Chap 10 Macro Problems

CHAPTER 14
MACROECONOMIC
PROBLEMS
Principles of Economics second edition All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch. 14: 1
BUSINESS 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
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.
 Output decreases and unemployment rate
Real GDP increases.
 A deep and long recession is known as depression.
PEAK
TROUGH
 The period where the output is.
PEAK minimum and unemployment rate
Y
is maximum.
ER
RE
V
CO
CE
RECOVERY
RE
S
SI O
 The period where the

N
output level increases and

TROUGH unemployment rate
Year declines.

UNEMPLOYMENT
DEFINITION
UNEMPLOYMENT
A situation where labour force participants are available and
willing to work but are unable to find jobs.
LABOUR FORCE
Defined as people from the total population above the 16 years
of age, not in any institutions and who are either employed or
unemployed but actively seeking for jobs.

UNEMPLOYMENT (cont.)
DEFINITION
UNEMPLOYMENT RATE
The percentage of the labour force that is unemployed and
actively seeking jobs.
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.

DEFINITION
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.

CALCULATION
UNEMPLOYMENT = NUMBER OF UNEMPLOYED X 100%

RATE LABOUR FORCE

TYPES OF UNEMPLOYMENT
1. Frictional Unemployment
People in between jobs (voluntarily)e.g. quit job to seek for higher
salary
2. Cyclical Unemployment
Lack of jobs due to recession (involuntarily).
Full employment cannot be achieved.
3. Structural Unemployment
Unemployment due to structural changes in the economy.
e. g. Changes in technology cause skills & experience irrelevant.
4. Seasonal Unemployment
Seasonal variation in activities of particular industry
e.g. Fisherman during monsoon season
Effects
Effects on
on Individuals
Individuals and
and Society
Society
EFFECTS OF
EFFECTS OF UNEMPLOYMENT
UNEMPLOYMENT
Effects
Effects on
on the
the Economy
Economy

Effects on Individuals & Society
1.Loss of income and self respect
2.Loss of job skills
3.Social and political problems
Effects on the Economy

1.Slow economic growth
2.Low output lead to depression
3.Loss in government revenue
4.Increase government expenditure
5.GNP gap widens – Potential GNP vs actual GNP

Job
Job creation
creation
Providing
Providing
training
training &
& Development
Development
education
education of
of new
new land
land
m a
a ett
rrkke L
Loow weerriin
n m ng
pe
Op
O e n t io
a t io n n rre
eqqu
g rre
esse
errvve
o p e
e r
r a uiirre m
e me e
op enntt
L
Loow we erriinng g
we
diissccou erriin
d Lo
L ow
oun
ngg
t e r e
e atte
sstt rra e
t
nt rra n
iint e r
atte
e
Decrease
Decrease in
in Increase
Increase in
in
tax
tax government
government
expenditure
expenditure
INFLATION
DEFINITION
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.

PRINCIPLES OF ECONOMICS
© Oxford Fajar Sdn. Bhd. (008974-T) 2010 14
Ch. 14: 14
INFLATION (cont.)
DEFINITION
STAGFLATION
The condition in an economy where it experiences
high unemployment and rapid inflation
simultaneously.
DISINFLATION
A reduction in the rate of inflation.

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

RATE CPI2006
Where CPI = Consumer Price Index

CPI
Food
Beverages & tobacco
Clothing & footwear
Gross rent, fuel & power
Misc g & s
Transport & communication
Medical care & health expenses
Recreation, entertainment, education and cultural services
Furniture & furnishing, and household equipment and operation

DEMAND-PULL
DEMAND-PULL INFLATION
INFLATION
CAUSES OF
CAUSES OF INFLATION
INFLATION
COST-PUSH
COST-PUSH INFLATION
INFLATION

DEMAND PULL INFLATION
OYF is the full employment aggregate
output.
Demand pull inflation occurs when

AD exceeds AS Increase in AD above full
General Price Level
AS employment from AD1 to AD2,
increases price to P2 but output
remains constant.
P2 Increase in AD from AD0 to AD1

will increase the price from P0
to P1 and output , Y0 to YF.
P1
P0 AD2
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 the AS

P1 curve to the left, AS1. General
price level increases from P0 to
P0 P1 .
AS1
AD1
0 Y1 YF Real Output
Cost push inflation occurs when
AS shift to the left

COST PUSH INFLATION
An increase in general P level associated with an
increase in the C.O.P.
Result of the seller’s activities.
Shift in the AS curve may result from various factors :
1. Wage push inflation – occurs due to an increase in
wage – lead to an increase of C.O.P and output price.
2. Profit-push inflation – occurs when monopolistic
increase its profit by restricting output
3. Import-induced @ Imported inflation – occurs when
the P of imported raw materials @ finished goods rise.

GAINERS LOSERS
• Businessman • Fixed income group
• Property • Holders of
Distribution
Distributionof
of
owner government bonds,
• Shareholders income
income fixed deposits
• Debtors • Creditors
EFFECTS OF
EFFECTS OF INFLATION
INFLATION
Savings
Savings Production
Production Balance
Balanceof
oftrade
trade
People save less Increase due to Deficits.

higher profit
Compulsory
Compulsory savings
savings
Price
Price
control
control and
and Anti-hoarding
Anti-hoarding
rationing
rationing campaign
campaign
R
Ra aiissiin
m a
a ett
rrkke rre
esse
ngg
n m r
Op
O pe
en t i o n rre e r v
vee
o p
pe
e at i on
rra eqquuiirre
emme
o enntt
R
Ra ng
d i
ais ng
dissccouisiin g Ra
R aiissiingate
ounntt rra t e rre
e sstt rrate
atte
e iin
n t e
Decrease
Decrease in
in
Increase
Increase in
in government
government
tax
tax expenditure
expenditure

Thank you


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CHAPTER 14

Principles of Economics second edition All Rights Reserved

Principles of Economics second edition All Rights Reserved

Principles of Economics second edition All Rights Reserved

 The period where the

output level increases and

Principles of Economics second edition All Rights Reserved

Principles of Economics second edition All Rights Reserved

Principles of Economics second edition All Rights Reserved

Principles of Economics second edition All Rights Reserved

UNEMPLOYMENT = NUMBER OF UNEMPLOYED X 100%

Principles of Economics second edition All Rights Reserved

Principles of Economics second edition All Rights Reserved

Effects on the Economy

Principles of Economics second edition All Rights Reserved

Principles of Economics second edition All Rights Reserved

Principles of Economics second edition All Rights Reserved

INFLATION = CPI 2007 – CPI 2006 X 100%

Where CPI = Consumer Price Index

Principles of Economics second edition All Rights Reserved

Principles of Economics second edition All Rights Reserved

Principles of Economics second edition All Rights Reserved

Demand pull inflation occurs when

P2 Increase in AD from AD0 to AD1

Principles of Economics second edition All Rights Reserved

Increase in cost will shift the AS

Principles of Economics second edition All Rights Reserved

Principles of Economics second edition All Rights Reserved

People save less Increase due to Deficits.

Principles of Economics second edition All Rights Reserved

Principles of Economics second edition All Rights Reserved

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