BUSINESS CYCLES, INFLATION

AND UNEMPLOYMENT

By Prof Kiran Rodrigues

Inflation
 Inflation is a rise in the general level of prices
of goods and services in an economy over a
period of time. 

 When the price level rises, each unit of

currency buys fewer goods and services. 

 A chief measure of price inflation is the

inflation rate.

 When Prices rise the Value of Money falls.

STAGES OF INFLATION
 1. CREEPING INFLATION (0%-3%)

 2. WALKING INFLATION ( 3% - 7%)

 3. RUNNING INFLATION (10% - 20 %)

 4. HYPER INFLATION ( 20% and abv)

TYPES OF INFLATION
1. Demand Pull Inflation

2. Cost Push Inflation

Causes of Inflation
1. Demand pull Inflation
Causes for Increase in Demand :-
 Increase in Money Supply
 Increase in Black Marketing
 Increase in Hoarding
 Repayment of Past Internal Debt
 Increase in Exports
 Deficit Financing
Cont……….
 Increase in Income
 Increase in Black money
 Increase in Credit facilities
Implications on the Economy
 Higher Disposable income

 Lower personal taxes

 Higher budget deficits

 Investment Booms
Cont….
• 2) Cost Push Inflation
Causes for Increase in Cost :-
 Increase in cost of raw materials
 Shortage of Supplies
 Natural calamities
 Industrial Disputes
 Increase in Exports
 Increase in Wages
 Increase in Transportation Cost
 Huge Expenditure on Advertisement
Implications on the Economy
 Slower productivity growth

 Higher wages and interest rates

 High food and energy costs

 Wage price spiral

 Falling Dollar
Effects of Inflation
• Inflation can have positive and negative effects on
an economy.
• Negative effects of inflation include loss in stability
in the real value of money and other monetary
items over time; uncertainty about future inflation
may discourage investment and saving
• High inflation may lead to shortages of goods if
consumers begin hoarding out of concern that
prices will increase in the future. Positive effects
include a mitigation of economic recessions, and
debt relief by reducing the real level of debt.
Business Cycles

Business Cycles
 The business cycle is the cycle of short-term ups and
downs in the economy

 An expansion, or boom, is the period in the business

cycle from a trough up to a peak, during which
output and employment rise.

 A contraction, recession, or slump is the period in the

business cycle from a peak down to a trough, during
which output and employment fall.
Business Cycles
A recession is a period during which aggregate
output declines. Two consecutive quarters of
decrease in output signal a recession.

A prolonged and deep recession becomes a

depression.
Variants of Inflation
 Stagflation occurs when the overall price level rises
rapidly (inflation) during periods of recession or high
and persistent unemployment (stagnation)

 Hyperinflation is a period of very rapid increases in

the overall price level. Hyperinflations are rare, but
have been used to study the costs and consequences
of even moderate inflation.

 Deflation is a decrease in the overall price level.

Prolonged periods of deflation can be just as
damaging for the economy as sustained inflation
Unemployment
 The unemployment rate is the percentage of
the labor force that is unemployed.

 The unemployment rate is a key indicator of

the economy’s health.

 Okun’s Law states, “ That for every 2% that

GDP falls relative to potential GDP, the
unemployment rate rises about 1 percentage
point
Features of Agricultural Labor Market

 Low Social Status

 Unorganized

 Seasonal Employment

 Low Earnings

 Exploitation
Types of Unemployment
 Cyclical

 Disguised

 Structural

 Open

 Voluntary and Involuntary

THANK YOU