Module 4 Macro Business Environment

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MODULE 4 MEASURING THE ECONOMY

Basic economic concepts, Open and Closed Economies, Primary, Secondary and Tertiary sectors and their contribution to the economy. SWOT Analysis for the Indian economy. Measuring GDP and GDP Growth rate. Components of GDP. Business Cycle- Features, Phases, Economic Time series Economic indicators, Correlation, persistence, coherence. Inflation: Types, Measurement, Kinds of price Indices. Employment and unemployment rates: Measurement. National Income: Estimates, Trends, Measurement, Problems in measuring National Income.
Varun Raj Preethi Prem Raghavendra BG Rajath Sagar Sangeetha Sneha Vijay B Vinay Vinutha Varun Prakash
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[Type the document title] Fundamental Concepts of Managerial Economics: Opportunity Costs, Incremental Principle concept, Time perspective, Discounting and Equi-Marginal principles.
Opportunity cost:
Opportunity or alternative or economic costs are between the second best use of a firms resources which the firm foregoes in order to avail itself of the return from the best use of the resources. Opportunity cost is the cost of sacrificed alternatives.All decisions which involve choice must involve opportunity cost. Opportunity cost may be real or monetary, explicit or implicit or quantifiable or unquantifiable.
The Incremental Principle concept:

It refers to the change in total. Incremental cost is the change in total cost due to a specific decision like production or distribution. Incremental revenue is the change in total revenue caused by changes in production or prices.When incremental revenue exceeds incremental cost, it indicates a profitable situation. In any business decision, a project will be profitable only when the incremental revenue (called marginal revenue) is greater than the incremental (marginal) cost. The principles of marginal revenue and marginal cost are basic to microeconomic theory.
Time Perceptive:
Any changes in decisions involve time element and managerial economics uses functional time periods of long and short runs in business analysis. Management has to review the long run effects on costs and revenue decisions on its corporate strategy.
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[Type the document title] Discounting and Equi-Marginal principles: Discounting principle: Consideration of different time periods necessitates
the criticality of the discounting principle. A rupee next year is not the same as a rupee this year and the rate of interest would be the discount rate at which future value is discounted in present. A present gain is valued more than a future gain. In investment decisions, discounting of future values with reference to present value is accomplished.
The following formula is used in respect of discounting. V= A (1+i) Where V = present value; A = annuity or returns expected in a year and i = current rate of interest.
Equi-marginal principle: Its states that rational decision makers allocate

resources in such a way that the ratio of marginal revenue and marginal cost of various uses of a given resource or of various resources in a given use is the same.
The equi-marginal principle may be applied in different situations. Multi-market seller: MR1=MR2=MR3=MRn (MR= marginal revenue) Multi-plant monopolist: MC1=MC2=MC3 MCn (MC= marginal cost) Multi-factor employer: MP1=MP2=MP3=.MPn (MP= marginal product) Multi-product firm: M1=MM M (M= marginal profit) Multi-good consumer: MU1=MU2=MU3= MUn (MU= marginal utility)
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[Type the document title] Open Economy:

By open economy it means that economy in which private people are allowed to participate in making economic decisions, in which there are economic activities between domestic community and outside. E.g., Trade can be in the form of managerial exchange, technology transfers, all kinds of goods and services. Although, there are certain exceptions that cannot be exchanged, like, railway services of a country cannot be traded with another to avail this service, a country has to produce its own.
Closed Economy:
An economy in which no activity is conducted with outside economies. A closed economy is self-sufficient, meaning that no imports are brought in and no exports are sent out. The goal is to provide consumers with everything that they need from within the economy's borders. A closed economy is the opposite of an open economy, in which a country will conduct trade with outside regions.
Contribution of Different Sectors in Indian Economy: Primary Sector:

The share of the primary sector which includes agriculture, forestry and fishery has gone down from55.3 % in GDP in 1950-51 to 44.5 % in 1970-71 and to a still lower figure at 26.1 % in 1996-97 and 17.5% in 2009. Still it employs 52% of population. As agriculture contributes the bulk share to the primary sector, it would be of interest to estimate the trend of the contribution of agriculture to GDP. The share of fishing in GDP has remained stable at 0.8 % throughout the 46 year period. It is really distressing that the share of forestry in GDP has shown a continuous decline from 5 % in 1950-51 to 4 % in 1970-71 and further to barely 1.0 % in 1996-97. This only underlines the fact that in the primary sector, agriculture alone is the most important and the trend and change in agricultural output determines the share of the primary sector in national output .
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Secondary Sector:
The share of the secondary sector which includes mining, manufacturing, construction, electricity, gas and water supply has shown a steady increase from 16.1 % GDP in 1950-51 to 31.1 % in 1996-97 and 29.5% in 2009. Two major components of the secondary sector are manufacturing industries and construction. The share of manufacturing in GDP increased from 11.4 % in 1950-51 to 22.5 % in 1996-97. It may also be noted that manufacturing industries are grouped under registered and unregistered units. The share of registered units in manufacturing industries more than doubled during the 45 year period i.e. from 5.4 % in 1950-51 to 14.5 % in 1995-96. But as against this, the share of the unregistered units marginally improved from 6 % of GDP in 1950-51 to 8.0 % in 1996-97. Similarly, the share of construction improved from 3.3 % in 1950-51 to 5.0 % in 1970-71 and thereafter it declined to 4.3 %in 1996-97 .
Tertiary Sector:
The share of the tertiary sector which includes trade, transport, storage, communications, banking, insurance, real estate and community and personal services improved from 28.5 % in 1950-51 to 32 % in 1970-71 and further increased 42.9 % in 1995-96 and 53% in 2009. Tertiary sector is composed of three components. (a) the share of transport, communications and trade improved from 11 % in 1950-51 to 20.2 % in 1996-97; (b) the share of public administration and defence improved from 2.3 % of GDP in 1950-51 to 4.9 % in 1996-97. The share of other services which was 6.4 % in 1950-51 remained more or less stable and slightly declined to 5.8 % in 1996-97; (c) the share of finance and real estate which includes banking and insurance improved marginally from 9 % in 1950-51 to 12.1 % in 1996-97. The structural change in the composition of national income by industrial origin in the consequences of the process of economic growth initiated during the plans.
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SWOT ANALYSIS OF INDIAN ECONOMY:
STRENGTH:
Intelligent human resource . Natural resource . Comparatively other counties labor cost is less . High percentage of cultivable land . Huge English specking International language (English) Growth of IT and BPO sectors bring in valuable foreign exchange . High growth rate in GDP . Diversified nature of economy . Extensity higher education system . 3rd largest reservoir of engineers.
WEAKNESS :
Highest percentage of workforce involved in agriculture which contributes 25% on GDP. High unemployment rate Below poverty line , corruption , around 1/4th of population below the poverty line . Socio economic conditions. Poor infrastructure . Import is more than experts . Lack of technological invention . Lack of domestic entrepreneurs . Political instability . Low literacy rate . Rural and urban classification . Poor leaving standard .
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OPPORTUNITIES :
Entry of private firms in various centres of business . Area of Bio-technology . Inflow of FDI , likely to increase in many sectors . Huge foreign exchange earning , prospect in IT sectors . Huge natural gas found in India , Natural gas as tremendous opportunities. Area of infrastructure . Investment in R & D , engineering design .
THREATS :
Increase in the sick units , because of MNCs. High physical depict. Threat of government intervention in some states. Volatile in the crude oil price and commodities. Growing import bills. Population explosion . Political stability . Agriculture majorly depend on monsoons .
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GROSS DOMESTIC PRODUCT
We begin with gross domestic product. GDP refers to production during a year. It is the flow of new products during the year or a quarter, measured in dollars. When we adjust GDP for the effects of inflation, we get real GDP, the measure of physical discussed in chapter 1. There are three different ways to think about and measure GDP. First, we can measure spending on goods and services by different groups-households, businesses government and foreigners. Second, we can measure production in different industries-agriculture, mining, manufacturing, and so on. Last, we can measure the total wage and profit income earned by different groups producing GDP. Each of these measures has its special purpose, but they all add up to the same thing. We consider each in turn in the next three sections.
MEASURING GDP THROUGH SPENDING

