Understanding Key Economic Concepts and Indicators

Business Cycle Phases

The business cycle consists of several phases:

  • Boom (Expansion): A period of rapid economic growth.
  • Contraction/Recession: A period of economic decline.
  • Depression: A prolonged and severe recession.
  • Crisis: A sharp downturn in economic activity.

These phases are influenced by factors such as aggregate demand.

Understanding Inflation

Inflation is defined as a continuous and widespread increase in the price level from one period to another. This means that the prices of most goods and services in the economy increase simultaneously.

Types of Inflation Based on Expectation

  • Expected Inflation: Anticipated inflation, where the harmful effects are considered.
  • Unanticipated Inflation: Unexpected inflation, leading to adverse effects like loss of purchasing power.

Types of Inflation Based on Impact

  • Balanced Inflation: All prices rise proportionally, affecting everyone equally.
  • Unbalanced Inflation: Only some prices rise, thus not affecting everyone equally.

Types of Inflation Based on Rate

  • Latent or Repressed Inflation: Occurs when governments impose price controls, preventing price indices from reflecting reality.
  • Slow Inflation: A low and stable inflation rate over a long period.
  • Hyperinflation: Also known as runaway inflation, characterized by very rapid price growth.
  • Stagflation: A combination of economic stagnation (low output growth, high unemployment) and high inflation.

Economically Active vs. Inactive Population

Economically Active Population: Includes all individuals who are willing and able to work. This depends on their willingness to work at market prices and their ability to meet market requirements (age, qualifications, health, etc.). This group includes those who are employed or actively seeking employment (unemployed).

Economically Inactive Population: Consists of individuals unwilling or unable to work. This may be due to engagement in other activities or not meeting market requirements. This category includes retirees, homemakers, students, and individuals with illnesses.

Unemployment Rates

Different types of unemployment reflect various economic conditions:

  • Seasonal Unemployment: Caused by changes in labor demand throughout the year (e.g., agriculture, tourism).
  • Cyclical Unemployment: Related to economic cycles, increasing during recessions or periods of declining economic output.
  • Frictional Unemployment: Arises from the normal functioning of the labor market. It occurs when workers leave jobs to find better ones, companies face crises, or new workers enter the workforce. Some level of frictional unemployment is normal.
  • Structural Unemployment: Results from mismatches between the skills or location of the workforce and employer requirements. Technological changes and industry shifts can cause structural unemployment. Unlike frictional unemployment, structural unemployment is not transitional.

Fiscal and Monetary Policy

Fiscal and Monetary Policies are measures, plans, and programs that the government implements to influence the economy over a specific period.

Ordinal Utility Theory

Ordinal Utility Theory suggests that the utility derived from consumption can be measured *ordinally*. Individuals rank their preferences for goods and services, indicating which provide more satisfaction or maintain their level of satisfaction.