Transcript HKCE Macroeconomics

HKCE Macroeconomics
 Chapter
5: Unemployment, Price
Fluctuations and Business Cycle
By Mr. LAU san-fat
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Labor Force & Unemployment
 Labor
force refers to all economically
active persons aged 15 or above,
including both employed and
unemployed population.
 An
economically active person is able and
willing to participate in production activities.
 The
employed population refers to
persons who perform work for payment
or profit.
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Labor Force & Unemployment
 The
unemployed population refers to
those unemployed labor force who have
no jobs but are still under searching.
 The under-employed population
refers to those employed persons who
involuntarily work less hours.
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Labor Force and
Unemployment
Aged 15 or Above
Under-employed
By Mr. LAU san-fat
Unemployed
Employed
Labor Force
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Whole
Population
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Labor Force & Unemployment

Exercises:
1. Is a housewife regarded as unemployed?
2. Ah Wing is a F.3 student who is a private
tutor at Friday nights. Is she employed?
3. A mild mentally retarded person who has
graduated from a special workplace and
is looking for a job. Is that person
unemployed?
4. A young lady who cared some poor
children carrying HIV in Cambodia last
summer. Is she employed?
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Measuring Unemployment

Unemployment rate


Unemployment rate
= (unemployed population/labor force)
x 100%
Under-employment rate

under-employment rate
= (under-employed population/labor force)
x 100%
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Measuring Unemployment
Exercise 1:

Given:





population aged 15 or above
employed population
unemployed population
under-employed population
100 000
5 205
1 225
643
Based on the above information, calculate:



labor force = 5 205 + 1 225=6 430
unemployment rate =(1 225/6 430)x100%=19.1%
under-employment rate = (643/6 430)x100%=10%
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Measuring Unemployment
Exercise 2:

Given that the unemployment rate is 5% and labor
force is 10 000. Now, 1 000 new school leavers are
seeking jobs.
 Would there be an increase in labor force?


Would the unemployment rate change if ALL of
them can find a job?


Yes, increase by 1 000
Yes, fall by [(500/11 000)x100% =] 4.5%-5%=-0.5%
Would the unemployment rate change if NONE of
them can find a job?

Yes, increase by [(1 500/11 000)x100%=]13.6%-5%
=+8.6%
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Costs of Unemployment
 Costs
to Unemployed Individuals:
 Lower
living standard
 Loss of skills/Skills become outdated
 Psychological problems emerge
 Costs
to Society:
A
fall in output
 Increasing financial burden to society
 Social and political problems
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Price Fluctuations
 Inflation
is a persistent increase in the
general price level.
 Deflation is a persistent decrease in the
general price level.
 The following situations are NOT
considered as inflation/deflation:
 An
once-and-for-all change in general price
 A persistent rise/fall in the price of one
good
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Price Fluctuations
 Remarks:
 Under
inflation/deflation, it does NOT
implies that the prices of ALL goods and
services change.
 In times of inflation, the prices of some
goods may fall while some may remain
constant.
 In times of deflation, the prices of some
goods may increase while some may
remain constant.
By Mr. LAU san-fat
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Measuring Changes in Prices
 Two
methods for measuring a change in
the general price level:
 Consumer
price index (CPI)
 Implicit price deflator of GDP
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Measurement by CPI
 Types

Consumer price index(A), CPI(A)


Reflecting the effect of price changes on the middle
expenditure group
Consumer price index(C), CPI(C) [formerly called
Hang Seng CPI]


