DPB2023

MACROECONOMICS
TOPIC 5:
INFLATION & UNEMPLOYMENT

CLO2: Use the national income data to measure the performance

of an economy (C3, PLO1)
5.1 Business Cycle
A business cycle is also known as a trade
cycle. It is an important element of
economics. A business cycle refers to
the regular fluctuations in
economic activity in an economy as a
whole.
5.1 Business Cycle
A business cycle also refers to
a wave-like
fluctuation in aggregate
economic activity particularly
with regard to national income,
employment and output.
Characteristics of a Business
Cycle
i. A business cycle is an economy-wide
phenomenon which prevails in all
industries. If the depression or boom
takes place in an industrial sector, then
it will spread to other sectors such as
construction, services, agriculture and so
on.
ii. A business cycle is a wave-like
movement in economic activity where
an expansion is followed by a
depression. So the economy moves from
one position to another position like a
pendulum.
Characteristics of a
Business Cycle
iii. Business fluctuations occur
periodically and tend to be recurrent in
nature. They usually appear again and
again after a period of time. The
periodicity and causes are not always
the same.
iv. Expansion and contraction in a
business cycle are self-reinforcing and
cumulative in effect.
v. A business cycle is characterized by
upward and downward movements.
 Phases of a Business
Real GDP
Cycle
Peak

ry
Peak

ve
co
Re

Re
ce
ss
ion
Trough

Year

Phases of a Business Cycle

Peak
During this time period, the economy is
at full employment where all available
resources are employed. The economy
will experience a high level of output
and trade, increasing effective demand
and higher employment levels and
income.
Business optimism creates more
investments and increases pressure on
available recourses that leads to an
increase in wages and prices of inputs.
Recession
i. A decrease in the volume of
output, trade and transactions
ii. An increase in the level
unemployment (level of
employment is lower)
iii. A reduction in aggregate income
in terms of wage and profit
iv. A decline in consumption
expenditure and investment level
Trough
The recession ends when the real
GDP stops falling. In this phase, the
overall level of economics activity
will fall to the lowest level.
Unemployment rates during this
phase will be higher and will create
many problems. Thus, it is a period
of great suffering and hardship to
society and the worst phase of a
business cycle.
Recovery
Is a period of revival leading to an
upturn of the economy. The
economys level of output and
employment expand towards full
employment during this phase. The
recovery period is initiated by
government expenditure, changes
in production techniques, new
innovations and exploitation of new
sources of energy.
6.2 Unemployment in
economic
Define unemployment:
Labour force participants being
available and willing to work but
are enable to find jobs.

Unemployment rate is a
percentage of the labour force
who are unemployment and are
actively seeking employment.
 Population

Not in labour
Labour Force
force

Those who Those who

Discouraged
Employment
workers
are in are below 16
institutions years

Unemployment
 Types Of
Unemployment
1. Frictional Unemployment
When people are in between jobs, or are entering or
reentering the labour force
2. Cycling Unemployment
When there is a lack of jobs that results because of
a downswing in a business cycle or a recession
3. Structural Unemployment
Arises due to structural changes in the economy of
a country
4. Seasonal Unemployment
Arises due to a seasonal variation in the activities of
particular industries.
Effect of
Unemployment
1. Individuals and Society
i. Loss of income and self respect
ii. Loss of jobs skills
iii. Social and political problems
2. Economy
i. Goods & Services which society
could have produced but did not.
ii. Losses in government revenue
obtained through personal taxes.
 Unemployment Rate
Formula
Unemployment Rate (%) = Number of
Unemployed X 100%
Labour Force
Year 2000 2001 2002

Total Population 17,800 17,800 18,200

Labour Force 6,834.1 7,046.5 7,527.9
Total Employment 6,350.8 6,621.0 6,848.9
The unemployment rate for each year is as
follows:

2000 = (Total Unemployment/Labour Force) X 100

= [(6834.1 6350.8)/6834.1] X 100
= 7.07%
2001 = (Total Unemployment/Labour Force) X 100
= [(7046.5 6621.0)/7046.5] X 100
=6.04%
2002 = (Total Unemployment/Labour Force) X 100
= [(7527.9 6848.9)/7527.9] X 100
= 9.02%
 Method to control the
unemployment
1. Monetary Policy
i. Open market operation ( securities & short-
terms bonds)
ii. Lowering the reserves requirement
iii. Lowering the discount rate
iv. Lowering the interest rate
2. Fiscal Policy
i. Decrease in taxes
ii. Increase in Government Expenditure
3. Direct Control Measures
i. Providing Training & Technical Education
ii. Development of new land
iii. Job creation in various sectors in an
economy
6.3 Inflation in
Economic
Definition of Inflation:
Continuous increase in the general
price level of goods and services
in the economy.

Definition of Deflation:
Decrease in the general price level
of goods & services in the
economy
Various degrees of
inflation
a. Creeping Inflation
a sustained rise in prices (about
2% per year)
b. Mild inflation
a sustained rise in price of
about 8%- 10% per year
c. Hyperinflation
when prices rise to 50% -60% or
more.
 Types of Inflation
a. Cost Push Inflation
refer to an increase in the general rice level
associated with an increase in the cost of
production
b. Demand-Pull Inflation
Due to rise in consumer demand, or an increase in
the level of government expenditure, rise in
investment firms or increase in demand for the
country exports by people in foreign countries or
the combination of four.
c. Import-Push Inflation
When the prices of imported raw materials or
finished goods increase. This may due to the
fluctuation of the foreign exchange rate.
Effect of Inflation1
1. Distribution of Income
changes the existing pattern of
distribution of income and wealth
in society where some groups are
relatively better off than others.
2. Savings
The value of fixed deposits,
bonds, life insurance policies and
money would depreciate in terms
of real income.
 Effect of Inflation2
3. Production
the general level of prices rises and
producers make higher profits (providing
they hold stocks). This will lead producers to
increase their level of production and
investment.
4. Balance of Trade (BOT)
Many countries face a deficit balance of
trade since imports are greater than exports.
This arises when the prices of domestic
products increase, at this makes them less
attractive to foreigners thereby leading to a
reduction in the demand for domestic
products.
 Inflation Rate Formula
Inflation rate = CPI this year CPI previous X
year
100%
CPI previous year

For example, given that the CPI for the year 2000
was 121 and that for the year 2001, 110, the
inflation rate using the above formula would be;

Inflation Rate = 121 110

X100
110
= 10%
*CPI Consumer Price Index
Method to Control the
inflation1
1. Monetary Policy
a. Open market operation
b. raising the reserve
requirement
c. raising the discount rate/bank
rate
d. raising the interest rate
e. selective credit control
Method to Control the
inflation2
2. Fiscal
a. Price control and rationing
b. Anti-hoarding campaign
c. Compulsory savings.