BUSINESS CYCLE, UNEMPLOYMENT AND INFLATION Business Cycles recurrent but non-periodic expansions and contractions of economic activity

y which extend over a period of time. Phases of Business Cycle: 1. Prosperity it is where the economy is at full employment and the national output is also at, or very close to, full capacity. he price level tends to rise because of the a!!re!ate demand brou!ht by full employment. "ts hi!hest point is the #pea$ period%. &. 'ecession the slowdown in economic activity where both output and employment decline but prices tend to be inflexible toward a downward direction. (. )epression it is where output and employment are at their lowest levels. "ts lowest point is the #trou!h phase%. "t is a severe and prolon!ed recession, so prices are li$ely to fall. *. 'ecovery a cyclical phase where output and employment expand toward full employment. he price level may rise prior to the reali+ation of full employment and full capacity production. ,on-Cyclical -luctuation 1. .easonal /ariation a fluctuation in economic activity which ta$es place within a one-year period. "t is usually recurrent and is the result of weather 0as in harvest or production seasons1 or custom 0as in buyin! sprees durin! Christmas1. &. .ecular rend the !rowth or decline of an economic series over a period of years. )urin! the presidency of 'amos, the Philippines became $nown as the #emer!in! or new economic ti!er of 2sia%, in which such identity was lost after his term. 3nemployment -ull 4mployment is defined as somethin! less than employment of 155 percent of the labor force. "t is full employment when there is available 6ob for every person who is willin! and able to wor$. 7owever, it does not mean that unemployment is +ero. 2 8-9: unemployment rate, understood often in the context of frictional unemployment, is !enerally accepted as the benchmar$ for full employment in most countries includin! the Philippines. Classifications of 3nemployment: 1. -rictional 3nemployment consists of #search unemployment% and #wait unemployment% in that a !roup of wor$ers is temporarily out of wor$, between 6obs, or in the process of chan!in! 6obs. &. .tructural 3nemployment it is where wor$ers have lost their 6obs due to chan!es in the demand for particular products or due to technolo!ical advance. -or example, a computer can now replace ten employees, causin! them to be unemployed.

(. Cyclical 3nemployment caused by insufficient a!!re!ate demand or by the recession phase of the business cycle. 2s the overall demand for !oods and services decreases, employment falls, and unemployment rises. 3nemployment ;easurement: -or example, <iven: 3nemployment: &,1(=,1(5 >abor -orce: (5,??=,555 hus, 3nemployment 'ate @ 3nemployment >abor -orce B 3' @ &,1(=,1(5 (5,??=,555 3' @ heories of 4mployment: 1. Classical theory states that employment increases at lower wa!es. he price of labor 0salaries and wa!es1 is determined by the law of demand and supply wherein whenever supply of labor exceeds the demand for it, wa!es necessarily fall. 2s soon as wa!es become cheap, businesses are willin! to hire more wor$ers because it is more profitable. &. Ceynesian theory states that employment is determined by a!!re!ate demand for !oods and services. Dohn ;aynard Ceynes ar!ued that hi!h wa!e could not be the main cause of unemployment because when people, to!ether with business and !overnment sectors purchased more !oods and services, there would be a !ood mar$et which would induce more production and hi!her employment. Ehen people would have less purchasin! power due to inflation or low wa!es, they would buy less number of !oods which would result to lower production and employment. "nflation occurs when there is a sustained increase in the !eneral level of prices of !oods and services. ypes of "nflation: 1. )emand-Pull inflation develops when economic resources are fully employed and there is an increase in a!!re!ate demand, or a!!re!ate demand !rows faster than a!!re!ate supply. 9: A 155, or

A 155

&. Cost-Push inflation- ori!inates on the supply side of the mar$et and occurs when one or more !roups of resource owners use their mar$et power to receive a hi!her return for their factor of production. "f firms with sufficient mar$et control find profit levels low, they may be able to increase profits by raisin! the prices of the !oods and services they produce. (. .tructural inflation occurs when there is inability of some sectors in the economy to cope or ad6ust to chan!es in the level and composition of a!!re!ate demand. he basic structural features are: a. sta!nation of food supply in the face of expandin! demandF b. instability of the purchasin! power of exportsF c. bottlenec$s in the supply of overhead capital and s$illed labor, and d. structural deficiencies in the tax system, mainly the inflexibility of revenues and the re!ressiveness of the tax structure. 4ffects of "nflation: 1. -ixed income !roup "nflation lowers the real incomes of individuals on fixed money incomes. &. Creditors hey lose durin! inflation because they will be repaid a fixed sum of peso which will have a lower purchasin! power. (. )ebtors hey benefit from inflation since their real indebtedness decreases as the price level increases. *. .peculators hese are luc$y or s$illed individuals who are able to buy the !oods that en6oy the sharpest price increases li$e land, !old, 6ewelry, etc. which oftentimes are not truly productive !oods. ?. -lexible income !roup hey have a monopoly situation or have a mar$et power that enables them to #!et away% by increasin! their prices faster than the avera!e. hese are usually entrepreneurs, property owners, mana!ers, and the li$e.