CHAPTER 14

MACROECONOMIC
PROBLEMS
 BUSINESS CYCLE (trade
cycle)
 DEFINITION
– Business cycle refers to wave-like fluctuations in
aggregate economic activities particularly in
national income, employment and output.
OR
– Business cycle is composed of periods of good trade
with rising prices and low unemployment percentages
and followed by periods of bad trade with falling
prices and high unemployment percentages.
 BUSINESS CYCLE (cont.)

 CHARACTERISTICS
1. An economy-wide phenomenon (prevails in all
industries)
2. A wave-like movements in economic activity
3. Business fluctuations that occur periodically and tend to
be recurrent in nature
4. Expansion and contraction are self-reinforcing and
cumulative in effect
5. Upward and downward movements
 PHASES OF BUSINESS
CYCLE
PEAK OR BOOM
 The period where the economy is at full employment.
 Maximum output and lowest unemployment rate.

RECESSION
 The period where real GDP declines.
Real GDP  Output decreases and unemployment rate
increases.
 A deep and long recession is known as depression.
PEAK
TROUGH
PEAK  The period where the output is minimum
RY

and unemployment rate is maximum.

VE
CO
RE

RE
CE

RECOVERY
SS

 The period where the output

IO
N

level increases and

TROUGH
unemployment rate declines.
Year
 BUSINESS CYCLE (cont.)

 Expansion is the period in a business cycle

where it moves from a trough to a peak i.e.
where output and employment increase

 Contraction is the period in a business cycle

where it moves from a peak to a trough during
which output and employment decline.
 Peak (the prosperity period)

 Economy is at full employment

 All available resources are employed
 High level of output and trade
 Increasing effective demand
 Higher levels of income
 Business optimism
 More investment
 Increase in wages and prices of inputs / interests
and profits
 Recession (contraction)

 Decrease in volume of output, trade and

transactions.
 An increase in the level of unemployment
 A reduction in aggregate income in terms of
wage and profit
 A decline in consumption expenditure and
investment level.
 Trough

 The recession ends when the real GDP stops

falling. The minimum point is called a trough. It
will last until there is increase in real GDP.

 Level of economic activity is at the lowest

 Unemployment rate higher
 Great suffering and hardship to society, worst
phase of a business cycle
 Recovery (revival)

 The trough is followed by a recovery.

 Output expands, employment expands
 Increased government expenditure
 Changes in production techniques
 New innovations
 Exploitation of new sources of energy
 Demand for consumption of goods
 Demand for capital goods
 Output, income, wages, prices and profits will start to
rise
 UNEMPLOYMENT
 DEFINITIONS
– LABOUR FORCE
• All persons in the age group of 15 to 64 years who are working
or actively seeking work.
• Those above 15 years of age who are students, housewives,
pensioners and discouraged workers are excluded.
• The people from the total population above 15 years of age,
who are not in any institution and are either employed or
unemployed but actively seeking employment.
 UNEMPLOYMENT

– UNEMPLOYMENT
• Defined as labour force participants being available and
willing to work but unable to find jobs.

– UNEMPLOYMENT RATE
• The percentage of the labour force that is unemployed and
actively seeking employment.
– The labour force participation rate
• The labour force participation rate is defined as the fraction
of the labour force to the total working age group population

= Labour force / Working age population (15-64 years old)

 UNEMPLOYMENT (cont.)

– A DISCOURAGED WORKER
• An individual who wants to work but has been unsuccessful
for a long period in finding a job and has given up seeking
jobs. He is not included in the labor force.

– UNDEREMPLOYMENT
• An individual who works part-time or who are in jobs below
their capability, but who are seeking full-time employment.

– FULL EMPLOYMENT
• The situation in the economy where all available resources
are employed to produce goods and services.
 UNEMPLOYMENT (cont.)

