etar topic 8
DESCRIPTION
Business cycles, unemployment and inflationTRANSCRIPT
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MACROECONOMICS
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Business Cycle, Unemployment Rate and Inflation Rate
Corpus, Kristine S.Cruz, Martin Joseph S.
Del Rosario, Beatrice Camille G.Estrada, Jemia Pearl A.Franco, Juan Miguel L.
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Overview
1. Business Cycle 2. Labor Force Concepts 3. Unemployment 4. Okun’s Law5. Misery Index6. Consumer Price Index (CPI) 7. Inflation 8. Phillip’s Curve and Stagflation
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SUCCESSFUL BUSINESSMEN
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Business Cycle • Economic cycle or boom-bust cycle • “Ups and Downs” of the economy
• Fluctuations that an economy experiences over time resulting from changes in economic growth.
• Fluctuations are measured by considering the real GDP and unemployment
• Long term growth trend • Not recurring but periodic
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Burns and Mitchell: Business Cycle
1. Measuring commodity output, income, prices, interest rates, banking transactions, and transportation services.
2. Business cycle divided into phases
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Business Cycle Indicators
Leading Economic Indicators Manufacters’ new orders for consumer goods and materials, index
of vendor performance, manufacturer’s new orders for capital goods, new building permits, index of consumer expectations
Coincident Economic Indicators Industrial production, real personal income, real manufacturing
and trade sales, number of employees on payrolls
Lagging Economic Indicators Labor cost, average prime interest rate, Consumer Price Index,
Average duration of unemployment
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Phases of the Business Cycle
• Contraction or the “Slow Down” • Peak• Trough • Expansion
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Business Cycle
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Contraction or Slow Down
• Slowdown in the economic activity• Defined by: low or stagnant growth, high
unemployment and decreasing prices • Accompanied by a bear market
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Peak
• Upper point of the cycle and economy is defined as overheated
• Expansion turns into contraction • “irrational exuberance”
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Trough
• Lowest point of the business cycle• Usually occurs in a period of recession
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Expansion
• Speed up in the economic activity• Economy starts to grow again (bull market) • Defined by: high growth, low unemployment
and increasing prices
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• GDP GDP = C + I + G + (N-X) GDP = Consumption + Investment + Government spending + Net exports (Exports – imports)
GDP = C(Y-T) + I(r) + G + (N-X) Y: income T: taxesR: interest rate As r increases, I decreases As r decreases, I increases
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Labor Force
Working Age Population
Labor Force
Employed
Persons
Unemployed
Persons
Person’s Outside the Labor Force
In the Philippines, the working age population is defined by: person’s ages 15 and above.
A person who is part of the labor force, is a person of age who is looking for a job, is employed during reference period.
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Labor Force Concepts
Concept Meaning
1. Labor Force Population of 15 yo and over who contribute to the production of goods and services to the country
2. Employed Persons in the labor force who are reported as either at work or with a job
3. Unemployed Persons in the labor force reported as:a. No workb. Currently available for work c. Seeking or or not seeking work
4. Underemployed Employed persons who desire to have additional hours of work in their present job or want an additional job
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Labor Force Concepts Concept Meaning
5. Labor Force Participation Rate (LFPR) Proportion of total labor force to total household
6. Employment Rate Proportion of employed persons to the total labor force
7. Unemployment Rate Proportion of underemployed persons to the total labor force
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Unemployment•Unemployment Rate •Types of Unemployment •Full Employment
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Unemployment
Manapat, Olaguer and Pedrosa (2010) :– Scenario– 15 years old and above– Available for work but without work– Seek/do not seek– At least 4 weeks
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Unemployment rate
Labor force = Employed + Unemployed• 15 years old and above• Contributed goods and services
*** exemptions
X 100
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ExampleQuestion: In December 2012, 143,060 Filipino residents
were employed and 11,844 were unemployed. Find the unemployment rate for December 2012
Unemployment rate = 11,844 ÷ (143,060 + 11,844)
= 7.64%
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Types of unemployment
Unemployment
Unavoidableunemployment
Avoidableunemployment
1. Frictional2. Structural3. Cyclical4. Seasonal
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1. Frictional Unemployment• temporary, associated with the changes in the
economy
Unavoidable unemployment
2. Structural Unemployment• location and qualification of labor force do
not match the available jobs• technology
Gabay, Remotin, Uy and Pizarro-Uy (2012) :
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Unavoidable unemployment
3. Cyclical Unemployment
• Caused by the recession phase of the business cycle
4. Seasonal Unemployment
• Jobs that are seasonal in nature
Medina (2003) :
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Underemployment
• Employed• Desire– additional working hours– Additional job– New job with longer hours
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Underemployment
Invisibly Underemployed
Visibly Underemployed
•Worked 40 hours
•Want additional working hrs
•Worked less than 40 hours
•Want additional working hrs
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Full Employment
• Unemployment rate ≠ 0
• Cyclical Unemployment = 0
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• The inverse relationship between GDP growth & unemployment
• As GDP rises above its natural rate, unemployment falls
For every 1% increase in the unemployment rate, a country's GDP will be roughly an additional 2% than its potential GDP. (EconedLink)
Okun’s Law
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2 (unemployment rate-natural employment) = potential GDP-actual GDP potential GDP
X 100%
Formula of Okun’s Law
In other words, when unemployment rate goes up by 1%, GDP goes down by 2%
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Practice Questions
Q According to Okun's law, when cyclical unemployment changes from -3% to -2%, the output gap changes from _____, measured relative to potential output.
