Business cycles inflation and unemployment A The business cy

Business cycles, inflation and unemployment
A. The business cycle model illustrates short term fluctuations in the level of economic activity along a long-term trend. Identify the two phases of the business cycle and describe what changes are happening with output, sales levels and employment in each phase.

B. Explain the four different types of unemployment in the economy and identify which type of unemployment is directly affected by changes in the business cycle.   

C. One method to measure inflation in the economy is the Consumer Price Index (CPI). Explain how and by whom the CPI is constructed and discuss the shortcomings of using it to definitively measure the level of inflation in the economy.

Solution

Ans

The two phases are expansion and trough. During expansion output expands, sales levels rise and so does employment. Prices are also rising slowly. Investor and consumer confidence grows.

During trough output falls substantially. Prices fall steeply. Sales levels and unemployment fall. There is gloom and less confidence on economy.

B The four types are

Structural employment.= it occurs because of lack of demand for some type of labour. It happens due to structural changes like technological development, innovations etc

2 cyclic=it is unemployment due to cyclic movements of economy E. G due to recession unemployment increases

3 frictional unemployment =it occurs because people take time to find new jobs

4 seasonal unemployment =it occurs due to seasonal change in demand and/or supply

C Bureau of labour statistics constructs cpi. It is calculated by measuring price of fixed basket of goods at regular intervals. These goods and services are bought typically by consumer. A BASE YEAR IS CHOSEN AND INDEX COMPUTED The price of representative bundle during current period is divided by prices of same goods in base period. The result is then multiplied by 100 to give relative level of cost of living between two periods. The shortcomings are

There is substitution bias. People substitution higher priced goods by low cost goods. This is not reflected by cpi

New goods are not entered into calculation

It doesn\'t measure quality improvements in goods which have higher cost