Total spending on goods and services produced by Americans during any period can be broken down as fallows : Gross domestic product= consumption +investment +government purchase +net exports [or exports minus imports] Using symbols, this key identify can be written on one line : Y=C+I+G+X Where y=gross domestic product C=consumption I=investment G=government spending X=net exports [exports imports ]
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CONSUMPTION
Consumption is defined as spending by households. It includes purchase of durable goods such as washing machines, stereos and cars. Non durable goods such as food clothing and gasoline; services such as haircuts, medical care and education. However the measurement of consumption does not consist simply of blindly summing all purchases made by households during a given time period
INVESTMENT
Investment is the sum of spending by firms on goods such as plant, equipment, and inventories, and spending by households on housing. We separate total investment into fixed investment and inventory investment.
FIXED INVESTMENT
Fixed investment is broken down into non residential fixed investment and residential fixed investment. Non residential fixed investment is spending on structures and equipment for use in business. Steel mills, office buildings, and power plants are best examples of structures. Trucks, lathes, and computers are example of equipment. Residential fixed investment is spending on construction of new houses and apartment buildings. Net investment= gross investment depreciation. We have the following relations ; Capital stock at the end of this year= capital stock at the end of the last year -depreciation during this year + gross investment during the year. By rearranging this equation and putting in the definition of net investment, we have: Net investment = capital stock at the end of this year -capital stock at the end of last year These equations hold whether we are looking at total investment or separately at non residential investment.
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INVENTORY INVESTMENT
Now consider inventory investment, which is simply the change in the stock of inventories held at business. Inventory investment this year= stock of inventories at the end of the this year -stock of inventories at the end of last year For example, when a publisher produces and stores 10000 copies of a newly printed book in its warehouse, the books are counted in GDP as inventory investment. Even though no one has yet purchased the books, they must be counted in GDP because they have been produced.
GOVERNMENT PURCHASE
Government purchases are the sum of federal government and state and local government purchases of goods and services. In 2000, state and local government purchases were 65 percent of total government purchases. These purchases include items such as schools, road construction and military hardware, however, it should be noted that the government purchases are only part of the total government outlays included in the government budget .when measuring government purchases, economists exclude transfer payments of income from the government to individuals; this includes items such as welfare payments and interest payments on public debt. These items are excluded since they do not reflect production.
IMPORTS AND EXPORTS

The united states has an open economy. An open economy is one with substantial interaction with other countries. The united states has experienced a growing volume of transactions with the rest of the world, and GDP has to take these into account. Exports are goods and services produced in the united states and purchased by foreign consumers, business or governments. Imports are goods and services produced abroad and purchased by united states consumers, businesses or governments. Since exports are produced in the united states, they are counted as part of GDP even though they are not part of domestic consumption, investment, or government purchases. Since imports are produced abroad, they are not counted as part of GDP even though they are part of domestic consumption, investment, or government purchases.
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THE RECENT COMPOSITION OF SPENDING
Table 2.1 breaks down us GDP for 2002. Consumption is the biggest component- about two thirds of GDP. services is the biggest component of consumption about 59 percent. Services [restaurants, utilities, housing, transportation, medical care and the like] have been growing as a share of consumption. In the early 1950s, services accounted for less than a third of consumption. Medical services have grown most rapidly
WHICH SPENDING ITEMS SHOULD BE INCLUDED?

In deciding which spending items to include in computing GDP, we must be careful to avoid double counting. For example the purchase of a 10 year old house should not be counted; that house was counted 10 years ago when it was constructed similarly, the purchase of the assets of mobile oil by Exxon should not be counted; the mobile building in Pittsburgh and mobiles offshore oil rigs were included in business fixed investment when they were built.
REAL GDP
GDP is a dollar measure of production or final goods and services during one year. Comparing one year with another, we run into the problem that the dollar is not a stable measure of purchasing power. For example, in the 1970s GDP rose a great deal, not because the economy was actually growing rapidly but because the dollar was inflating. As this example suggests, the measure of GDP,[what we have used to measure production up to this point] fails to be an adequate representation of production for comparison across time. Therefore, to correct this discrepancy and make GDP comparisons across years, we need a measure of output that adjusts for inflation. We want GDP in constant dollars. or as we generally call it real GDP. In contrast, the GDP we looked at so far is sometimes called nominal GDP
MEASURING GDP THROUGH PRODUCTION: VALUE ADDED

GDP can also be computed by adding up production of goods and services in different industries. As we observed on the spending side, we must avoid counting the same items more than once. Many industries specialize in the production OF immediate goods used in the production of other goods. If we want each industrys production to include the contribution of those industries to total GDP , that we want to take the production of intermediate goods into account. The concept of value added was developed to prevent double counting and attribute to each industry a part of GDP. The value added by a firm is the difference between the revenue the
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firms earns by selling its products and the amount it pays for the products of other firms it uses as intermediate value goods. It is a measure of the value that is added to each product by firms at each stage of production.
THE NATIONAL INCOME AND PRODUCT ACCOUNTS

1} gross domestic product is the production of goods and services in the united states. The spending, value added, and factor income measures of GDP are all equal. 2} consumption, investment, government purchases and net exports are the four basic components of spending consumption is the largest component and investment is the most volatile component. 3} the investment component of GDP includes the replacement of depreciating capital. It is thus gross investment. Net investment is gross investment less depreciation. 4} final sales is GDP less inventory investment. It fluctuates less than GDP 5} to avoid double counting, we measure the contribution of each industry by its value added and do not include any goods produced in an earlier year.
SAVINGS AND INVESTMENT

Savings is defined as income consumption. An important principle is that saving must equal investment. To see this, consider first a closed economy with no government and therefore no taxes Spending on GDP=consumption + investment Income =saving + consumption Consumption + investment =savings +consumption
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Components of GDP;
GDP (Y) is a sum of Consumption (C), Investment (I), Government Spending (G) and Net Exports (X M). Y = C + I + G + (X M) Here is a description of each GDP component:
C (consumption) is normally the largest GDP component in the economy, consisting of private (household final consumption expenditure) in the economy. These personal expenditures fall under one of the following categories: durable goods, non-durable goods, and services. Examples include food, rent, jewelry, gasoline, and medical expenses but does not include the purchase of new housing. I (investment) includes, for instance, business investment in equipment, but does not include exchanges of existing assets. Examples include construction of a new mine, purchase of software, or purchase of machinery and equipment for a factory. Spending by households (not government) on new houses is also included in Investment. In contrast to its colloquial meaning, 'Investment' in GDP does not mean purchases of financial products. Buying financial products is classed as 'saving', as opposed to investment. This avoids double-counting: if one buys shares in a company, and the company uses the money received to buy plant, equipment, etc., the amount will be counted toward GDP when the company spends the money on those things; to also count it when one gives it to the company would be to count two times an amount that only corresponds to one group of products. Buying bonds or stocks is a swapping of deeds, a transfer of claims on future production, not directly an expenditure on products. G (government spending) is the sum of government expenditures on final goods and services. It includes salaries of public servants, purchase of weapons for the military, and any investment expenditure by a government. It does not include any transfer payments, such as social security or unemployment benefits.
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X (exports) represents gross exports. GDP captures the amount a country produces, including goods and services produced for other nations' consumption, therefore exports are added. M (imports) represents gross imports. Imports are subtracted since imported goods will be included in the terms G, I, or C, and must be deducted to avoid counting foreign supply as domestic.
A fully equivalent definition is that GDP (Y) is the sum of final consumption expenditure (FCE), gross capital formation (GCF), and net exports (X M). Y = FCE + GCF+ (X M) FCE can then be further broken down by three sectors (households, governments and non-profit institutions serving households) and GCF by five sectors (non-financial corporations, financial corporations, households, governments and non-profit institutions serving households). The advantage of this second definition is that expenditure is systematically broken down, firstly, by type of final use (final consumption or capital formation) and, secondly, by sectors making the expenditure, whereas the first definition partly follows a mixed delimitation concept by type of final use and sector. Note that C, G, and I are expenditures on final goods and services; expenditures on intermediate goods and services do not count. (Intermediate goods and services are those used by businesses to produce other goods and services within the accounting year. ) According to the U.S. Bureau of Economic Analysis, which is responsible for calculating the national accounts in the United States, "In general, the source data for the expenditures components are considered more reliable than those for the income components [see income method, below]."
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A nations economy can be divided into various sectors to define the proportion of the population engaged in the activity sector. This categorization is seen as a continuum of distance from the natural environment. The continuum starts with the primary sector, which concerns itself with the utilization of raw materials from the earth such as agriculture and mining. From there, the distance from the raw materials of the earth increases.
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PHASES OF BUSINESS CYCLES
From the records of business cycles it is obvious that no one cycle is the same as another. In other words, the details of cycles differ. However, all the cycles belonging to the same family and thus have common characteristics. According to Burns and Mitchell, every business cycle has a critical mark -off points of peak and through. From trough to peak there is the expansion phase and from peak to trough the contraction phase. Apart from these two relatively longer phases there are two other phases characterised by the turning points. The upper turning point is located at the peak marks the beginning of recession, while the lower turning point located at the trough is the venue of revival. Both recession and revival are relatively short in duration. Thus according to Burns and Mitchell the four distinct and closely related phases of business cycles are as fallows
ECONOMIC FLUCTUATIONS, GROWTH AND DEVELOPMENT

