BUSINESS CYCLES:

UNEMPLOYMENT &
INFLATION
 JOHN MYNARD KEYNES
- Considered as the “father of modern economics”
- British economist who gave the solution to the American
problem of economic depression.

BUSINESS CYCLES
- Refers to the fluctuations in the economy.
- “peaks and valleys of the economy are caused by several
factors like”
• Technologies
• Wars
• Politics
• Monetary condition
• Levels of total spending
Changes in business activities which are noncyclical are:
• Christmas time
• School opening

UNEMPLOYMENT
&
INFLATION
The biggest economic problems of
The biggest economic problems of
business cycles.
business cycles.
THEORIES OF BUSINESS CYCLES
Can be classified into two categories.

EXOGENOUS
1. EXOGENOUS
THEORIES
THEORIES
- forces outside the economic system create the
business cycle.
Example of these forces are:
• wars
• political development
• natural disasters
• major innovations
THEORIES OF BUSINESS CYCLES
Can be classified into two categories.

ENDOGENOUSTHEORIES
2. ENDOGENOUS
THEORIES

- forces within the economic system cause the

fluctuations in the economy.
Example of these forces are:
• accelerators
• multipliers
• innovations
• monetary policies
“An increase in aggregate demand results to a greater
increase in investments.”

AGGREGATE DEMAND

Composed of (1) household consumptions, (2) business

investment and (3) government expenditure.

These 3 kinds of
A situation which Generate more
expenditure create
attracts more national income or
an economic
investment. output.
expansion.
• Innovation (many consider as exogenous)
- It is the application of an invention for commercial use.

• Innovations (like new techniques of production

or better machines)
- Improve economic activities

• Favorable monetary policies lead to better

economic conditions.
 PHASES OF THE
BUSINESS CYCLE

Prosperity - peak of the business cycle.

Recession - production and employment fall.

- production and employment are at

Depression
their lowest levels.

Recovery - production and employment rise

towards full employment.
EFFECTS OF BUSINESS CYCLE
• During bad economic times like recession and
depression, various sectors and individuals are affected
in different ways.
• For instance, those who produce capital goods like
trucks, buildings, farm machines, and so forth are greatly
affected in terms of production and employment.
• In the same manner, industries which produce consumer
durables like cars, refrigerators, gas ranges and home
appliances are adversely affected during bad economic
times.
• However, in the case of basic products which are non-
durables, they are less sensitive to recession or
depression. e.g. food.
THE BUSINESS
CYCLE
UNEMPLOYMENT
• In the rural areas of the poor countries, unemployment is
more widespread, particularly…
• Disguised unemployment- a situation where individuals
are actually working but they do not contribute to
production.
• There are various causes of unemployment such as
changes in technology, renovations, business cycles, and
seasons.
• Some of these causes are temporary in nature. However,
there are types of unemployment which have become
persistent.
TYPES OF UNEMPLOYMENT

Frictional unemployment - caused by interruptions in

production for technical reasons, or when workers
temporarily laid off due to renovation works. It is also
a situation when workers left their jobs and are looking
for new ones.

Structural unemployment
- a change in technology
renders the skills and talents of some workers
obsolete.
TYPES OF UNEMPLOYMENT

Cyclical unemployment - caused by the fall of

business activities in the economy. When aggregate demand
decreases, production subsequently declines. Some
workers have to be laid off.

Seasonal unemployment - during slack periods, many

workers in farming and construction are laid off.
EFFECTS OF
UNEMPLOYMENT
• Unemployment has both economic and social
implications.
• When there is unemployment, the productive resources of
the economy are not fully used. This means less goods
and services are produced.
• On the part of the country, unemployment means a decline
in national income or gross national product. In such
situation, government revenues likewise fall.
• Evidently, the government has to put aside some of its
important projects due to lack of funds.
FULL EMPLOYMENT DEFINED
• When there is an available job for every person who is
willing and able to work, it is full employment.
• Such definition, however, does not mean that
unemployment is zero.
• If about 6 percent of the labor force is unemployed, this is
still considered full employment.
• There are several factors of unemployment during a
period of full employment. (sick people, employees left
their jobs, minimum wage is usually high in rich countries
and because of old age, personal handicaps, some group
stand at the borderline between employability and
unemployability.)
THEORIES OF EMPLOYMENT
• The classical theory of employment states that
employment increases at lower wages.
• Employers are willing to hire more at lower wages
because it is more profitable. This means the cost of
production is lower.
• Such theory further claims that widespread
unemployment could be caused only by the stubborn
refusal of workers to accept low enough wages.
• As soon as wages become cheap, then employers are
able and willing to hire more workers but Keynes did not
agree with such theory.
THEORIES OF EMPLOYMENT
• He said that during depression, workers are willing to
accept any wage but could not find jobs. He argued that
high wage could not be the main cause of unemployment.
• The Keynesian theory of employment- which is the
modern theory of employment- states that employment is
determined by aggregate or total demand for goods and
services.
• When people, together with the business and government
sectors, purchase more goods and services, it simply
means there is a very good market. Such situation
induces more production.
FULL EMPLOYMENT
POLICIES

