Business Economics

GROUP MEMBERS:

Tayyaba SadafNida TariqM.Khawar jaleelHasan SalimShahid Mehmood

Business Cycles, Unemployment and their

relationship

Business Cycle“A trade cycle is composed of

period of good trade characterized by Rising prices

and low Unemployment percentages alternating with

periods of bad trade characterized by falling Prices

and High Unemployment percentages."

Business Cycle

Business CycleEconomy-wide fluctuations in production or economic activity over several months or years.Fluctuations occur around a long-term growth trend, and typically involve shifts over time between periods of an expansion or boom and periods of contraction or recession.Usually measured by fluctuations in real GDP and other macroeconomic variables

Four Phases of Business Cycle

Prosperity Phase: Expansion or Boom or Upswing of economy.Recession Phase: from prosperity towards decline (upper turning point).Depression Phase: Contraction or Downswing of economy.Recovery Phase: from depression to prosperity (lower turning Point).

Four Phases of Business Cycle

1. Prosperity PhaseWhen there is an expansion of output,

income, employment, prices and profits, there is also a rise in the standard of living. This period is termed as Prosperity phase.

The features of prosperity are:-High level of output and trade.High level of effective demand.High level of income and employment.Rising interest rates. Inflation.Large expansion of bank credit.Overall business optimism.

2. Recession Phase

The turning point from prosperity to depression is termed as Recession Phase. Most economists use a specific definition of "two consecutive quarters of declining real GDP" for recession.

3. Depression Phase

A depression is a large recession.

when there is a continuous decrease of output, income, employment, prices and profits, there is a fall in the standard of living and depression sets in.

The features of depression are:- Fall in volume of output and

trade. Fall in income and rise in

unemployment. Decline in consumption and

demand. Fall in interest rate. Deflation. Contraction of bank credit. Overall business pessimism

4. Recovery PhaseThe turning point from depression to

expansion is termed as Recovery or Revival Phase.

During the period of revival or recovery, there are expansions and rise in economic activities.

When demand starts rising, production increases and this causes an increase in investment. There is a steady rise in output, income, employment, prices and profits

Revival slowly emerges into prosperity, and the business cycle is repeated.

Unemployment 

“An economic condition marked by the fact that individuals actively

seeking jobs remain not hired. It is expressed as a percentage of the

total available work force.”

How Is Unemployment Measured?When talking about

unemployment, economists usually refer to the “unemployment rate”

Unemployment rate can be defined as the number of people actively looking for a job divided by the labor force.

Calculating the unemployment rate:

Unemployment rate = Unemployed workers x 100 Total labor force

Employment rate is defined as the number of people currently employed divided by the population of working age.

Participation rate is the number of people in the labor force divided by the population of working age that is not institutionalized.

Labor force is defined as the number of people employed plus the number unemployed but seeking work.

Non-labor force includes those who are not looking for work, those who are institutionalized such as in prisons or psychiatric wards, stay-at home spouses, children, and those serving in the military.

Types of Unemployment

Voluntary versus Involuntary UnemploymentFrictional UnemploymentCyclical UnemploymentStructural UnemploymentSeasonal unemployment 

Voluntary versus Involuntary Unemployment

• Voluntary unemployment: Unemployment due to people willingly leaving previous jobs and now looking for new ones.

• Involuntary unemployment: Unemployment

due to people getting laid off or fired from their previous jobs and needing to find work elsewhere.

Frictional UnemploymentUnemployment that occurs because it

takes workers some time to move from one job to another.

Frictional unemployment can also occur when students move into the work force for the first time and when an individual moves to a new city and needs to find work.

technology is helping both workers and companies make the job search process more efficient.

Cyclical Unemployment

Unemployment associated with business cycles occurring in the economy.

Occurs during recessions because, when demand for goods and services falls, companies respond by cutting production and laying off workers rather than by reducing wages and prices.

As an economy recovers from a recession or depression, cyclical unemployment tends to naturally disappear.

Structural UnemploymentJoblessness caused not by lack of

demand, but by changes in demand patterns or obsolescence of technology and requiring retraining of workers and large investment in new capital equipment.

It occurs when there is a mismatch between the skills of the unemployed workers and the skills needed for the available jobs.

Seasonal unemployment Seasonal unemployment occurs

because the demand for some workers varies widely over the course of the year. (E.g.. Pool lifeguards).