1} revival 2} expansion 3} recession 4} contraction Joseph Schumpeter does not agree with Burns and Mitchell on the phases of business of business cycle. In his opinion, peaks and trough of a cycle cannot be regarded as the critical mark-off points. His analysis of different phases of business cycles is altogether different from that of Burns and Mitchell. According to Schumpeter, the critical mark-off points are neighbourhoods of equilibrium which are located at or near the points of inflection. In figure 5.1, we have shown Schumpeters four phase business cycle. Points A B and C in this figure are points of inflection and the neighbourhoods of equilibrium are located in their close proximity. In Schumpeter s model, the upper half of the business cycle from A to B is divided into two parts: (a) prosperity and (b) recession. The lower half of the business cycle from B to C similarly consists of two phases: (c) depression (D) recovery.
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Prosperity of expansion
Certain economist prefer to call the prosperity phase the upswing or expansion because they think that purely quantitative terms are to be preferred to over-coloured terms like prosperity and depression. However without going into the merits of different terms, we shall use prosperity phase, upswing and expansion phase interchangeably. It may be noted in figure 5.1 that the prosperity or the expansion phase exists in the upper half of the cycle. In the prosperity phase, since the wage disbursements increase rapidly, the demand for consumption goods also grows rapidly. The supply of these goods, however in the later stages increases with a lag and this leads to a rise in prices. Thus the prosperity phase is accompanied by a rise in prices which gather momentum towards the later stages This delay in price is mainly due to the fact that there is some unutilised plant capacity available in the early stages of expansion and production can be increased without proportionate increase in costs. But in the later stages, unutilised plant capacity is not there and thus plants have to be expanded. Further some other bottle necks may appear. The rise of general price level is more marked during the prosperity phase when a large proportion of the productive activity is in the form of setting up of new factories and steel plants, increased production of heavy engineering goods, construction of commercial and housing complexes and work on power projects. The payrolls of these operations add substantially to the volume of spending while supply of consumption goods fails to increase correspondingly. This results in a substantial rise in the general price level DISTORTIONS OF PRICE RELATIONS PRICES DONOT RISE UNIFORMILY DURING THE PROSPERITY PHASE. GENERALLY WHOLESALE PRICES RISES MORE Of the wholesale prices, prices of RAW MATERIALS and semi finished goods usually rise faster than the wholesale prices of consumption goods. These changes in different prices disturb to some extent the symmetry of the price system, distort price relations, change price spreads between one level and another, and bring about at the same time some more or less considerable changes in the distribution of the national income. Changes occur not only in the relatively prices of goods but also in the various elements of cost structure. Some elements of cost rise rapidly while others increase slowly. raw materials prices usually increase rather quickly.
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EXPANSION REACHES ITS HEIGHT Entrepreneurs observing that their profits are growing rapidly, make further investment. This cumulative expansion in periods of prosperity is sustained primarily by the slow rise of costs. The expansion process marked by increasing investment activity usually results in higher output level, prices and profits. Growth of investment in the prosperity phase depends greatly on the expansion in the money supply, especially the bank credit. The records of the past cycle show that this actually happens. The rising share prices and with them growing spirit of confidence in the prospects of business the commercial banks to expand credit facilities. These conditions speed up the velocity of circulation. The increasing investment activity during the periods of prosperity results in the growth of fixed capital such as plant, machinery and equipment. It also makes substantial increase in wage disbursements.
THE END OF EXPANSION During the prosperity phase, expansion itself gradually brings into the play of series of forces which ultimately lead to the beginning of recession. The most important of these factors is the gradual rise of costs relative to prices. In the early stages, the rising gap between the costs and prices induces entrepreneurs to expand their activities. However, in courser of time when gradual increase in costs relative to prices narrows down the profit margin, the expansion process is progressively weekend The problem of rising unit costs can be tackled if a corresponding increase in produce prices is possible. However, in practice, this possibility meets two formidable obstacles. One of these is the resistance of consumers; the other is the limit imposed by the diminishing elasticity of banks consumers credit
RECESSION The phase of recession, which is a turning period is relatively shorter. In this period while the forces of expansion are weakened, the forces that make for contraction get strengthened. The recession ids normally characterised by liquidation in the stock market, strains in the banking system and some liquidation of bank loans, some fall in prices, a sharp reduction in demand for capital equipment and abandoning of relatively new projects. During recession, production of consumer goods does not decline immediately. Even when the incomes of the people fall, they persist for some time with their consumption standard which they had achieved in good times. Hence the demand for consumption goods falls with a lag. In
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contrast, the fall in the production of capital goods is dramatic. Since entrepreneurs abandon their investment programmes, the demand for equipment, machinery and plant falls substantially and it is natural for the capital goods manufacturing sector to respond to this situation quickly. The fall in security prices does not merely suggest that prices and profits are going to fall in future, but it also makes its contribution in that direction. Borrowers on stock market security finding that their collateral is shrinking often find it necessary to repay some of their loans. For this purpose they may liquidate their holdings of commodities which may cause a fall in their prices. The weaker market in securities invariably postpones new issues which implies that corporate enterprises shelve their investment programmes at least for some time. hence , the orders for plant, machinery, equipment or buildings are reduced
DEPRESSION OR CONTRACTION Recession ultimately merges with depression which is the phase of relatively low economic activity. When an economy moves from recession to depression, there is a notable fall in production of goods and services and in employment. This decline in production is general and is visible throughout the economy but it is by no means uniform. Usually agricultural activity considered to be necessary for subsistence is not much affected in terms of both output and employment. Retail business is also little affected. In contrast, the output reduction is substantial in manufacturing, mining and construction. In the industrial sector, the worst affected industries are those which produce machines, tools, plants, equipment and steel. In these industries, employment falls rapidly. During depression there is substantial reduction in the incomes of the people and thus the demand for consumer goods also declines. Nonetheless it is far than the fall in the demand for machines and equipment. It has been observed that during depression when incomes of most of the households drastically fall, they make substantial reduction in their expenditure on durable goods. This explains why the output and employment in industries producing these goods fall rapidly. Most of the households even when their incomes fall during the depression find it difficult to reduce the consumption of non durable goods. Therefore production and employment are little affected in the sectors producing these goods. Steadily declining prices of commodities continuously erode the profits of producers and traders alike. In the later stages of depression, some firms incur losses and in an atmosphere of pessimism have little hopes for the revival of economic activity. These are the other conditions in which the most adversely affected firms decide to close down. Those of the firms must survive see no reason why they should make investment. As the marginal efficiency of capital totality collapses and its revival is not in sight, no one is willing to venture fresh investment. In this period there is great reduction in the volume of money.
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The rate of change in prices is not the same in respect of all goods and services. Prices of certain goods fall little while prices of others suffer a virtual collapse. These unequal changes in prices cause distortions. Moreover distortions also appear in cost-price relations because cost do not fall proportionately to prices. Also all costs do not fall at a uniform rate. Some costs are rigid or fall quite slowly, whereas other costs falls steeply usually wages and salaries are sticky during the depression. Trade union pressures and labour laws often prevent substantial reductions in wage rates. Rents, interest rates, insurance premium and taxes are slow to move downward. These cost rigidities while prices continue to fall during the depression wipe out the profit margin in many cases.
RECOVERY The recovery starts when forces that work to recover the normal price relations and cost price relations start operating effectively. Generally the beginning of recovery process is not as dramatic as the beginning of recessionary process. The recovery is gradual. It starts from the prices stop falling. From the records of various depressions it is clear that when inventories are accumulated stores are exhausted with the slowing down of production, supplies reach scarcity levels and further downward movement of prices is arrested. This is the stage where producers see no risk in undertaking production. This stages reaches faster in those fields where production can be controlled easily. During depression demands demand for durable goods is reduced drastically and, in response to this, production is correspondingly cut down. But the demand for even these goods cannot be postponed indefinitely. Therefore, once the stocks of these goods are exhausted, the pressure for increasing their production is created. To begin with, firms use idle capacity to increase production , this naturally generates both employment and income which creates additional demand for consumer goods and services. At this stage marginal efficiency of capital starts recovering. The firms begin making investment to replace depreciated equipment. With business prospects improving, some firms opt for larger investment. Along the restoration of the normal price relations, there is correction of distortions in cost price relations. The lagging price which had eroded profit margins during the depression start falling. Since financial institutions do not find attractive outlets for their funds, interest rates fall in the later phase of depression. Long-time interest rates fixed by contract are brought down in some cases by agreement, rents, insurance rates and taxes are also adjusted downward. Wages are reduced under the hard reality of unemployment. Since the relatively inefficient workers lose jobs, less efficient plants are idle, and less efficient managerial executives are dropped. The general level of efficiency rises during the later phase of depression, which in turn lowers down the average cost of production.
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Another sign of the beginning of the recovery, apart from the correction of distortions in cost price relations, is revival of stock exchange activities manifested in the rising prices of securities. Business Cycle Measurement: Economic Time Series Business cycles have a number of key characteristics manifested by economic time series. It is the purpose of this section to discuss those characteristics and to show how we can use them to test the implications of economic models. In some cases those properties pertain to an individual economic time series; in other cases, the properties apply to pairs of economic time series. But in every case, we will use these properties as a form of testing for economic models of aggregate economies. In this section, we discuss a number of the business cycle characteristics of individual and pairs of macroeconomic time series. Models of the economy have been developed to explain the existence of these properties. As it turns out, there is some disagreement among economists about some of these statistical properties; there are competing explanations for the source of the trends apparent in macroeconomic data. This difference of professional opinion has caused the development of alternative aggregative models of the economy, consistent with each type of trend in the data. We begin by studying the trends that can be present in macrorconomic data.
Stationarity and Non-Stationarity: Some economic time series appear to have trends in them, i.e., they seem to have a general tendency to rise or fall over time. Macroeconomic data fall into this category as almost all macro data seem to be rising over time. But other series have no such tendency to rise or fall. Rather they seem to be fluctuating about a constant value. These patterns give rise to the following two definitions.
Definition of Stationarity and Non-Stationarity Time Series: 1) An economic time series is stationary if its average value is constant over time. 2) An economic time series is non-stationary if its average value is not constant over time. The formal statistical definitions of these concepts, used in actual practice by macroeconomists, are somewhat more complicated than the definitions above but the conditions given here are sufficient for our purposes. In the left panel of this.fig, an example of a stationary time series is drawn. Notice that it is fluctuating about a value that is unchanging over time. So if something causes this time series to move away from this constant value, the series will return to it over time. This constant value is the mean of the series and meaning that if something were to cause this series to deviate from its mean, it will return to its mean if enough time passes. Now consider the right panel of fig 4.3 and observe that there is no tendency for this time series to return to a fixed value over time. The series is trending down and so, no matter how long we
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wail, this series will not settle down to a constant value if the series were to move away from its downward trend. A non-stationary time series does not revert to a fixed average value over time.
ECONOMIC INDICATORS: How do we know when we are in a recession? Is there any way to predict that a recession will
soon occur? The NIPA data comes out with a lag after the end of a quarter and the NBER certifies recessions after turning points occur. These two sources of information are thus not going to be useful for learning about the current and future states of the economy. In addition, an index number can be useful to policy makers if it reliably predicts the onset of a recession in future. Therefore the timing of an economic time series can be useful for assessing the current and future prospects of the economy. The business cycle indicators compiled by the conference board are grouped into one of the three categories- leading, coincident and lagging. These are described as follows: 1. Leading economic indicators: This group includes ten measures that generally indicate business cycle Peaks and Troughs three to twelve months before they actually occur. The ten leading indicators are: - Manufactures new orders for consumer goods and materials. - An index of vendor performance - Manufacturers new orders for non-defence capital goods - The standard and poors 500 index of stock prices - New building permits for private housing - The interest rate spread between U.S. treasury bonds and federal funds - The M2 real money supply - Average workweek in manufacturing - An index of consumer expectations - Average weekly initial claims for unemployment insurance
2. Coincident Economic Indicators: This category contains four measures that indicate the actual incidence of business cycle peaks and troughs at the time they actually occur. In fact, coincident economic indicators are a primary source of information used to document the official business cycle turning points. The coincident indicators are: - The number of employees on non-agricultural payrolls - Industrial production - Real personal income - Real manufacturing and trade sales
3. Lagging Economic Indicators: This is a group of seven measures that generally indicate business cycle peaks and troughs three to twelve months after they actually occur. The lagging indicators are:
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Labor cost per unit of output in manufacturing The average prime interest rate The amount of outstanding commercial and industrial debt The consumer price index for services Consumer credit as a fraction of personal income The average duration of unemployment The ratio of inventories to sales for manufacturing and trade
CORRELATION: One tool used to describe business cycles is the correlation coefficient measures the strength of a relationship between: 1) Two economic variables 2) A single variable and its history. Correlation Coefficient: 1) Positive correlation: When the values of two variables movie in the same direction, i.e., when an increase in the value of one variable is associates with an increase in the value of other variable, and a decrease in the value of one variable is associated with the decrease in the value of the other variable, correlation is to be positive.
2) Negative Correlation: The values of two variables move in opposite directions, so that with an increase in the values off one variable the value of the other variable decrease, and with a decrease in the values of one variable the values of the other variable increase, correlation is said to be negative. PERSISTENCE AND COHERENCE: Business cycles consist of persistent co-movements in the deviations of certain macroeconomic variables from their trends. This co-movement is called coherence. Macroeconomic data often tend to be high or low relative to trend for some period of time. Real GDP and other economic time series seem to move together in certain patterns over time. There are two time series concepts that are related to these properties and these are defined below. Definition of Serial Persistence An economic time series displays series persistence if the series tends to be above or below trend for more than one period of time. Definitions of Co-Movements in Economic Time Series 1) Procyclic: A procyclic economic indicator is one that moves in the same direction as the economy. So if the economy is doing well, this number is usually increasing,
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whereas if we are in a recession this indicator is decreasing. The GDP is an example of a procyclic economic indicator.
2) Countercyclic: A countercyclic economic indicator is one that moves in the opposite direction as the economy. The unemployment rate gets larger as the economy gets worse so it is a countercyclic economic indicator.
3) Acyclic: An acyclic economic indicator is one that has no relation to the health of economy and is generally of little use. The number of home runs the Montreal Expos hit in a year generally has no relationship to the health of the economy, so we could say it is an acyclic economic indicator. An economic indicator is acyclical if it is neither procyclical nor countercyclical.
Inflation:
Inflation is the most experienced economic phenomenenon in India and in the rest of the world. J.K Galbraith have confessed their inability to provide a solution to the problems of inflation that could be implemented effectively in all countries.
Definition:
Geoffrey Crowther defines inflation as a state in which the value of money is, falling, i, e.prices are rising are rising. A.C.Pigou says, Inflation is a situation in which the communitys money income increases faster than its real income. 1.Demand pull inflation : A situation where in an increase in aggregate demand for output either from the government or the entrepreneurs or the households exceeds the aggregate supply of output there by leading to an increase in general price level (inflation). For instance, In Bangalore, normally the rent for houses or commercial premises are always on the higher side due to the extreme demand, hence who ever has more money would get.
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2. Cost push inflation : A situation where in the price level increases due to a rise in the cost or production. Even though there is no increase in aggregate demand, prices may still rise, this may happen if the costs particularly the wage cost increases for instance, in cities, most of the commodities are costly as compared to rural areas as the wage / salary for the employees / workers for employees / workers is on the higher side.
3. Structural inflation :
In this situation, the rise in the prices occurs due to increasing investment expenditure and expansion of money supply without a corresponding increase in the output level. For instance, recently, car manufactures announced in the increase in car price as the increase in steel prices that has proportionate relationship with overall increase of cost of manufacturing cars.
Causes of inflation:
The basic cause of inflation normally occurs, when aggregate demand for output tends to be excessive in relation to the supply of output: Increase in the money circulation; Increase in the disposable income; Increase in communitys aggregate spending on consumption and investment or in goods. Excessive speculation and tendency to hoarding and profiteering; Increase in foreign demand the result in exports; Increase in population as the widening gap between demand and supply. Deficiency in capital equipment that leads to a company to invest more fund in renovating or buying new equipment that cost would be imposed on end users. Drought, famine, earth quake, storm, volcano eruption and other natural calamities adversely affecting agricultural production and output of other industries. Prolonged industrial unrest (strike or lockout of a particularly industry or industries, nation wide truck strike that would cause stagnation of goods that would result the increase in demand) affecting normal industrial output that would ensure the match in demand and supply.
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[Type the document title] Effects of Inflation:

