Business cycles

The more or less fluctuations of GDP

4 phases : peak, trough, contraction, expansion

Peak
expansion come to end
max output
high level of employment
consumer and business confidence is optimism

trough
GDP stop declining
Business activity at lowest point
High level of unemployment
Consumer and business confidence is poor

Expansion / recovery
Output will rise
Unemployment is falling
Consumer and business confidence is growing

Contraction / recession
Falling real GDP
Unemployment is rising
Consumer and business confidence is declining

Unemployment

Inability of labor force participants to find jobs

Is a macroeconomic issue directly affects people
When a member is unemployed, the family feels it in lost income and reduce
standard of living

Types of unemployment
a)
-

Frictional unemployment
Short term , people are temporarily between jobs
Worker move from one job to another job / to get a better job
Occurs because workers have different abilities, preferences
While searching a job = frictional unemployment

b) Structural unemployment
- People unemployed because of capital-labor substitution / long run decline in
demand in particular industry
- When there is a mismatch between their skills and the requirement

c) Cyclical unemployment
- Individual lose job because of downturn in aggregate demand / recessions
- Company cut back on workers due to reduce sales, fears of eco recession,
insufficient demand

d) Seasonal unemployment
- Due to seasonal changes in employment
- Certain industries only produce their products at certain time of a year

Labor force = employed + unemployed

Number of people who >16 years old

who are either employed or unemployed

16 years
Non institutional
populations
Did not work as paid
Work in own business
Worked 15hours/> as
unpaid
Temporarily absent from
work
Full/ part time

Exclude : volunteer /

16 years/ >
Not working, available for
work, has made effort to
find work over the past 4
weeks
4 categories :
Job loser
Reentrant
Job leaver
New entrant

work around own house

Who not in labor force

-

No job & not looking for job

Retired, fulled time students, home maker, volunteer
Institutional population
Mental institution, prison, military(army)
Discouraged worker
Who given up searching for job

Unemployment rate = number employed/ labor force X 100

Inflation
-

When there is a continuous trend in rising average price levels for 2 quarters
consecutively for G&S

Not high prices , but rising price

Measures average
Represent a decline in purchasing power
Lowers the value of money

Deflation : occurs when general price is falling

Hyperinflation : inflation exceeding 50% per month

Causes of inflation
a)
-

Demand pull inflation

Too much money chasing too few goods
Demand is growing faster than supply
Occurs in growing economies

b)
-

Cost push inflation

When price of input increases
Reduce the ability of producer to generate output
Firm need to increase the price to maintain their profit margins
Occurs when shortage of supply combined with enough demand