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Business Cycles: 
Unemployment and 
Inflation
Topic Outline 
I. Business Cycles 
• Theories of Business Cycles 
• Phases of the Cycle 
• The Business Cycle (Diagram) 
•...
Business Cycles
Business Cycles 
• John Maynard Keynes – “Father of Modern 
Economics” 
• Business Cycle- refers to fluctuations in the 
e...
Theories of Business Cycles 
• Exogenous Theories – forces outside the economic 
system create the business cycle. 
– Forc...
Theories of Business Cycles 
• Endogenous Theories – forces within the economic 
system cause the fluctuations in the econ...
Phases of the Cycle 
• Prosperity – peak of the business cycle. 
• Recession - both production and employment fall. 
• Dep...
The Business Cycle 
Prosperity 
Growth 
Depression 
Business 
Activities 
Time
Effects of Business Cycles 
• During bad economic times like recession and 
depression, various sectors are affected In di...
• Industries which produce consumer durables are 
adversely affected during bad economic times. 
• Since consumers tend to...
Unemployment
Types of Unemployment 
• Frictional Unemployment – caused by interruptions 
in production, for technical reasons, or when ...
• Cyclical Unemployment - caused by the fall of 
business activities in the economy. 
• Seasonal Unemployment - during sla...
Effects of Unemployment 
• The productive resources of the economy are not 
fully used. This means less goods and services...
Full Employment Defined 
• When there is an available job for every person who 
is willing and able to work, it is full em...
Theories of Employment 
• Classical Theory of Employment states that 
employment increases at lower wages. Employers are 
...
Full Employment Policies 
• Shorter work week – a reduction of work week from 
44 to 40 hours would increase the number of...
Full Employment Policies 
• Postponement of technological developments - 
it is claimed that the use of time and labor-sav...
Inflation
• There is an inflation when there is a rising 
general level of prices. Nevertheless, it does not 
necessarily mean that ...
• Inflation adversely affects many sectors 
of the economy, particularly the fixed income-groups. 
Needless to say that th...
• Unfortunately, inflation creates more 
inflation. When prices keep on increasing, people 
are inclined to spend their mo...
Types of Inflation 
• Demand-pull Inflation – occurs when 
demand for goods and services exceed supply. 
This is based on ...
Types of Inflation 
• Cost-push Inflation – an increase in the 
cost of production results to an increase in 
prices. Cost...
Types of Inflation 
Structural Inflation explains that the inability 
of some sectors of our economy to respond 
immediate...
The Philippine Experience 
1984 
• The Philippine Economy turned from bad to worse. 
• Foreign loans did not come, dollars...
The Philippine Experience 
• On the other hand, there were groups who reaped 
economic benefits from our economic crisis. ...
Causes of the Recession 
•Economic recession in the industrial countries has 
greatly affected our exports to said countri...
Causes of the Recession 
• The UP Report pointed out authoritarianism and 
crony capitalism as the roots of the existing c...
Government Policies 
•The government has introduced economic 
reforms or measures to reduce the problems of 
inflation and...
Government Policies 
• To reduce government expenditures through 
more economical use of its resources. 
• To concentrate ...
Government Policies 
• To encourage more foreign investments to 
accelerate our economic recovery. 
•To transform the peop...
Economic Recovery depends 
on Government Officials 
•Honesty is one main reason why other countries 
experienced success. ...
Group 1 
Members: 
Barroquillo, Paulo Yves 
Dela Cruz, Ellaine Christine 
Martinez, Karl Lester 
Rendon, Jerome Junichi 
L...
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Business Cycles, Unemployment and Inflation

  1. 1. Business Cycles: Unemployment and Inflation
  2. 2. 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
  3. 3. Business Cycles
  4. 4. 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.
  5. 5. Theories of Business Cycles • Exogenous Theories – forces outside the economic system create the business cycle. – Forces: wars, political developments, natural disasters, or major innovations.
  6. 6. Theories of Business Cycles • Endogenous Theories – forces within the economic system cause the fluctuations in the economy. Forces : Accelerators , multipliers, innovations or monetary policies.
  7. 7. 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.
  8. 8. The Business Cycle Prosperity Growth Depression Business Activities Time
  9. 9. 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.
  10. 10. • 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.
  11. 11. Unemployment
  12. 12. 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.
  13. 13. • 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.
  14. 14. 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.
  15. 15. 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.
  16. 16. 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.
  17. 17. 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.
  18. 18. 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.
  19. 19. Inflation
  20. 20. • 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.
  21. 21. • 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.
  22. 22. • 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.
  23. 23. 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.
  24. 24. 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.
  25. 25. 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.
  26. 26. 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.
  27. 27. 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.
  28. 28. 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.
  29. 29. 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
  30. 30. 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.
  31. 31. 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.
  32. 32. Government Policies • To encourage more foreign investments to accelerate our economic recovery. •To transform the people into more self-reliant and productive groups.
  33. 33. 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.
  34. 34. Group 1 Members: Barroquillo, Paulo Yves Dela Cruz, Ellaine Christine Martinez, Karl Lester Rendon, Jerome Junichi La Valle, Adrian III-CCSAD
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