The adverse effects of inflation on the economic system may be classified as being of the following kinds: 1. 2. 3. 4. Effect on production Effect on distribution of income Social and political effects Other general effects
1. Effect on production: Till the level of full employment is reached, gently rising prices are to some extent beneficial. The favorable impact on production is, however, possible only when inflation does not tack place at too fast a rate. Running or galloping inflation creates uncertainty which will adversely affect production. When inflation has reached an advanced stage, its beneficial aspects disappear disadvantages of inflation are felt in the economy. 2. Effect on distribution: It is a notable feature of inflation that all prices do not move in the same direction and to the same extent. 3. Business community: All producers, traders and speculators gain during inflation because of the emergence of windfall profits. Prices of good rise at a far greater rate than costs of production, wages, interstates, insurance premium, and ect.are all more or less fixed as they were contracted earlier before the production of good commenced. 4. Fixed income groups: During times of inflation, wage earners and salaried people are the worst affected. If they try to push up their wages through labor unions, they bring about cost-push inflation and their position is worsened in the long run due to unemployment and retrenchment. Those belonging to this group find their real income dwindling with the repaid rise in prices.
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5. Debtors and creditors: During inflation, debtors gain while creditors lose. Creditors lose because they are paid back dues in money which has less purchasing power. Debtors gain because they are paying back less in real terms. 6. Social and political effects: On the political front, inflation bring about, a weakness in political discipline. The increasing grievances and hardships of the masses in general on account of inflation may prepare them to revolt against the established society, social values and social order. It will create a great number of political tensions.
Control of inflation
Inflation, if not controlled in its early stage, will take the shape of hyperinflation which will completely ruin the economy. The different methods used to control inflation, known commonly as anti- inflation measures, attempt mainly at reducing aggregate demand for goods and services on the basic assumption that inflationary rise in price is due to an excess of demand over a given supply of goods and services. Anti-inflationary measures can be put into three broad groups: (1) Monetary policy (2) fiscal policy and (3) direct control and other executive measures. (1) Monetary policy: The methods and devices used by central banks to bring appropriate changes in the supply of money and credit for ensuing monetary stability constitute what is called monetary policy. Central banks generally use three traditionally weapons A. Bank rate policy B. Open Market operations and C. Variable reserve ratio (2) Fiscal policy: Fiscal policy is a measure of control a government exercises through taxation; public borrowing and spending on the functioning of the economy. To combat inflation, fiscal measure would have to secure an increase in taxation and decrease in government spending. (3) Direct controls: This executive policy refers to the regulatory measures adopted by a government to contain the harmful effects of inflation. Important among these measures is price control. This is an effective method during war time because both monetary and fiscal policies are more or less
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1ineffective during this period. Price control means pegging down the prices (of goods) beyond which they should no rise. But this step is considered to be detrimental to the consumers sovereignty, freedom and welfare.
Deflation
Deflation means a contraction of currency and credit leading to a fall in prices. It is the opposite of inflation, another extreme currency situation, where prices fall and the value of money rises. Deflation, according to Paul Einzig, is a state of disequilibrium in which a contraction of purchasing power tends to cause, or is the effect of, the price level.
Effects
Deflation has an adverse effect on the level of production, business activity and employment. During deflation, prices fall because demand for goods services is contracting. With a fall in prices, producers accumulate stocks, incur heavy losses and a remedial measure retrench labor and reduce output. Pessimism grips the business community and investors and gradually a depressionary state of affairs develops in the economy.
Inflation versus Deflation

