Business Cycles,Inflation and Its Relationship Izhar Ul Haq Majid Ali Nasir Rabbani Haris Shirazi Khubaib Haider

The Business Cycle Alternating increases and decreases in economic activity over time Phases of the business cycle Expansion Recession Depression Recovery LO1

The Business Cycle Trend Growth Peak Peak Peak Expansion Recession Level of real output Recession Expansion Trough Recession Trough Time LO1

Causes & Measurement of Business cycle Economic Disturbances Economic Policies Supply shocks Measurement LO1

Inflation Prof. Crowther defines inflation as; “a state in which the value of money is falling i.e. Prices are rising”. Prof. Samuelson puts it thus; “inflation occurs when the general level of prices and the cost is rising”. LO2

CPI = x CPI = x Inflation General rise in the price level Inflation reduces the “purchasing power” of money Consumer Price Index (CPI) CPI Price of the Most Recent Market Basket in the Particular Year Price estimate of the Market Basket in 1982-1984 = x 100 CPI 207.3 - 201.6 201.6 = x 100 = 2.8% LO3

Causes of Inflation Demand side Supply side LO3

Types of Inflation Cost Push Inflation Rising imported raw materials costs Rising labor costs  Hoarding by traders and speculators Role of natural calamities War   LO3

Types of Inflation Demand Pull Inflation Demand-pull inflation is likely when there is full employment of resources. In these circumstances an increase in demand will lead to an increase in prices. Reduction in direct or indirect taxation Depreciation of the exchange rate Rapid growth of the money supply  Faster economic growth in other countries Existence of Black Money Increase in population growth Reduction in the level of savings

Measurement of Inflation LO3

Measurement of Inflation Country 1999 2000 2001 2002 2003 2005 2006 2007 2008 2009 2010 2011 Pakistan 6 5.2 4 3.9 4.8 9.1 7.9 7.6 20.3 13.6 13.4 11.9

business cycle and inflation Relationship between business cycle and inflation LO3

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