2
Learning Objectives

(7.1)
Business Cycle

3
 Business Cycles
Def : the more or less regular fluctuations
of GDP around its long-run trend, along
with associated changes in levels of
employment, unemployment, and prices.
The best, most precise ways to describe
the ups and downs of economic activity.
The four phases of a business cycle are:
trough, expansion, peak and contraction
LO-7.1
4
Business Cycles
LO-7.1

5
 Business Cycles
Peak LO-7.1

– maximum level of output (real GDP).

– High level of employment / minimum
unemployment rate.
– consumer and business confidence is optimism.
Trough
– real GDP stops declining (minimum).
– the moment when business activity is at its
lowest point in the cycle
– Unemployment is relatively high (maximum) and
poorer business and consumer confidence.
6
 Business Cycles
Contraction LO-7.1

– a period of falling real GDP.

– rising unemployment and declining business
and consumer confidence.
– Also sometimes called a recession.
– Usually a recession is said to occur if there
are two quarters of declining real GDP.
Expansion
– Output (real GDP) will rise.
– Unemployment is falling and both consumer
and business confidence is growing.
– Also sometimes called a recovery.
7
Learning Objectives

(7.2)
Unemployment

8
 Learning Objectives
a) Definition of unemployment
b) Causes of unemployment
c) The breakdown of the population
d) The unemployment rate

9
 Unemployment

• Def: Unemployment is the inability of labor-

force participants to find jobs.
• As the labor force grows, making sure that
all participants are fully employed becomes
a critical issue.
• Unemployment is a macroeconomic issue
that directly affects people. When a member
of a family is unemployed, the family feels it
in lost income and a reduced standard of
living.
LO-7.2a
10
 Types and Causes of Unemployment
LO-2b
1) Frictional unemployment
• refers to the time lag between the jobs when an
individual is searching for a new job or is
switching between the jobs.
• Also, created due to the inadequate and
inconsistent information.
• occurs because workers have different abilities,
preferences / jobs have different skill
requirements.
• temporary and lasts for a short period of time.
• it is not caused due to the shortage of job, but in
fact, the workers themselves quit their jobs in
search of better opportunities. 11
 Types and Causes of Unemployment
LO-2b

2) Structural unemployment
• the situation when the jobs are available,
and also the workers are willing to work,
but they don’t have the required job skills to
qualify for the vacant positions.
• in other words, a mismatch between the
skills that unemployed workers possess
and the skills required to perform a job.
• created due to the advancement in
technology that changes the demand
patterns for the labor workforce.
12
 Types and Causes of Unemployment
3) Cyclical unemployment LO-2b

• a type of unemployment which is related to

the business cycle.
• cyclical unemployment will tend to rise
sharply during periods of slow economic
growth or during periods of economic
contraction (recessions).
• the demand for the commodities fall which
leads to less production and ultimately
fewer workers are needed.
• In an economic downturn, some firms will
go out of business and workers will lose
their jobs. 13
 Types and Causes of Unemployment
LO-2b

4) Seasonal Unemployment
• unemployment is unemployment due
to seasonal changes in employment or
labor supply.
• certain industries only produce or
distribute their products at certain
times of the year.
• e.g. agriculture, catering and leisure,
construction, tourism, etc.

14
 The Breakdown of The Population
LO-2c
Employed
Labor Force

Adult population
> 16 years
Unemployed

Not in the Labor

Force
Population

Child Population
< 16 years
In
In
To N
th
N
th
To ot
e
tal
tal ot
e
P in
L
in
L
P A
N th
a
o A
N th
a
o cti
ot e
b
p cti
ot e
b
p ve
A L
or
15
ul ve
A L
or
ul cti Fa
ati cti Fa
ati ve b
or
o ve b
or
o or
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F
F
or
or
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ce
 Labor Force
LO-2c

Labour force refers to those who, during

the reference week, are in the 16 to 64
years (in completed years at last birthday)
and who are either employed or
unemployed

Labor force = Employed + Unemployed

16
 Employed
Def: All persons (>16) who, at any time during the
reference week worked at least one hour for pay,
profit or family gain (as an employer, employee,
own-account worker or unpaid family worker).
They are also considered as employed if:
a) Did not work during the reference week
because of illness, injury, disability, bad weather,
leave, labour dispute and social or religous
reasons but had a job, farm, enterprise or other
family enterprise to return to.
LO-2c 17
 Employed
b) Temporary laid-off with pay and would
definitely be called back to work.
c) Employed less than 30 hours during the
reference week because of the nature of their
work or due to insufficient work and are able
and willing to accept additional hours of work.
• Each employed person is counted only once,
even if he or she holds more than one job.

LO-2c
18
 Unemployed
Def: A person 16 years old and above who is not
working during the reference week, is available for
work and has made specific efforts to find work
over the past four weeks.

