Unit 6

MACROECONOMIC
PROBLEMS
 BUSINESS CYCLE

 DEFINITION
– Business cycle refers to wave-like fluctuations in
aggregate economic activities particularly in
national income, employment, prices and output.
OR
– Business cycle is composed of periods of good trade
with rising prices and low unemployment percentages
and followed by periods of bad trade with falling
prices and high unemployment percentages.
 BUSINESS CYCLE (cont.)

 CHARACTERISTICS
1. An economy-wide phenomenon
2. A wave-like movements in economic activity
3. Business fluctuations that occur periodically and tend to
be recurrent in nature
4. Expansion and contraction are self-reinforcing and
cumulative in effect
5. Upward and downward movements
 PHASES OF BUSINESS
CYCLE
PEAK OR BOOM
 The period where the economy is at full employment.
 Maximum output and lowest unemployment rate.
 Growth faster than trend
 Rising inflation
Real GDP

RECESSION
PEAK
 The period where real GDP declines.
PEAK  Output decreases and unemployment rate increases.
Y

 A deep and long recession is known as depression.

ERV
CO
RE

RE
CE
S
SI O
N

TROUGH

Year
 PHASES OF BUSINESS
CYCLE

TROUGH
 The period where the output is minimum
and unemployment rate is maximum.
Real GDP
 Fall in prices
 Low demand for Imports
PEAK
 Loose policy
PEAK
Y
ERV
CO

RECOVERY
RE

RE
CE

 The period where the output

S
SI O

level increases and

unemployment rate declines.
N

TROUGH
 Demand picking up
Year
 Increase in investment
Fall in the level of investments, fall in production, fall
in employment, fall stock prices, etc. are found
during _____ phase of business cycle.

(a) expansion
(b) boom
(c) peak
(d) contraction
All but one are the endogenous factors of business
cycle

(a) War
(b) Changes in government spending
(c) Money supply
(d) Fluctuations in investments
Which of the following is not the feature of business
cycle?

(a) Business cycle vary in intensity

(b) Business cycle follow perfectly timed cycle
(c) Business cycle vary in length
(d) Business cycle have no specific phases.
 Economic recession is characterized by all of the
following except _____

(a) Decline in investments, employment

(b) Increase in the price of inputs due to increased
demand for inputs
(c) Investors confidence is shaken
(d) Demand for goods, services decline
 UNEMPLOYMENT
 DEFINITIONS
– LABOUR FORCE
• Defined as people from the total population above the 16
years of age, not in any institutions and who are either
employed or unemployed but actively seeking for jobs.
Non-Labour Force includes all those who are not working and
are neither seeking nor available for work.
– UNEMPLOYMENT
• Defined as labour force participants being available and
willing to work at the prevailing wage rate but unable to find
jobs.

– UNEMPLOYMENT RATE
• The percentage of the labour force that is unemployed and
actively seeking jobs.
 UNEMPLOYMENT (cont.)

• Voluntary unemployment is a situation in which a

person is out of job on his own accord or choice. He doesn’t
want to work on the prevalent or prescribed wages. Either he
wants higher wages or doesn’t want to work at all ( so
excluded from Labour force)

– UNDEREMPLOYMENT
• An individual who works part-time or who are in jobs below
their capability, but who are seeking full-time employment.

– FULL EMPLOYMENT
• The situation in the economy where all available resources
are employed to produce goods and services.
 UNEMPLOYMENT (cont.)

CALCULATION

UNEMPLOYMENT = NUMBER OF UNEMPLOYED X 100%

RATE LABOUR FORCE
 Periodic Labour Force Survey (PLFS)
Rural Urban Rural+Urban
male female person male female person male female person
PLFS 2020-21
LFPR 57.1 27.7 42.7 58.4 18.6 38.9 57.5 25.1 41.6
WPR 54.9 27.1 41.3 54.9 17 36.3 54.9 24.2 39.8
UR 3.9 2.1 3.3 6.1 8.6 6.7 4.5 3.5 4.2
PLFS 2019-20
LFPR 56.3 24.7 40.8 57.8 18.5 38.6 56.8 22.8 40.1
WPR 53.8 24 39.2 54.1 16.8 35.9 53.9 21.8 38.2
UR 4.5 2.6 4 6.4 8.9 7 5.1 4.2 4.8
PLFS 2018-19
LFPR 55.1 19.7 37.7 56.7 16.1 36.9 55.6 18.6 37.5
WPR 52.1 19 35.8 52.7 14.5 34.1 52.3 17.6 35.3
UR 5.6 3.5 5 7.1 9.9 7.7 6 5.2 5.8
PLFS 2017-18
LFPR 54.9 18.2 37 57 15.9 36.8 55.5 17.5 36.9
WPR 51.7 17.5 35 53 14.2 33.9 52.1 16.5 34.7
UR 5.8 3.8 5.3 7.1 10.8 7.8 6.2 5.7 6

LFPR is defined as the percentage of persons in labour force (i.e. working or seeking or available for work)in the population.

