Business Cycles
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Macroeconomics & Business Environment
17 Economic Fluctuations and Unemployment
PREPARED BY:
Pyare Lal Verma, Faculty Economics/QM, INC Shimla
Session
17
1 How do fluctuations in economic growth take place? 2
What is a business cycle and what are various phases of business cycle?
3
What are various theories of Business Cycle? Multiplier Accelerator Theory of P.A. Samuelson
4
How can we explain Employment Fluctuations? Concept of Full Employment
2 of 23
Session
17
17.1
Fluctuations in the Economic Growth
3 of 23
Session
17
17.1
Business Cycle & its Phases
A swing in total national output, income and employment usually (lasting for over 2-10 years is a business cycle) marked by widespread expansion and contraction in many sectors of the economy. Business Cycle is typically divided into four phases: c)The recovery d)The prosperity e)The recession f)The depression
4 of 23
Session
17
17.1
Features of Business Cycles
a) The phases of business cycle recur with some sort of regularity and are uniform in case of different cycles. b) In case of developed countries the cycle length is short (around 4.5 years) than the developing countries (around 7.5 years) c) Amplitude of a business cycle is the maximum extent of departure from long run trend in either direction. d) All economic variables are affected by the business cycles.
5 of 23
Session
17
17.2
Theories of Business Cycle: Multiplier Accelerator
• Multiplier Theory Income depends upon Investment. For a given level of aggregate output to be maintained, investment activity must be maintained at certain level.
•Accelerator Theory Current Investment depends upon the change in aggregate output from previous year to this year. For a constant level of investment to be maintained output must grow at a certain rate.
•Accidental increase in investment set up cumulative upward movement of output. •To generate business cycle two more ingredients are a) Ceiling: beyond which real output cannot grow. b) Floor: Below which the gross investment cannot fall. 6 of 23
Session
17
17.2
Business Cycles Indicators
a) Monetary and Fiscal Policies which seek to combat these cyclical movements are called stabilization policies b) Business Cycle Indicators • Leading Indicators: includes measures that generally indicate business cycle peaks and troughs three to twelve months before they actually occur. • Coincident Indicators: contains measures that indicate the actual incidence of business cycle peaks and troughs at the time they actually occur. The number of employees on payrolls, industrial production etc are examples. • Lagging Indicators: measures that generally indicate business cycle peaks and troughs three to twelve months after they actually occur. Labour cost per unit of output in manufacturing, the interest rate, outstanding commercial and industrial debt, the Consumer Price Index etc. 7 of 23
Session
17
17.3
Employment Fluctuation
a) Used as a barometer to point out condition of economy b) Unemployment is the result of deficiency of effective demand c) Nature of unemployment in LDC’s are different than DCs d) In LDCs unemployment is the result of inadequate capital equipment while in DCs it is the result of deficiency in effective demand
8 of 23
Session
17
17.3 •
Unemployment Categories
Frictional : Due to Imperfect Information
ii. Employer unawareness about available workers iii. Workers unaware about job offerings
b) Structural: Due to structural changes v.
Leaving out not well qualified
• •
Cyclical: Due to general downturn There is inverse relationship between output and employment.
9 of 23
Session
17
17.3
The Concept of Full Employment
a) Full employment is the level of employment that results when the rate of unemployment is normal. b) At a given point of time there is some natural rate of unemployment in the dynamic exchange economy. c) Natural rate of unemployment is the long run average of unemployment cause due to frictional and structural changes in labor market. d) Policies the encourage workers to reject job offers and prohibit employer from offering appropriate wage rates increase natural rate of unemployment. e) Actually rate of unemployment generally rise above the natural rate during recession and vice versa. 10 of 23
Session
17
THANK YOU
11 of 23
17 Economic Fluctuations and Unemployment
PREPARED BY:
Pyare Lal Verma, Faculty Economics/QM, INC Shimla
Session
17
1 How do fluctuations in economic growth take place? 2
What is a business cycle and what are various phases of business cycle?
3
What are various theories of Business Cycle? Multiplier Accelerator Theory of P.A. Samuelson
4
How can we explain Employment Fluctuations? Concept of Full Employment
2 of 23
Session
17
17.1
Fluctuations in the Economic Growth
3 of 23
Session
17
17.1
Business Cycle & its Phases
A swing in total national output, income and employment usually (lasting for over 2-10 years is a business cycle) marked by widespread expansion and contraction in many sectors of the economy. Business Cycle is typically divided into four phases: c)The recovery d)The prosperity e)The recession f)The depression
4 of 23
Session
17
17.1
Features of Business Cycles
a) The phases of business cycle recur with some sort of regularity and are uniform in case of different cycles. b) In case of developed countries the cycle length is short (around 4.5 years) than the developing countries (around 7.5 years) c) Amplitude of a business cycle is the maximum extent of departure from long run trend in either direction. d) All economic variables are affected by the business cycles.
5 of 23
Session
17
17.2
Theories of Business Cycle: Multiplier Accelerator
• Multiplier Theory Income depends upon Investment. For a given level of aggregate output to be maintained, investment activity must be maintained at certain level.
•Accelerator Theory Current Investment depends upon the change in aggregate output from previous year to this year. For a constant level of investment to be maintained output must grow at a certain rate.
•Accidental increase in investment set up cumulative upward movement of output. •To generate business cycle two more ingredients are a) Ceiling: beyond which real output cannot grow. b) Floor: Below which the gross investment cannot fall. 6 of 23
Session
17
17.2
Business Cycles Indicators
a) Monetary and Fiscal Policies which seek to combat these cyclical movements are called stabilization policies b) Business Cycle Indicators • Leading Indicators: includes measures that generally indicate business cycle peaks and troughs three to twelve months before they actually occur. • Coincident Indicators: contains measures that indicate the actual incidence of business cycle peaks and troughs at the time they actually occur. The number of employees on payrolls, industrial production etc are examples. • Lagging Indicators: measures that generally indicate business cycle peaks and troughs three to twelve months after they actually occur. Labour cost per unit of output in manufacturing, the interest rate, outstanding commercial and industrial debt, the Consumer Price Index etc. 7 of 23
Session
17
17.3
Employment Fluctuation
a) Used as a barometer to point out condition of economy b) Unemployment is the result of deficiency of effective demand c) Nature of unemployment in LDC’s are different than DCs d) In LDCs unemployment is the result of inadequate capital equipment while in DCs it is the result of deficiency in effective demand
8 of 23
Session
17
17.3 •
Unemployment Categories
Frictional : Due to Imperfect Information
ii. Employer unawareness about available workers iii. Workers unaware about job offerings
b) Structural: Due to structural changes v.
Leaving out not well qualified
• •
Cyclical: Due to general downturn There is inverse relationship between output and employment.
9 of 23
Session
17
17.3
The Concept of Full Employment
a) Full employment is the level of employment that results when the rate of unemployment is normal. b) At a given point of time there is some natural rate of unemployment in the dynamic exchange economy. c) Natural rate of unemployment is the long run average of unemployment cause due to frictional and structural changes in labor market. d) Policies the encourage workers to reject job offers and prohibit employer from offering appropriate wage rates increase natural rate of unemployment. e) Actually rate of unemployment generally rise above the natural rate during recession and vice versa. 10 of 23
Session
17
THANK YOU
11 of 23
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