From the analysis given above, one may be led to believe that inflation and deflation are exact opposites. But they are not. Inflation is a rise in prices unaccompanied by any appreciable increase in employment, while deflation is a fall in price accompanied by increasing unemployment. Both inflation and deflation are socially bad, but inflation may be considered to be better of the two evils. Keynes stated: Inflation is unjust, deflation is inexpedient. Of the two deflations is the worse. Inflation brings about a redistribution of income between different groups of people in the country. This redistribution is done in such an unjust manner that the rich gain at the expense of the poor. Deflation, on the other hand, reduces national income through reduction in the volume of production and much loss in
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employment. It adversely affects every group in the community. The entire community gets pauperized because of its maleficent effects. Deflation increases the level of unemployment in the economy, where inflation at least implies that all factors are employed in some way or the other. Inflation can be curbed to a large extent, only occasionally does it get out of control when the government fails to adopt appropriate monetary and fiscal policies. But deflation, when once started, injects so much pessimism into businessmen and bankers that it is very difficult to control it. Monetary policy becomes useless during such pessimism. No amount of increase in money supply can revive the piece level and business expectations in the economy during depression.
Investment=savings
The equity of savings and investors follows from none other than the definition of GDP and income. As long the satisfactionadhere to these definitions, there is no possibility that investment can ever differ from savings.
Savings and investment in an open economy

