TOPICS

1. 2. 3. 4. 5. 6. 7. 8. 9. Business Cycles. Phases of Business Cycles. Multiplier Accelerator Theory. Demand Induced Cycles. Other Theories of Business Cycles. Forecasting Business Cycles. Employment Fluctuations. The Concept of Full Employment. Nature and Trends of Unemployment in India.

 Economic growth never smooth. High rate of growth, continuous expansion followed by recession. Long recession leads to depression. Two main expansion. phases: Recession and

Turning points: peaks and troughs.

TWO CHARACTERISTICS OF RECESSION

FEATURE: 1
Decline in consumer spending. Creation of huge inventories. Decline in demand. Firms lay off employees. Results in high unemployment.

Feature: 2
Fall in output. Inflation falls. Decline in demand of crude materials. Prices fall. Wages and prices do not fall in the same pace. Fall profits. Fall in demand for credit. Fall in interest rates.

PHASES OF BUSINESS CYCLES

Expansion
Also called prosperity. Contributors: gap between costs and prices. Possibility for producers to produce more. More employment opportunities. Increase in purchasing power of the people.

Recession
Expansion recession. factors set the base for

Cost increase relative to price. Profit margins decrease. Expansion activities slow down. Scarcity of different products prices start rising. Cost of production also continue to rise.

Depression
Banks loans are liquidated. Further fall in prices. More new projects are canceled. Creates more unemployment. Drastic fall in output, employment and general price level.

Recovery
Stop in the price fall. Companies begin using idle capacities. Production picks up. More employment opportunities. Leads to long run upward movement in prices. Encourages investment and growth.

 Based on the interaction multiplier and accelerator. Accelerator: rapid output stimulates more output growth.

between growth

A certain growth rate for a constant volume of investment. Full employment a ceiling beyond which output cannot grow. A floor level wherein gross investment cannot be negative.

 Recession: decline in aggregate demand lowers the output. With no change in aggregate supply output declines. Price level would also fall. Boom: aggregate demand curve shifts to the right. Output reaches potential GDP or even higher. Prices rise. Shifts in Aggregate Demand lead to fluctuations in output, employment and prices.

 Often used as key indicator of countrys economic situation. Keynes determined

Employment demand.

by

effective

Raised by increasing effective demand. Comprises aggregate demand & aggregate supply generated within the economy. Rise in investment raises effective demand & helps solve unemployment.

Unemployment in Developing Countries

Not due to deficiency of effective demand. Due to lack of capital equipment or other complementary resources that would support existing workforce.

Types of Unemployment
Frictional Unemployment
Due to constant changes in the labor market. Employers not fully aware of all the available workers. Employees not aware of existing job opportunities.

Structural Unemployment
Due to structural changes in the economy. Eliminates a few jobs & creates some new jobs.

Cyclical Unemployment
Due to downturn in economic activity.

 Not mean zero unemployment. Natural rate of unemployment exists. Meaning: average unemployment caused by frictional and structural changes in the labor market. Need to distinguish between natural rate & actual rate of unemployment. Actual unemployment revolves around natural rate of unemployment. Actual rate rises above natural rate during recession. Actual rate falls below actual rate during boom.