Business Cycle, Unemployment & Inflation

• Business cycle


  Ups and downs of a nation's production, measured in the level of real Gross Domestic Product (GDP)
• Peak


  1. The economy produces its highest level of real GDP after rising during a recovery

  2. The economy is close to or at full employment and business activities reach a temporary maximum

  3. Firms are able to generate the highest business profits and households enjoy the highest level of income
• Recession or Contraction


  1. There is a negative growth of output, or in other words the real GDP falls

  2. The unemployment rate rises and the production capacity is underutilized

  3. Consumers decrease their expenditures as they have lesser
• Trough


  1. The real GDP falls to its minimum after falling during a recession

  2. The unemployment rate and the unused production capacity are at their highest level
• Recovery or Expansion


  1. The real GDP rises towards full employment after an economy experiencing recession and trough

  2. Output is rising significantly, firms are making profits, creating more jobs and business opportunities, thus reduces the unemployment rate and raises the households' income
• Types of unemployment


  • Frictional - caused by the normal time to search job required by workers with marketable skills
  • Structural - caused by outdated or mismatch skills of workers with the skills required by the available job opportunities
  • Cyclical - unemployment that is caused by a recession
• Unemployment rate


  Does not include discouraged workers as unemployed<|>Labour force includes underemployed and part-time worker as employed<|>Frictional and structural unemployment are both unavoidable in any cycle of an economy<|>Full employment does not refer to zero unemployment
• Full employment


  Frictional unemployment + Structural unemployment
• Inflation


  Increase in the general (average) price level of consumer goods and services<|>Reported using consumer price index (CPI) which is an index that measures changes in the average prices of consumer goods and services
• CPI basket


  • Consumer Price Index as compared
• Inflation


  • Decreases purchasing power of fixed income earners, reducing their standard of living
  • Benefits the holders of wealth as the value of wealth mostly will increase together with inflation rate
  • Real interest rate is the difference between nominal interest rate and the inflation rate
• Types of inflation


  • Demand pull - happens due to an excess of total demand
  • Cost push - Increase in the cost of production