Some more symbols save space in the explanation of a savings and investment in an open economy. F= Government transfer to the private sector Q=Interest on the government debt T=Tax V=Factor income and transfer payments from abroad Sp=Private savings SG=Government savings SR=Rest of world savings.
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And recall that we previously defined Y=GDP C=Consumption I=Investment G=government spending X=Net exports
PRIVATE SAVINGS: From the definition of savings, we know that the private
savings is disposal income(Y+V+F+q-T)-C
GOVERNMENT SAVINGS; Government savings incomes (tax receipts, net of

transfer payment: SP= (T-F-Q)-G. Government savings is also called the government budget surplus or budget deficit. The budget is in the surplus when G is less than (T-F-Q) Rest of the world savings: The rest of the world savings in the United States is defined as payments received from the United States less payments made by United Nations. Sr=-x=Y. SP+Sg+Sr=(Y+V+f=Q-T)-C+(T-F-Q-G)-V-X Everything cancel out on the righty handle side except Y-C-G-X, which from the income identity is equal to the investment. TRANSNACTIONS WITH THE REST OF THE: the balance of payment accounts and the exchange rate The balance of payments accounts record transactions between Americans and the rest of the world. International transactions are divided inn to current account
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transactions. The current accounts keep track of net exports of goods and services net interest payments payments and international transfer such as governments grands and remittances. The financial accounts keeps track of borrowing and lending. When an American lends to a foreigner by load buying a bond or some similar transactions the lending appears with a negative sign of financial accounts
The Exchange Rate;

Transactions with other countries requires the US dollar be exchanged for foreign countries for foreign currency and so on, During the period of from 1973 to 2002, the dollar generally fell relatively to the yen. As we will see this this was a result the higher rate of inflation in the united states yean Japan during these years.
MEASURING INFLATION:
The national level income and product accounts accounts discussed at the beginning of the year this year chapter But two other measures inflation and employment are released to the public at more frequent intervals of and from the basis of most policy initiatives data on inflations and employment are released every month. Fig2.5shows the rate of inflation the percent changes in the us price level as measured by the CPL since 1960 but as shown in the 2.5gained momentum The government puts out another major price index in additional to the CPI it is called producer price index(pip).instead of measuring the prices actually paid by consumers the pip measures the priceless charged by producers at various stages in the production process.
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Deflators;
The construction of data on nominal and real GDP results in another type of price index. The purpose of measuring real GDP is to get rid of the price effects in nominal GDP. Therefore, the ratio off nominal GDP to real GDP is a measures of prices IT IS CALLED THE GDP IMPLICT PRICE DEFLACTOE FOR EXAMPLE IN 2000NOMINL GDP was 9872billion.
Inflation, Price INDEXES AND DEFLATORS

1. Inflation is the rate of increase in the price of level. The pric level is an average of all prices in the economy 2. There are two types of measures of the price level indexes and deflators. The consumers prices index (CPI) and the producer. 3. The CPI is used for cost of living adjustments in many unions contracts and in many government programs. MEASUING EMPLOYMENT AND WAGES; Employment falls along with the production during recession and rises again during recovery. Over the long haul employment grow along with GDP. The household survey called the current population survey, is completed is conducted each month by the because of the census and the data are tabulated The establishment of survey interview employees to find out number of people on the patrol at each workplace. The survey excludes farm employees, because it is based on payroll, it also omits people who are self employed total non agriculture payroll employment was million people in December2002
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Hours per week and hours;

The numbers of hours worked each other varies among workers and over time some people normally work only a few hours a week and other work 6070hours.The average worker one put in to about 34hours per week, while the average factor works puts in about 41 hours For all these reasons employment by itself is not a complete measure of labor input to the economy. total hours of work the number of people of labor to the economy. Total of work people working multiplied by the hours of work of the average worker is a better measuring.
Review and practice

Major points 1. There are there ways to measure and think about the spending side, the production side The production side and the income side. the components of spending are consumption, investments, governments spending and net exports. 2. Real GDP is the physical volume of production after of rising princess have been removed. Real GDP growth has about 3.2percent have been removed about 35years 3.Value added by a firm id the different between the revenue of the firm and its purchase of goods and service from other firms. 4. Depreciation is the loss of capital from wear and tear.Net investments is the investments less depreciation. 5.Conceptually,income and productions are equal. 6. The international accounts called the balance of payments accounts consists of current year account and a financial account.
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7.The exchanges rates is crucial for international transactions. It is the price of dollars in terms of foreign currency. when the exchanges can be bought with each dollar. This makes foreign goods cheaper in terms of dollars. 8. An important implications of the number of dollors required to purchase a private savings plus the government surplus the capital inflow from abroad. 9.The consumer price index is the number of dollars required to purchase a market basket of goods and service typically of the consumption patterns of Americans. 10.Priceindex called deflators can be calculated by dividing of a components of nominal GDP by the same component of real GDP. The consumption deflator is widely used by economists as an alternative to the CPI.
Key terms and concepts

Consumption Investments Fixed investments Inventory investments nominal value added national income personal income personal income
Residential fixed investment disposal Capital stock Depreciations Net investments Government purchase Imports Exports
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budget surplus current account financial accounts exchange rates euro price index

Intermediate goods Final goods Real GDP deflators consumers price index(CPI) Producer price index
KINDS OF PRICE INDICES;

Price Indices: The numerical value that summarizes price level is called as price indices. The main purpose of Price Indices is it helps in explaining the purchasing Power or Inflation/Deflation from one period to another. There are two types of Price Indices: Wholesale Price Index (WPI): It is an indication of price movements in all markets other than the retail market. It is worked out for a whole country or for a very large area and the prices are collected from the wholesale dealers. Consumer Price Index: is a price index with special reference to a class or category of people for whom it is meant and the items to be included in calculating index numbers vary from one group to another. Types of Consumer Price Index: At present in India apart from WPI, three different indices of consumer prices are available: Consumer Price Index for Industrial Workers (CPI-IW); Consumer Price Index for Urban Non-manual Employees (CPI UNME); Consumer Price Index for agricultural Laborers (CPI AL). The inflation rate in economy varies from WPI to CPI. For e.g. in 1998-99 the inflation rate as per WPI was 6.3% and as per CPI it was 15.3%. It also varies between three type of CPI as mentioned above. Relationship between Price Indices and inflation: Inflation is estimated through Price Indices. Earlier inflation was estimated in terms of wholesale price. However from the point of view of consumers, retail prices are far more relevant and thus today inflation is measured in terms of CPI.
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Employment Structure of employment in India

The structure of employment may be studied by recognizing the following characteristics: a) Distinction between organized and unorganized sector. b) The relative share of self-employment, regular salaried employment and casual labour. It would be of interest to examine the structure from these two points of view.
Organized Vs. unorganized sector employment

The organized usually refers to employment in the public sector and in private sector establishments employing 10 or more persons. It is commonly believed that wages in the organized sector are much higher than in the unorganized sector. Moreover, the organized sector being regulated also provides greater job security and other benefits. Within the organized sector, jobs in the public sector receive much higher wages and accompanying benefits than those in the private sector for similar skills. Besides this, public sector offers greater job security.
Self-employed, regular salaried and casual labour