Worker Population Ratio (WPR): WPR is defined as the percentage of employed persons in the population.

Unemployment Rate (UR): UR is defined as the percentage of persons unemployed among the persons in the labour force.
 CYCLICAL
Natural rate of UNEMPLOYMENT ( with
UNEMPLOYMENT respect to trade cycle)

FRICTIONAL
UNEMPLOYMENT TYPES OF Disguised
UNEMPLOYMENT
UNEMPLOYMENT

SEASONAL
STRUCTURAL
UNEMPLOYMENT
UNEMPLOYMENT
 Effects
Effects on
on
Individuals
Individuals and
and Society
Society

EFFECTS OF
EFFECTS OF
UNEMPLOYMENT
UNEMPLOYMENT

Effects
Effects on
on
the
the Economy
Economy
 CAUSES OF UNEMPLOYMENT IN
INDIA

 Slow Economic Growth ( structural

Transformation)
 Increase in Labour force
Rapid Population Growth
Social Factors
 Rural-Urban Migration
 Inappropriate Technology
 Defective Educational System
 Lack of Infrastructure Development
 Job creation

g DIRECT CONTROL Development

Providing trainin of new land
and education MEASURES

Lowerin
Open market g r es e r v
e
requirem
operation ent

MEASURES
TO MONETARY
CONTROL POLICY
UNEMPLOYMENT

Lowering Lowering
ate
discount rate interest r

Increase in
Decrease in tax FISCAL POLICY government
expenditure
 INFLATION

 DEFINITIONS
– INFLATION
• A continuous increase in the general price level of goods and
services in the economy.
– DEFLATION
• A decrease in the general price level of goods and services
in the economy.
– STAGFLATION
• The condition in an economy where it experiences high
unemployment and rapid inflation simultaneously.
– DISINFLATION
• A reduction in the rate of inflation.
 INFLATION (cont.)

CALCULATION

INFLATION RATE = CPI 2007 – CPI 2006 X 100%

CPI 2006

where,
CPI = Consumer Price Index
Demand-pull
Demand-pull inflation
inflation

CAUSES OF
CAUSES OF
INFLATION
INFLATION

1. Oil Pric
2. Farm Pri
Cost-push
Cost-push inflation
inflation 3. Import Pr
4. Wage-Pus
 DEMAND-PULL INFLATION

Demand-pull inflation occurs

OYF is the full employment aggregate output.
when AD exceeds AS

General Price Level

AS Increase in AD above full
employment from AD1 to
AD2, increases price to P2
but output remains constant.
P2
Increase in AD
from AD0 to AD1
P1 will increase the
price from P0 to
P0 AD2 P1 and output ,
Y0 to YF.
AD1
AD0

0 Y0 YF Real Output
 COST-PUSH INFLATION

AS0 , AS1
General Price Level
OYF is the full employment
aggregate output.

Increase in cost will shift

P1 the AS curve to the left,
P0 AS1. General price level
AS1
increases from P0 to P1.

AD1

0 Y1 YF Real Output

Cost push inflation occurs when AS shift to the left.

GAINERS LOSERS
p
• Businessman • Fixed income grou
• Property Distribution • Holders of
Distribution s,
owner
of government bond
• Shareholders ofincome
income fixed deposits
• Debtors • Creditors

EFFECTSOF
EFFECTS OFINFLATION
INFLATION

Balance
Balance
Savings
Savings Production
Production of
oftrade
trade
 Compulsory savings

DIRECT CONTROL Anti-hoarding

Price control
MEASURES campaign
and rationing

Raising
Open market r es e r
requirem ve
operation ent

MEASURES
TO MONETARY
CONTROL POLICY
INFLATION

Raising Raising
ate
discount rate interest r

Decrease in
Increase in tax FISCAL POLICY government
expenditure