Professional Documents
Culture Documents
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
Business Cycle
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)
Labor Force
Meaning
1. Labor Force
2. Employed
3. Unemployed
4. Underemployed
Meaning
6. Employment Rate
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
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
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
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%
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
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
Inflation rate
Unemployment rate
Interest rate
GDP per capita
Sample Problem
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
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
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
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
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
Stagflation
Persistent high inflation combined with
high unemployment rate and stagnant
demand in the country's economy