Business Cycles:

Unemployment and
Inflation
 Topic Outline

I. Business Cycles
• Theories of Business Cycles
• Phases of the Cycle
• The Business Cycle (Diagram)
• Effects of Business Cycle
II. Unemployment
• Effects of Unemployment
III. Full Employment Defined
• Theories of Employment
• Full Employment Policies
IV. Inflation
• Types of Inflation
V. The Philippine Experience
• Causes of the Recession
• Government Policies
• Economic Recovery depends on Government Officials
Business Cycles
 Business Cycles
• John Maynard Keynes – “Father of Modern
Economics”
• Business Cycle- refers to fluctuations in the
economy.
• Unemployment and Inflation- biggest economic
problems of business cycles.
 Theories of Business Cycles

• Exogenous Theories – forces outside the economic

system create the business cycle.
– Forces: wars, political developments, natural
disasters, or major innovations.
 Theories of Business Cycles

• Endogenous Theories – forces within the economic

system cause the fluctuations in the economy.
Forces : Accelerators , multipliers, innovations or
monetary policies.
 Phases of the Cycle
• Prosperity – peak of the business cycle.
• Recession - both production and employment fall.
• Depression – both production and employment are at
either lowest levels.
• Recovery – both employment and production rise
towards full employment.
 The Business Cycle

Prosperity

Business
Growth
Activities

Depression

Time
 Effects of Business Cycles
• During bad economic times like recession and
depression, various sectors are affected In different
ways:
– Those who produce capital goods are greatly
affected in terms of production and employment.
– Firms have no reason to buy capital goods when
economic or business activities are down.
• Industries which produce consumer durables are
adversely affected during bad economic times.
• Since consumers tend to be economical, both
production and employment fall.
• Basic products which are non-durables, they are less
sensitive to recession or depression.
Unemployment
 Types of Unemployment
• Frictional Unemployment – caused by interruptions
in production, for technical reasons, or when workers
are 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.
• Cyclical Unemployment - caused by the fall of
business activities in the economy.
• Seasonal Unemployment - during slacks period,
many workers in farming and construction are laid
off.
 Effects of 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 decline in national income or gross national
product. In such situation, government revenues
likewise fall. Evidently, the government has to put
side some of its important projects due to lack of
funds.
• Unemployment could lead to loss of self-confidence
or to more serious social crimes.
 Full Employment Defined
• When there is an available job for every person who
is willing and able to work, it is full employment.
• Several Factors of unemployment during a period of
full employment:
– Sickness, dissatisfaction,
– Legal minimum wage is more than the value of the
output of many young workers.
– Old age, disabilities.
 Theories of Employment
• Classical Theory of Employment states that
employment increases at lower wages. Employers are
willing to hire more workers because it is more
profitable.
• 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.
 Full Employment Policies

• Shorter work week – a reduction of work week from

44 to 40 hours would increase the number of workers.
If working hours are shortened, it is believed by those
who proposed this policy that more workers would be
hired.
 Full Employment Policies

• Postponement of technological developments -

it is claimed that the use of time and labor-saving
devices decreases the number of workers.
• Public investment – the government should
utilize its resources to increase demand for goods
and services.
Inflation
• There is an 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. Needless to say that their purchasing
power declines as prices rise. Inflation also
aggravates unemployment problems. Demand
for goods and services decreases when prices
increase.
• Unfortunately, inflation creates more
inflation. When prices keep on increasing, people
are inclined to spend their money before it loses
its value. It is to be noted that the tendency of
people to spend their money is of short duration.
Once they have exhausted their surplus money,
the natural demand for goods and services takes
place.
Types of Inflation
• Demand-pull Inflation – occurs when
demand for goods and services exceed supply.
This is based on law of demand and supply. When
all the productive resources re fully employed, an
additional demand for goods increases prices. It is
no longer possible to expand output or supply.

Another cause would be the excess of

Money supply. When money supply increases,
without corresponding increase in production of
goods and services, prices rise.
Types of Inflation

• 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.
In addition, profit-push version of the
labor sector is the cause of inflation.
Types of Inflation
Structural Inflation explains that the inability
of some sectors of our economy to respond
immediately to demand for goods and services.
When supply cannot meet demand, prices increase.
If there are no obstacles or constraints (financial,
physical or institutional), whenever prices rise,
producers are encouraged to enter the market. This
increases supply and therefore prices fall.
The Philippine Experience

1984
• The Philippine Economy turned from bad to worse.
• Foreign loans did not come, dollars were difficult
to obtain and both domestic and foreign markets
declined.
•The average inflation rate for 1984 was 50 percent.
•As of the end of December 1983 to March 1984,
almost one million workers lost their jobs.
The Philippine Experience

• On the other hand, there were groups who reaped

economic benefits from our economic crisis.
• It has been claimed that a few rich Chinese
businessmen owned the black market and they
dictated the rates.
• Likewise, foreign banks at the beginning of the
crisis in 1983 realized a 79 percent profit on their
investments.
Causes of the Recession
•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 sources of our dollar
earnings, their reduction has a great impact on our
developing economy.
•Another reason was the increase in OPEC prices of
oil products.
Causes of the Recession

• The UP Report pointed out authoritarianism and

crony capitalism as the roots of the existing crisis.
• It can be said therefore, that economic
opportunities were not equal and the principle of
business efficiency was likely ignored.
• Everything depended on right connections
Government Policies
•The government has introduced economic
reforms or measures to reduce the problems of
inflation and unemployment and these have been
planned for economic recovery. Some of these
measures have been:
•To increase the production of short-gestation
crops and other small-scale industries.
•To reduce over-supply of money.
Government Policies

• To reduce government expenditures through

more economical use of its resources.
• To concentrate more on the development of less
expensive agricultural projects and have shorter
gestation than industrial projects.
Government Policies

• To encourage more foreign investments to

accelerate our economic recovery.
•To transform the people into more self-reliant
and productive groups.
Economic Recovery depends
on Government Officials

•Honesty is one main reason why other countries

experienced success.
•Attitudes and values should be favorable to the
economic growth.
•Economic programs are useless if they are not
properly implemented.
 Group 1

Members:
Barroquillo, Paulo Yves
Dela Cruz, Ellaine Christine
Martinez, Karl Lester
Rendon, Jerome Junichi
La Valle, Adrian
III-CCSAD