They are also considered as unemployed if:

a) persons who did not look for work because
they believed no work was available or that they
were not qualified.

LO-2c 19
 Unemployed
b) persons who would have looked for work if they
had not been temporarily ill or had it not been for
bad weather;

c) persons who were waiting for result of job

applications; and

d) persons who had looked for work prior to the

reference week.

LO-2c
20
 Unemployed
There are four categories of unemployed workers.
a) Job Loser - An individual whose employment
was involuntarily terminated or who was laid off.
b) Reentrant - An individual who has worked a full-
time job before but left the labor force and has
now reentered it looking for a job.
c) Job Leaver - An individual who voluntarily quit.
d) New Entrant - An individual who has never
worked a full-time job for two weeks or longer.
LO-2c
21
 Not In
Not in The Labor Force
the Labor Force
• Persons who are neither employed nor
unemployed are not in the labor force.
– retired, full time students, home makers
& volunteers.
• Institutional Population.
– mental institutions, prison & military.

LO-2c 22
 Unemployment Rate

The unemployment rate (%) is calculated as the

percentage of the labor force that is unemployed.

N u m b e r u n e m p lo y e d
U n e m p lo y m e n t ra te = 100
L a b o r fo rc e

LO-2d

23
Calculate the labor force, unemployment rate
using this data:
Adult population LO-2d

139.7
# of employed
million
# of unemployed 13.7 million
not in labor force 85.7 million
Labor force = employed + unemployed
= 139.7 + 13.7
= 153.4 million

U-rate = 100 x (unemployed)/(labor force)

= 100 x 13.7/153.4
= 8.9% 24
Learning Objectives

(3)
Inflation

25
 Learning Objectives

a) Definition of inflation
b) Causes of inflation
c) The inflation rate

26
 Definition of Inflation
• Def: When there is a continuous trend in the
rising average price levels in the economy for
2 quarters consecutively for goods and
services, it will create inflation.
• Inflation is NOT high prices - it is rising prices.
• Inflation takes place when a basket of goods
cost more to purchase, therefore lowers the
value of money and reduce purchasing power.
• Not all prices change at the same time or by
the same amount.  
• The inflation rate measures average, not
individual, price changes.   LO-3a 27
 Definition of Inflation
• For example, if the inflation rate is 2%
annually, then theoretically a RM1 pack of
gum will cost RM1.02 in a year.
• Deflation - opposite to inflation, occurs when
the general level of prices is falling.
• Hyperinflation is generally defined as
inflation exceeding 50% per month.

LO-3a 28
 Causes of Inflation
LO-3b
1) Demand pull inflation
• Occurs when aggregate demand is
growing faster than supply.
• When there is excess demand producers
are able to raise their prices and achieve
bigger profit margins because demand is
running ahead supply.
• This usually occurs in growing
economies (boom or rising in GDP). 

29
 Causes of Inflation
LO-3b

2) Cost push inflation 

• occurs when the price of inputs increases.
• If the price of these were to rise, it would
reduce the ability of producers to
generate output because their unit cost of
production had increased.
• firm need to increase prices to maintain
their profit margins, it will create inflation.
 
30
 Measuring Inflation
Inflation is measured as the percentage change
in a price index from one year to the next. A
price index measures the average price level
for a set of goods and services, relative to a
base year.

Calculating the Inflation Rate:

where F is the final price index

value and I is the initial price index
value. LO-3c
31
 Measuring Inflation
Example: 2016 – 133 (price index) LO-3c

2017 – 137 (price index)

Calculate Inflation rate from 2016 to 2017:

This gives an inflation rate of 3%, meaning the

average price level increase by 3% from 2016
to 2017.
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exercises
33
 Question 1

• A retired person.
• An individual who looked for work for
seven months and stopped looking six
weeks ago.
• A law student who finishes law school
quits his job as a law clerk and has been
actively seeking work as a lawyer.
34
 Question 1

• Jenny is a hugely successful film star,

age 12, who has earned over $5,000,000
each year for the past five years.
• Someone who works for pay in his or her
own business.
• A full-time student who is not working.

35
 Question 2

If year 1 is the base year and the price index

for year 2 is 105 and the price index for year 3
is 103, what is the inflation rate in years 1 and
2? years 2 and 3? Explain what has happened
between years 1 and 2? Years 2 and 3?

Note: The price index is always equal to 100 in

the base-year.

36
 Reference

• Chapter 3
• Tucker, I.B (2011). Economics for today’s
world. (7th ed.). Mason, OH: Thomson
South Western.
• Mankiw, G. N. (2007) Essentials of
economics (4th ed.). Mason, OH:
Thomson South Western.
• Lecture notes

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