Question

1. Illustrate and explain using a diagram the four (4) phases of the business cycle;

2. Explain how these phases come about (i.e. what influences cause the turning points to occur);

3. Explain the different types of unemployment and how they come into existence;

4. Illustrate and explain using a diagram how the money-market functions.

Answer 1

a&b) The business cycle is the rise and fall of economic change that occurs over time in a certain business. This cycle is a useful tool for analyzing the economy. It helps in making better financial decisions as well.

The Business cycle has four stages: Expansion, peak, contraction, and depression. They occur at varying regular intervals.

During Expansion, the economy is growing. There is more economic development. In this stage, there are increase in profits, revenues and outputs. The market is well-managed, promoting a balanced inflation and less unemployment.

In the stage of Peak, everything is at its maximum- before moving slowing into the contraction phase.

During contraction, all the economic factors, such as production, prices, saving and investment, starts decreasing. Generally, producers are unaware of decrease in the demand of products and they continue to produce goods and services. In such a case, the supply of products exceeds the demand.

Depression is the stage where the growth rate of an economy becomes negative. In addition, in trough phase, there is a rapid decline in national income and expenditure.

C) The following points highlight the five main types of unemployment that occurs in the economy:

1. Frictional Unemployment:

It occurs when changing demand patterns in an economy dislocate existing production patterns to the extent that labour becomes redundent.

Due to change in demand for goods and services, specialized workers cannot easily move to new work. Similarly, due to changes in the technique of production the skill of certain workers may be made obsolete. As a result there is unemployment in an industry (in which demand has declined) and shortage of labour in another industry (in which demand has increased).

2. Structural Unemployment:

This type of unemployment arises through a change in demand which switches production from one kind of work to another, it differs from frictional unemployment in that it occurs through permanent or long-term changes in the structure of the economy. In other words, structural unemployment is long-term unemployment caused by the decline of certain industries and changes in production process.

3. Cyclical Unemployment:

This type of unemployment arises from the business cycle. Keynes was mainly concerned with this type of unemploy­ment. Such unemployment occurs due to deficiency of demand or purchas­ing power and is also called demand-deficient unemployment.

4. Seasonal Unemployment:

This type of unemployment occurs due to seasonal pattern of demand and the consequent seasonal nature of activities in some industries. In some industries like entertainment, tourism and soft drink, the demand for goods and services fluctuates seasonally. As a result these industries are fully staffed in the peak season but many workers are laid off in the off-season.

5. Disguised Unemployment:

The concept introduced by Mrs. Joan Robinson in 1934. It is a type of unemployment which prevails in LDCs like India, due to population growth, shortage of land and the existence of certain social institutions like the joint family system.

All the members of the peasant family work on the same family arm. The newcomer, whether he is a distant relation or a new -born child, will ultimately start working on the same farm with other members of the family.

This makes it possible for many persons to work on the same family farm without any consideration of whether any extra output is really being produced from additional employment or not. They may not add anything to total output. The employment may be superfluous. This means, even if they were to be removed, the total production will not be affected.