Data on the basis of category of employment is considered separate for rural and urban areas here. In rural areas, in 1999-2000, 56 percent of the workers were selfemployed, about 7 percent were regular salaried workers and 37 percent were casual labourers. The proportion of self-employment in rural areas was around 63 per cent in 1977 and it has shown a decline over the last two decades and there has been in regular salaried and casual labour workers which is a reflection of marginal cultivators into agricultural labourers.
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The situation is very different in urban areas. The share of self-employment though significant has remained more or less about 43 percent during the entire period 1977 to 2005. The regular salaried workers have been around 40 percent and only 18 percent are casual labours.
Quality of employment
Quality of employment in an economy can be judged by certain indicators. Some of the important indicators are:1. Wages received by the workers. 2. Number of days during the year for which casual labourers were employed. 3. Share of workers engaged in organized and unorganized sectors. 4. Proportion of workers engaged in self-employment,regular salaried and casual labours. 5. Distribution of work opportunities amongprimary, secondary and tertiary activities. 6. Productivity of workers based on their levels of skills and educational attainments.
Measurement of employment
It is important to know the meaning of the following three concepts which have been used in measuring employment in India: 1. Labour force participation rate(LFPR): Labour force means economically active population from which labours apply comes for production and so it includes both employed and unemployed persons. LFPR means the number of personf
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in labour force for every thousand person in the economically active population LFPR does not include children, students, retired old person etc.
2. Work force participation rate(WFPR): Work force refers to the part of labour force which is actually employed. The WFPR means the number of persons or the number of person days employed per thousand persons or person days.
3. Unemployed rate of persons unemployed(PU): Unemployment rate refers to the no. of persons unemployed per thousand persons in the labor force.
Employment rate in India

Employers in all seven industry sectors forecast an increase in staffing levels during quarter 3,2011. The most optimistic hiring intensions are reported in the whole sale and retail trade sector, with a net employment standing at plus 51 percent. Services sector employers report bullish hiring plans with the result of 48 percent, and dynamic hiring prospects are evident in the finance, insurance and real estate sector and the mining and construction sector, with 47 percent and 46 percent respectively. The manufacturing sector stands at 45 percent. Employment in different sectors has been explained as follows
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1. Finance, insurance and real estate: With a net employment of +47%, employers forecast vigorous hiring activity in Quarter 3, 2011. While a declined by 7 percentage points when compared with the previous quarter, it is 11 percentage points stronger year-over-year. Based on unadjusted survey data, employers report bullish hiring plans for Quarter3 2011. 2. Mining and construction Sector employers anticipate a vigorous hiring pace in quarter 3, 2011 reporting a net employment of +46%. The assumption declines by 5 percentage points quarter over quarter, but is unchanged when compared with quarter 3, 2011. Based on unadjusted survey data, employers report bullish hiring intentions for the coming quarter. 3. Manufacturing Job seekers are likely to benefit from a dynamic labor market in quarter 3, 2011 according to employers who report a net
employment of +45%. Hiring prospects are considerably weaker quarter over quarter with employers reporting an 11 percentage point decline . 4. Public administration and education Employers forecast a brisk hiring pace in quarter three , 2011 reporting a net employment of 34%. However hiring propects are considerably weaker when compared with quarter 2, 2011. That
declined by 20% points year over year their was 5% decrease in points. Based on unadjusted survey of survey data, employers predict
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solid head count growth in the coming quarter despite a sharp quarter over quarter decline.
5. Services sector employers anticipate a booming labour market in quarter3, 2011 reporting a net employment of 48%. While there was a decline by 2% points quarter over quarter it is 5% points stronger year over year. Based on survey data employers forecast a dynamic hiring pace in the coming quarter.
UNEMPLOYMENT
Losing a job can be the most distressing economic event in personals life. Most people rely on their labour earnings to maintain their standard of living ,and many people also get a sense of personal accomplishment from working. A job loss means a lower living standard in the present, anxiety about the future and reduced self-esteem . It is not surprising ,therefore , that politicians campaigning for office often speak about how their proposed policies will help create jobs . In previous chapters we have seen some of the forces that determine the level and growth of a countrys standard of living . A country that saves and invests a high fraction of its income, for instance, enjoys more rapid growth in its capital stock and GDP than a similar country that saves and invests less . An even more obvious determination of a country s standard of leaving is the amount of unemployment it typically experiences . People who would like to work but cannot find a job are not contributing to the economys production of goods and services . Although some of unemployment in inevitable in a complex economy with thousands of firms and millions of worker , the amount of unemployment various substantially over time and cross countries . When a country keeps its workers as fully employed as possible , it achieves a higher level of GDP than it would if it left many of its workers standing idle .
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We begin the chapter by looking at some of the relevant facts that describe unemployment . In particular, we examine three questions How does the govt. measure the economys rate of unemployment? What problem arise in interpreting the unemployment data ? How long are the unemployed typically without work ?
IDENTIFYING UNEMPLOYMENT
Lets start by examining more precisely what the term employment means. HOW IS UNEMPLOYMENT MEASURED? Measuring unemployment is the job of the bureau of labor statistics(BLS), which is part of the department of labor. Every month, the BLS produces data on unemployment and on other aspects of labor market, including types of employment, length of the average work week, and the duration of unemployment. These data come from a regular survey of about 60,000 households, called the current population survey. Based on the answers to survey questions, the BLS places each adult (age 16 and older) of each surveyed household in to one of three categories:
1) EMPLOYED:
This category includes those who worked as paid employees, worked in their own business, or worked as unpaid workers in a family members business. Both full time and part time workers are counted. This category also includes those who were not working but who had jobs from which they were temporarily absent because of, for example, vacation, illness, or bad weather.
2) UNEMPLOYED:
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This category includes those who were not employed , were available for work and had tried to find employment during the previous fore weeks . It also includes those waiting to be recalled to a job from which they had been lay off.
3) NOT IN THE LABOUR FORCE :

This category includes those who fit neither of the first two categories, such as a full-time students , homemaker or retiree .
The labore-Market Experiences of Various Demographic Group:

Labour Force participation (%)
Demographic Group
Unemployment Rate (%) 8.8 6.8 16.3 11.5 25.2 18.4 46.0 33.4
Adult (ages 20 and older ) White-male White-female Black-male Black-female Teenagers(16-19ages) White-male White-female Black-male Black-female
75.3 60.4 69.6 63.4 40.3 40.9 26.4 27.4
Labor-Force Participation of Men and Women in the U.S. Economy Women's role in American society has changed dramatically over the past century. Social commentators have pointed to many causes for this change. In part, it is attributable to new technologies, such as the washing machine, clothes dryer, refrigerator, freezer, and dishwasher, which have reduced the amount of time required to complete routine household tasks. In part, it is attributable to
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improved birth control, which has reduced the number of children born to the typical family. This change in women's role is also partly attributable to changing political and social attitudes, which in turn ma y have been facilitated by the advances in technology and birth control. Together these developments have had a profound impact on society in general and on the economy in particular. Nowhere is that impact more obvious than in data on labor-force participation. Figure 3 shows the labor-force participation rates of men and women in the United States since 1950. Just after World War II, men and women had very different roles in society. Only 33 percent of women were working or looking for work, in contrast to 87 percent of men. Over the past several decades, the difference between the participation rates of men and women has gradually diminished, as growing numbers of women have entered the labor force and some men have left it. Data for 2009 show that 59 percent of women were in the labor force, in contrast to 72 percent of men. As measured by labor-force participation, men and women are now playing a more equal role in the economy. The increase in women's labor-force participation is easy to understand, but the fall in men's may seem puzzling. There are several reasons for this decline. First, young men now stay in school longer than their fathers and grandfathers did. Second, older men now retire earlier and live longer. Third, with more women employed, more fathers now stay at home to raise their children. Full- time students, retirees, and stay-at-home dads are all counted as being out of the labor force.
Does the Unemployment Rate Measure What We Want It To?
Measuring the amount of unemployment in the economy might seem a straightforward task, but it is not. While it is easy to distinguish between a person with a full- time job and a person who is not working at all, it is much harder to distinguish between a person who is unemployed and a person who is not in the labor force. Movements into and out of the labor force are, in fact, common. More than one-third of the unemployed are recent entrants into the
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labor force. These entrants include young workers looking for their first jobs. They also include, in greater numbers, older workers who had previousl y left the labor force but have now returned to look for work. Moreover, not all unemployment ends with the job seeker finding a job. Almost half of all spells of unemployment end when the unemployed person leaves the labor force. Because people move into and out of the labor force so often, statistics on unemployment are difficult to interpret. On the one hand, some of those who report being unemployed ma y not, in fact, be trying hard to find a job. They may be calling themselves unemployed because they want to qualify for a government program that financially assists the unemployed or because they are actually working but paid "under the table" to avoid taxes on their earnings. It may be more realistic to view these individuals as out of the labor force or, in some cases, employed. On the other hand, some of those who report being out of the labor force may want to work. These individuals ma y have tried to find a job and may h a v e g i v e n u p a f t e r a n u n s u c c e s s f u l s e a r c h . D i s c o u r a g e d workers, do not show up in unemplo yment statistics, even though the y are truly workers without jobs. Because of these and other problems, the BLS calculates several other measures of labor underutilization, in addition to the official unemployment rate. These alternative measures are presented . In the end, it is best to view the official unemployment rate as a useful but imperfect measure of joblessness.
How Long Are the Unemployed without Work? In judging how serious the problem of unemployment is, one question to consider is whether unemployment is t ypically a short-term or long-term condition. If unemployment is short term, one might conclude that it is not a big problem. Workers may require a few weeks between jobs to find the openings that best suit their tastes and skills. Yet if unemployment is long term, one might conclude that it is a serious problem. Workers unemployed for many months are more likely to suffer economic and psychological hardship.
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Because the duration of unemployment can affect our view about how big problem unemployment is, economists have devoted much energy to studying data on the duration of unemployment spells. In this work, they have uncovered a result that is important, subtle, and seemingly contradictory: Most spells of unemployment are short, and most unemployment observed at any given time is long-term. To see how this statement can be true, consider an example. Suppose that you visited the government's unemployment office every week for a year to survey the unemployed. Each week you find that there are four unemployed workers. Three of these workers are the same individuals for the whole year, while the fourth person changes every week. Based on this experience, would you say that unemployment is typically short-term or long-term? Some simple calculations help - answer this question. In this example, you meet a total of 53 unemplo yed people over the course of a year; 52 of them are unemployed for one week, and 3 are unemplo yed for the full . 'ear. This means that 52/55, or 95 percent, of unemployment spells end in one week. Yet whenever you walk into the unemployment office, three of the four people you meet will be unemployed for the entire year. So, even though 95 percent of unemployment spells end in one week, 75 percent of the unemplo yment observed at an y moment is attributable to those individuals who are unemplo yed for a full year. In this example, as in the world, most spells of unemployed are short land most unemployment observed at any given time is long-term. This subtle conclusion implies that economists and policymakers must be care ful when interpreting data on unemplo yment and when-designing policies to help the unemployed. Most people who become unemployed will soon find jobs. Yet most of the economy's unemployment problem is attributable to the relatively few workers who are jobless for long periods of time.
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Why Are There Always Some People Unemployed? We have discussed how the government measures the amount of unemployment, the problems that arise in interpreting unemployment statistics, and the findings of labor economists on the duration of unemployment. You should now have a good idea about what unemployment is. This discussion, however, has not explained why economies experience unemployment. In most markets in the economy, prices adjust to bring quantity supplied and quantity demanded into balance. In an ideal labor market, wages would adjust to balance the quantity of labor supplied and the quantity of labor demanded. This adjustment of wages would ensure that all workers are always fully employed. Of course, reality does not resemble this ideal. There are always some workers without jobs, even when the overall economy is doing unemployment rate never falls to zero; instead, it fluctuates around the natural rate of unemployment. To understand this natural rate, the remaining sections of this chapter examine the reasons actual labor markets depart from the ideal of full employment. To preview our conclusions, we will find that there are four ways to explain unemployment in the long run. The first explanation is that it takes time for workers to search for the jobs that are best suited for them. The unemployment that results from the process of matching workers and jobs is sometimes called frictional unemployment, and it is often thought to explain relatively short spells of unemployment. The next three explanations for unemployment suggest that the number of jobs available in some labor markets may be insufficient to give a job to everyone who wants one. This occurs when the quantity of labor supplied exceeds the quantity demanded. Unemployment of this sort is sometimes called structural unemployment, and it is often thought to explain longer spells unemployment. As we will see, this kind of unemployment results when wages are, for some reason, set above the level that brings supply and demand into equilibrium. We will examine three possible reasons for an above-equilibrium wage: minimum-wage laws, unions, and efficiency wages.
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Why Some Frictional Unemployment is gnevitable Frictional unemployment is often the result of changes in the demand for labor among different firms. When consumers decide that they prefer Dell to Apple computers, Dell increases employment, and Apple lays off workers. The former Apple workers must now search for new jobs, and Dell must decide which new workers to hire for the various jobs that have opened up. The result of this transition is a period of unemployment. Similarly, because different regions of the country produce different goods, employment can rise in one region while falling in another. Consider, for instance, what happens when the world price of oil falls. Oil-producing firms in Alaska respond to the lower price by cutting back on production and employment. At the same time, cheaper gasoline stimulates car sales, so autoproducing firms in Michigan raise production and employment. Just the opposite happens when the world price of oil rises. Changes in the composition of demand among industries or regions are called sectoral shifts. Because it takes time for workers to search for jobs in the new sectors, sectoral shifts temporarily cause unemployment. Frictional unemployment is inevitable simply because the economy is always changing. A century ago, the four industries with the largest employment in the United States were cotton goods, woolen goods, men's clothing, and lumber. Today, the four largest industries are autos, aircraft, communications, and electrical components. As this transition took place, jobs were created in some firms and destroyed in others. The result of this process has been higher productivity and higher living standards. But along the way, workers in declining industries found themselves out of work and searching for new jobs. Data show that at least 10 percent of U.S. manufacturing jobs are destroyed every year. In addition, more than 3 percent of workers leave their jobs in a typical month, sometimes because they realize that the jobs are not a good match for their tastes and skills. Many of these workers, especially younger ones, find new jobs at higher wages. This churning of the labor force is normal in a wellfunctioning and dynamic market economy, but the result is some amount of frictional unemployment.
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Public Policy and Job Search Even if some frictional unemployment is inevitable, the precise amount is not. The faster information spreads about job openings arid worker availability, the more rapidly the economy can match workers and firms. The Internet, for instance, may help facilitate job search and reduce frictional unemployment. In addition, public policy may play a role. If policy can reduce the time it takes unemployed workers to find new jobs, it can reduce the economy's natural rate of unemployment. Government programs try to facilitate job search in various ways. One way is through government-run employment agencies, which give out information about job vacancies. Another way is through public training programs, which aim to ease workers' transition from declining to growing industries and to help is As advantaged groups escape poverty. Advocates of these programs believe that make the economy operate more efficiently by keeping the labor force more employed and that they reduce the inequities inherent in a constantly changedmarket economy.
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Module 4 Macro Business Environment

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MODULE 4 MEASURING THE ECONOMY

The Incremental Principle concept:

Equi-marginal principle: Its states that rational decision makers allocate

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Contribution of Different Sectors in Indian Economy: Primary Sector:

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SWOT ANALYSIS OF INDIAN ECONOMY:

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MEASURING GDP THROUGH SPENDING

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IMPORTS AND EXPORTS

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WHICH SPENDING ITEMS SHOULD BE INCLUDED?

MEASURING GDP THROUGH PRODUCTION: VALUE ADDED

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THE NATIONAL INCOME AND PRODUCT ACCOUNTS

SAVINGS AND INVESTMENT

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ECONOMIC FLUCTUATIONS, GROWTH AND DEVELOPMENT

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Inflation versus Deflation

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Savings and investment in an open economy

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GOVERNMENT SAVINGS; Government savings incomes (tax receipts, net of

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The Exchange Rate;

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Inflation, Price INDEXES AND DEFLATORS

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Hours per week and hours;

Review and practice

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Key terms and concepts

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KINDS OF PRICE INDICES;

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Employment Structure of employment in India

Organized Vs. unorganized sector employment

Self-employed, regular salaried and casual labour

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Employment rate in India

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