Seasonal unemployment can be thought of as a form of structural unemployment, because the skills of the seasonal employees are not needed for at least some part of the year.

It is viewed as less problematic than structural unemployment, because the demand for seasonal skills hasn't gone away forever and reappears in a predictable pattern.

Impacts of Unemployment

1. Economic impacts of Unemployment

2. Social Impacts of Unemployment

Impacts of Unemployment

Economic impacts of Unemployment

•Unemployment financial costs•Spending power of unemployed•Reduced spending power of the employed

Unemployment financial costsUnemployment scholarships. The greater the number of the

unemployed or the longer they are without work the more money the government has to shell out.

Therefore, the nation not only has to deal with the lost income and decreased production but also with an additional cost.

Spending power of unemployed Unemployed individuals are

unable to earn money to meet financial obligations. The spending power of an unemployed person and his/her family decreases drastically and they would rather save than spend their money, which in turn affects the economy adversely.

Spending power of employed

Increased taxes and the insecurity about their own work may affect the spending power of the working people as well and they too may start to spend less than before thus affecting the economy and also the society in a negative manner.

Impacts of Unemployment

Social Impacts of Unemployment•Negative emotions

•Poor physical health•Political issues•Tension over tax raises•Insecurity amongst employees•Crime and violence•Suicide cases•Decreased standard of living

Relationship between Unemployment and Business Cycles

Okun’s Law:

Okun’s law holds that every 1% of GDP above trend equates to 0.5% less unemployment.

Effect of each phase of business cycle on

unemploymentDepression:During this phase;

•The economy is experiencing declines in real GDP.•Producers limit their production and start to downsize.•Unemployment increases.

Effect of each phase of business cycle on unemploymentRecovery:Due to increase in consumer

demands, prices increase and profit margins reappear.

Investors are attracted to start new businesses.

New Jobs are created and Unemployment decreases.

Effect of each phase of business cycle on unemployment

Boom:During this phase;

•Rapid rise in the production because of the rise in consumer demand.•Investors earn a very healthy return over their investments.•Employed people's standard of living improves.•Unemployment decreases.

Effect of each phase of business cycle on unemployment

Recession:During this phase;

•Signals are sent to producers to stop or decrease production.•Decrease in production compels the producers to lay off workers that have been hired at high cost in boom period.•Unemployment increases.

Unemployment in Pakistan Population of Pakistan is estimated to be 180.71 million, during the year 2011-2012.

Total labor force has increased from 56.3 million in 2009-10 to 57.24 million in 2010-11.

The minimum wage of labor has been increased to Rs. 8,000 from Rs. 7,000 as announced by the Prime Minister of Pakistan on 1st May, 2012.

The total number of people employed during 2010-11 was 53.84 million.

The total unemployment rate has increased from 5.6 percent in 2009-10 to 6.0 percent in 2010-11.

Unemployment in Pakistan

Unemployment in Pakistan

Role of Government to reduce Unemployment

Monetary Policy: Monetary tools involve the availability

and cost of money in the economy.

The government can lend money at a very low interest rate. This makes money cheap to borrow; money flows into the economy and creates growth, which in turn, gives incentives to businesses to produce more. Thus increased production increases employment.

Fiscal Policy A government can boost an economy

by reducing taxes, thus increasing the amount of disposable income of consumers, and results in increased demand.

Government can lower Personal Income Taxes to help stimulate demand, while lowering Corporate Income Taxes to help businesses produce more.

Once the recession is over, the tax rates can be brought back to normal - since in an economic boom, demand continues to rise.

Saving Small Business Large companies have easy access to

capital markets even with the depressed economy.

By contrast, banks are reluctant to fund small operations that have little or no cash and uncertain prospects and usually a relatively small number of customers.

The government should shoulder some of the risk of small business loans’. Long-term, low-interest loans can be granted to small businesses. With a well-funded small business sector, many new jobs can be created and unemployment reduced.

Creating variety of jobs The duties of government include

the creation of a greater variety of jobs to suit a variety of talents and create a pool of jobs that is distributed among various sectors in an economy.

1. For example, not everyone in a society is well suited to be a banker, lawyer, or doctor. There must be a variety of jobs available to suit the variety of talents in the labor market.

Incentives to businesses that create jobs Government may give better

tax breaks to businesses for hiring people i.e. giving incentives to businesses that create more jobs.

These incentives might help the business cut the cost of hiring, particularly for extra new workers.