1. Shorter work week. A reduction of work week from 44 to

40 hours would increase the number of workers.
2. Postponement of technological developments. This is
another way of increasing demand for workers. It is
claimed that the use of time and labor-saving devices
decreases the number of workers.
3. Public investment. The government should utilize its
resources to increase demand for goods and services.
INFLATION
• There is inflation when there is a rising general level of
prices. Nevertheless, it does not necessarily mean that all
prices are increasing. In fact some prices remain constant
or even fall. Other prices rise very suddenly. In short,
there is no even escalation of prices.
• Inflation adversely affects many sectors of the economy,
particularly the fixed-income groups.
• Unfortunately, inflation creates more inflation. When
prices keep on increasing, people are inclined to spend
their money before it loses its value.
• By and large, it is always the poor masses who greatly
suffer during inflation.
TYPES OF INFLATION

1. Demand-pull inflation - occurs when demand for

goods and services exceeds supply. This is based on
the law of supply and demand.

2. Cost-push inflation
- An increase in the cost of
production results to an increase in prices. Cost increases
whenever there is an increase in wages, oil prices or prices
of raw materials.

3. Structural inflation
- this view explains that the
inability of some sectors of our economy to respond
immediately to demand for goods and services.
THE PHILIPPINE
EXPERIENCE
• The Philippine economy turn from bad to worse in 1984.
• Foreign loans did not come, dollars were difficult to
obtain, and both domestic and foreign markets declined.
• Businessmen, workers, farmers, and the rest of the poor
masses complained about the financial difficulties.
• The average inflation rate for 1984 was 50 percent.
• As a result, average family income even plunged deeper
than such earnings in 1983.
• The buying power of the Filipinos was not eroded by
galloping inflation but was also greatly destroyed by
massive layoffs and stagnant real wages.
CAUSES OF THE RECESSION
• The side of the government was the global recession as
the main cause of our economic crisis.
• Economic managers of the administration explained that
the economic recession in the industrial countries has
greatly affected our exports to said countries.
• Since exports of raw materials and primary farm products
are the main source of our dollar earning, their reduction
has a great impact on our developing economy.
• Another explanation of the government was the increase
in OPEC prices of oil products. Thus has increased cost of
production and consequently the prices of goods and
services.
GOVERNMENT POLICIES
1. To increase the production of short-gestation crops and
other small-scale industries. These produce goods within
a few months. Thus, incomes are immediately generated;

2. To reduce over-supply of money, the Bangko Sentral has

actively engaged in the open market sale of treasury and
Bangko Sentral Bills:

3. To reduce government expenditures through more

economical use of its resources, such as the shut down
of losing gov’t corporation, unnecessary travel abroadof
top government officials, etc.
GOVERNMENT POLICIES
4. To concentrate more on the development of agricultural
projects which are less expensive and have shorter
gestation than industrial projects.

5. To encourage more foreign investments to accelerate our

economic recovery; and

6. To transform the people into more self-reliant and

productive groups. They have been encouraged to
engage in backyard gardening, poultry, piggery, and
other income-producing projects.
ECONOMIC RECOVERY DEPENDS
ON GOVERNMENT OFFICIALS
• Not a few countries emerged from poverty to progress
because of the good virtues of their top government
officials.
• They are not only competent administrators but also they
are honest, and they have been invested in the US and
Europe. A big portion of their foreign loans could not be
accounted for.
• However, the people have an equal responsibility in the
economic recovery of their own country.
END