BUSINESS CYCLE,

UNEMPLOYMENT & INFLATION

ATIENZA, KRISTINE ARABELLA G.

MANAOIS, DIANNE MARION F.
PADILLA, VERNETTE ANN J.

BUSINESS CYCLE

PHASES OF BUSINESS CYCLE

1. Peak/Prosperity: business activities are in its temporary
maximum
2. Recession: phase in business cycle that is characterized by a
decline in total output, income, trade, and ultimately
employment
3. Trough/ Depression: turning point of recession; economic
activity is at its lowest
4. Expansion: there is a recovery in the economy

CAUSES OF BUSINESS CYCLE

Sunspot Theory (William Evans)
Fluctuations of business activity to climatic conditions.

Innovation Theory (Joseph Schumpeter)

Innovation is a fundamental cause of business cycle
Innovation is defined as the enhancement of an existing
production system that leads to new and better products

Self Generating Theory (Wesley Mitchell)

One phase of the business cycles grows out of the
preceding phase

UNEMPLOYMENT
A condition of people who are able and willing to work
but cannot find jobs
TYPES OF UNEMPLOYMENT
1.

2.

Unavoidable unemployment

a. Frictional unemployment: temporary unemployment associated

with the changes in the economy
b. Structured unemployment: occurs when the location and
qualifications of the labor force do not match the available jobs
c. Cyclical unemployment: unemployment caused by the recession
phase of the business cycle

Avoidable unemployment

Unemployment usually associated with insufficient demand for

workers caused by many factors such as poor performance of the
economy

UNEMPLOYMENT RATE

HOW MUCH IS FULL EMPLOYMENT?

Full employment is unavoidable unemployment or if
cyclical unemployment is zero.

The full employment rate of unemployment is

referred to as the natural rate of unemployment.

WHO ARE THE UNDEREMPLOYED?

1. They are working on a part time basis;

2. They are paid full time but are not busy because
the demand for the product is low.

OKUNS LAW
Developed by Arthur Okun
Relationship between GDP and unemployment. As
a result of his findings, he concluded that for every
2-3% movement in GDP, unemployment changes
by 1% in both opposite directions.

INFLATION
Sustained increase in the average price level, or it is
the rate of change of the consumer price index
(CPI).

CONSUMER PRICE INDEX (CPI)

Examines the weighted average of prices of a
basket of consumer goods and services, such as
transportation, food and medical care.

CAUSES OF INFLATION
Demand-pull inflation: occurs when the level of
spending in the economy exceeds the amount firms
are capable of producing.

Cost push and supply shock inflation: occurs when

a vital resource becomes scarce, causing its price
to rise and raising the costs of production for firms.

LOSERS AND WINNERS IN INFLATION

LOSERS

Holders of Securities
Pension Holders
Fixed Income Earners

WINNERS

Windfall to Fixed Asset

Owners
Producers

DEFLATION AND HYPERINFLATION

Deflation: sustained decrease in the average price
level.

Hyperinflation: refers to a period of extremely high

inflation reaching 100,000% and above.

PHILLIPS CURVE STAGFLATION

Phillips Curve: shows the relationship between
inflation and unemployment.
Inflation and unemployment have an existing tradeoff. A low level of unemployment rate will
accompany a high level rate of inflation rate.

STAGFLATION
Stagflation: comes from two different words,
stagnant and inflation. The word stagnant is used
to depict the dormancy of the economy which the
simultaneous occurrence of inflation.
*

The economy is experiencing increasing inflation and unemployment

at the same time.