Business Cycles, Unemployment and Economic

Growth

• Business Cycle is the term used to describe the fluctuations in

aggregate production as measured by the ups and downs of real
GDP.
• The fluctuations, although not subject to easy predictability or
regularity, can be readily identified.
• A recession is usually defined as a period in which output,
income and employment decline nationally over a period of six
months.
• There will be wide spread contraction of economic activity.
• Real GDP, industrial production, and personal income usually
decline, while unemployment increases.
 Business Cycles, Unemployment and Economic
Growth
Boom
Real GDP (per year)

Depression
Recovery or expansion

Recession or contraction

Time

• Almost all recessions are preceded by a decline in stock market prices, but
not all declines in stock market prices are followed by a recession.
 Unemployment
• Labour Force: People > 15 years of age either employed or
actively seeking a job.

• Unemployment Rate: The ratio of number of people classified

as unemployed to the total labour force.

• Unemployed Person: One > 15 years of age who is available for

work and has actively sought employment during the previous
four weeks.

• Discouraged Worker: Who leaves the labour force after

unsuccessfully searching for a job for a certain period.
 Unemployment
• Frictional Unemployment
• Structural Unemployment
• Cyclical Unemployment: characterized by Layoffs?
• Disguised Unemployment
• Natural rate of unemployment: % of labour force that can
normally be expected to be unemployed for reasons other than
cyclical fluctuations in real GDP.
• Full Employment: Actual rate of unemployment = Natural rate
of unemployment.
• Potential real GDP: Level of real GDP that would prevail if the
economy achieved the natural rate of employment over a
period of one year.
• Over heated economy: Actual rate of unemployment < natural
rate of unemployment
 What factors determine Natural rate of
Unemployment?
• Composition of labour force in terms of age groups.
• Changes in the structure of domestic demand.
• Rapid changes in technology.
• Number of two income earners in families.
• Tendencies towards moving in and out of the labour
force.
• As of 1994, natural rate of unemployment in the US
economy was in the range of 5.5% to 6.0%.
• Unemployment rates in India as of 2012/13, 2013/14
and 2014/15 were 11.3%, 9.8% and 10.8%,
respectively.
 Potential Real GDP

1. Potential real GDP is not the economy’s “capacity”

output.
2. It is not easy to measure potential real GDP.
3. Potential real GDP grows over time.

Potential real GDP is the benchmark used in

macroeconomics to gauge the performance of the
economy.
 Economic Growth
• Measured by the annual percentage increase in the level of
real GDP/GNP.
Sources of Economic Growth
1. The productive resources available to the nation.
2. The quality of productive resources available to the nation.
3. Improvements in technology.
4. Improvements in the efficiency with which available inputs
are used.