CALCULATION
UNEMPLOYMENT = NUMBER OF UNEMPLOYED X 100%
RATE LABOUR FORCE
 FRICTIONAL
UNEMPLOYMENT

 Frictional unemployment occurs when people

are in between jobs, or are entering or re-
entering the labour force.
 Temporary unemployed for a short period of
time.

 E.g. people quitting their job for higher

wages/better position
 E.g. fresh graduates seeking jobs
 CYCLICAL UNEMPLOYMENT

 Occurs when there is a lack of jobs, resulting

from downsizing in a business cycle or a
recession.
 Unlike frictional unemployment, cyclical
unemployment is involuntary.

 It may take more time till the economy recovers.

 STRUCTURAL
UNEMPLOYMENT

 Arises due to structural changes in the

economy of a country.
 A worker loses his or her job because that job is
no longer a part of the structure of the economy.
 A structural unemployed person has difficulties
securing a new job, without upskilling or
reskilling/retraining or getting additional
education.
 E.g. Technological unemployment
 SEASONAL UNEMPLOYMENT

 Arises due to a seasonal variation in the

activities of particular industries.
 Climate changes, changes in fashion trends,
seasonal businesses, festival related
businesses
 IMPACT OF UNEMPLOYMENT

 On Individual and Society

1. Loss of income and self respect
2. Loss of job skills
3. Social and political problems
 On the Economy
1. The national income gap (potential and actual)
2. Loss of government revenue
3. Unemployment insurance – govt. expenditure
4. Slow economic growth / output / development
 Job creation

ning Development of new

Provi
vidding trai
ain
on
attiio land
and educ ca

Lowerin
Ope
enn ma ke
arrk ett ing reserv
e
ion requirem
ope
op attio
erra ent

Low
Loweerrin
ing ing
Lowerin
at e
discount rate
cou interest r

Increase in
Decrease in tax government
expenditure
 INFLATION

 DEFINITIONS
– INFLATION
• A continuous increase in the general price level of goods and
services in the economy.
– DEFLATION
• A decrease in the general price level of goods and services in
the economy.
– STAGFLATION
• The condition in an economy where it experiences high
unemployment and rapid inflation simultaneously.
– DISINFLATION
• A reduction in the rate of inflation.
 INFLATION (cont.)

CALCULATION
INFLATION RATE = CPI 2007 – CPI 2006 X 100%
CPI 2006

where,
CPI = Consumer Price Index
 DEMAND-PULL INFLATION

Demand-pull inflation occurs

OYF is the full employment aggregate output.
when AD exceeds AS

General Price Level

AS Increase in AD above full
employment from AD1 to
AD2, increases price to P2
but output remains constant.
P2
Increase in AD
from AD0 to AD1
P1 will increase the
price from P0 to
P0 AD2 P1 and output ,
Y0 to YF.
AD1
AD0

0 Y0 YF Real Output
 COST-PUSH INFLATION

AS0 , AS1
General Price Level
OYF is the full employment
aggregate output.

Increase in cost will shift

P1 the AS curve to the left,
P0 AS1. General price level
AS1
increases from P0 to P1.

AD1

0 Y1 YF Real Output

Cost push inflation occurs when AS shift to the left.

 Measure to control Inflation

 Direct control measures

 Price control and rationing
 compulsory savings
 Anti-hoarding campaign
 Monetary Policy
 Open market operations
 Raising reserve requirements
 Raising discount rate
 Raising interest rate
 Fiscal policy
 Increase in tax
 Decrease in government expenditure
 Numericals

Labour statistics 2010 2011

Total population 225 240
Not in labour force 50 52
employed 165 180

Calculate
•The labour force for year 2010 and 2011
•Unemployment rate.
 The population is 50 million,the labour force is
26 million and the no. of employed is
23.5.calculate the unemployment rate
 Complete the following table

Years Total labour force Total employed Unemployment rate(%)

1996 8372.0 8162.7
1997 9038.2 8805.1
1998 8880.9 3.2
1999 9010.0 3.0
2000 9892.1 3.6