A. -6% to -4%B. -3% to -2%C. -1% to 0%D. 3% to 2%E. 6% to 4%
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Okun’s Law in the United States
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-Okun’s law in the short can only be used in the short run-law must be regarded only as a rule of thumb and not as
a “structural feature” of the economy
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Practice Questions
Q According to Okun's law, when cyclical unemployment increases from 2 to 4%, the output gap increases from ___ %.
A. -4 to -8B. -2 to -4C. 0 to 2D. 2 to 4E. 4 to 8
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GDP Growth and Unemployment Rate in The Philippines
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Misery Index
• A measure of economic well-being for a specified economy
• computed by taking the sum of the unemployment rate and the inflation rate for a given period
Unemployment rate + Inflation rate
• An increasing index means a worsening economic climate for the economy in question, and vice versa.
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Example
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Philippines as the 80th miserable country out of 108 countries--2014
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Factors contributing in World Misery Index
• Inflation rate• Unemployment rate• Interest rate• GDP per capita
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Consumer Price Index (CPI)
• It indicates the average prices paid by consumers for a market basket of goods and services from a base period.
Examples of goods and services: transportation, food and medical care
• Market basket is the term used for commonly purchased goods and services by an average household
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Consumer Price Index (CPI)
• Measure of changes in the purchasing-power of a currency and rate in inflation (increase in prices)
CPI: Index that expresses the current prices of a basket of goods and services in terms of the prices during the same period in a previous year • Shows the effect inflation rate on purchasing
power
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How is the CPI used?
1. As an economic indicator2. As a deflator of other economic series3. As a means of adjusting the value of the peso
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Solving for the CPI
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Sample Problem
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Consumer Price Index CPI in Philippines increased to 142.60 Index Points in March from 142.50 Index Points in February of 2016. Consumer Price Index CPI in Philippines averaged 42.94 Index Points from 1957 until 2016, reaching an all time high of 142.90 Index Points in January of 2016 and a record low of 1.30 Index Points in February of 1957. Consumer Price Index CPI in Philippines is reported by the National Statistics Office of Philippines.
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•When the general prices of goods and services increase• As inflation happens, the purchasing power of
peso decreases• The purchasing power of peso indicates how much
peso in the base year is worth in the current year•Measured using CPI
Inflation
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Inflation rate
• Annual rate of change of the consumer price index (CPI)
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Types of Inflation
1. Wage Inflation2. Cost-Push3. Price Power Inflation4. Sectoral Inflation
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Wage Inflation• Also known as demand-pull or excess demand
inflation
• Total demand for goods and services > supply of goods and services
• Less supply; higher prices
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Cost - Push • Increases in production cost push the increase
of increased prices• Increase in wages = Increase in the overall price
of the product
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Pricing Power Inflation• Administered Price Inflation• Business houses and industries increase price
to increase profit margins• Cannot happen at times of economical crises
and economic depressions• Oligopolistic Inflation
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Sectoral Inflation•Whenever a certain sector of industries
increase prices, increases the prices of other industries related to it• Layoffs will happen whenever this happens at
times of economic recession
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Effects of Inflation: Two Types of Effects
Pros• Labor Market
Adjustment• Room to Maneuver•Mundell-Tobin
Effect• Instability with
Deflation
Cons• Cost-Push Inflation• Hoarding• Shoe Leather Cost• Social Unrest and
Revolt• Hyperinflation•Menu Cost
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Labor Market Adjustments
• Results in high employment• Enables labor markets to reach equilibrium
Room to Maneuver
• Liquidity Trap•Moderate level of inflation = nominal interest
rates stay sufficiently above 0
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Mundell-Tobin Effect• Moderate inflation = induce savers to substitute
lending for money holding• Fall of market clearing interest rates• Increase in investments due to lower interest rates
• Deflation is expected• Happens only after deflation occurs• Continual fall of prices• Long term deflation followed by periodic spikes in
prices
Instability with Deflation
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Cost-Push Inflation
• Demand of an increase in wages = increase in price• Continual increase in prices due to increasing
demand for more pay
Hoarding
• Creates shortage in hoarded goods• Caused by fear in a decrease in the buying
power caused by inflation
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Shoe Leather Cost
• Increases the opportunity cost in holding cash balances in interest paying account•More transaction will be needed slowly
depleting the cash
Social Unrest and Revolts• Revolutions caused by underpaid,
underemployment, etc
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Hyperinflation
• An extremely rapid period of inflation• Caused by a rapid increase in money supply
Menu Costs
• Constant changing of menus by firms to keep up with the increase in prices
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Phillips Curve
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Simply states that employment rates are directly related to the inflation rate
Phillips Curve
● Wt - Wage in last period● Wt-1 - Wage in current period● E - Response of wage change to employment rate● U - U* - Employment Gap● U - Actual Employment● U* - Natural Rate of Unemployment
Wt-1 = Wt[1 - E(U-U*)]
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Stagflation
Persistent high inflation combined with high unemployment rate and stagnant demand in the country's economy
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