Reflecting the effect of price changes on the lower
expenditure group
Consumer price index(B), CPI(B)


of CPI:
Reflecting the effect of price changes on the higher
expenditure group
Composite consumer price index, Composite CPI
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Measurement by CPI
 Types
of CPI:
Index
Monthly Expenditure % of Households
Range (at
Covered
1999/2000 prices)
CPI(A)
CPI(B)
$4 400 - $18 100
$18 100 - $31 800
50
30
CPI(C)
$31 800 - $64 600
10
Composite CPI
$4 400 - $64 600
90
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Measurement by CPI
 Remarks:
 The
lower expenditure group households
tend to spend a higher proportion of their
expenditure on necessities, such as food.
 The higher expenditure group households
tend to spend a higher proportion of their
expenditure on housing, clothing and
footwear and transportation.
 Since the expenditure weightings of
different expenditure groups differ, the
price change of an item may have different
impacts on different income groups.
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Measurement by CPI
 If
CPI in the current period is larger than
100, it means there is inflation while
deflation occurs if it is less than 100.
 Inflation rate
= [(CPI in the current period – CPI in the
last period)/CPI in the last period]x100%
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Measurement by Price
Deflator of GDP
 Implicit
Price Deflator of GDP
=(GDP at current market prices/GDP at
constant market prices)x100
 If the implicit GDP deflator is larger than
100, it means there is inflation, however,
deflation occurs if it is less than 100.
 Inflation rate
= [GDP deflator in the current period –
GDP deflator in the last period)/GDP
deflator in the last period]x100%
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GDP Deflator vs. CPI
 As
the implicit price deflator of GDP has
a wider coverage of goods and services,
it is a better measure of the changes in
the general price level than CPIs.
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GDP Deflator vs. CPI
 As
the implicit price deflator of GDP has
a wider coverage of goods and services,
it is a better measure of the changes in
the general price level than CPIs.
 However, CPIs is good for
understanding the effects of price
changes on different income groups.
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Effects of Changes in Price
Level
 Effects
on purchasing power of money:
 Inflation
reduces the purchasing power of
money.
 Deflation raises the purchasing power of
money
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Effects of Changes in Price
Level
 Effects
on real income:
Conditions
Effects on Real Income
If % rise in money income > inflation rate Real income increases
If % rise in money income < inflation rate Real income falls
If % rise in money income = inflation rate No change in real income
If % fall in money income > deflation rate Real income falls
If % fall in money income < deflation rate Real income rises
If % fall in money income = deflation rate No change in real income
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Effects of Changes in Price
Level
 Effects
on cost of living:
 Inflation
means a persistent increase in the
general price level and thus raising the
cost of living.
 Deflation means a persistent fall in the
general price level and thus decreasing the
cost of living.
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Effects of Changes in Price
Level
 Effects
on Fixed Income Earners:
 Inflation
reduces the purchasing power of
the fixed income earners as the real value
of their fixed money income is not allowed
to be adjusted upwards.
 Deflation raises the purchasing power of
the fixed income earners as the real value
of their fixed money income is not reduced.
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Effects of Changes in Price
Level
 Effects
on Income Redistribution (The
Redistributive Effect):
 The
redistributive effect would occur if the
inflation/deflation is unexpected or
unanticipated.
 As income will be re-distributed, some
people would gain and some lose.
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Effects of Changes in Price
Level
 Redistributive
Effects under Inflation
People who gain
People who lose
Borrowers/Debtors gain because
they pay less in real terms.
Lenders/Creditors lose as they
receive less in real terms.
Bankers gain as their liabilities of
deposit falls in real terms.
Depositors lose as their interest
returns falls in real terms.
Employers gain as employment
contracts fix the amount of money
wage and thus they pay less in
real terms.
Employees lose as their money
income is fixed and thus their
real income is reduced.
Insurance companies gain as the
insurance payments fall in real
terms.
Policy-holders lose as the
compensation and returns fall in
real terms.
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Effects of Changes in Price
Level
 Redistributive
Effects under Deflation
People who lose
People who gain
Borrowers/Debtors lose because
they pay more in real terms.
Lenders/Creditors gain as they
receive more in real terms.
Bankers lose as their liabilities of
deposit rises in real terms.
Depositors gain as their interest
returns increases in real terms.
Employers lost as employment
contracts fix the amount of money
wage and thus they pay more in
real terms.
Employees gain as their money
income is fixed and thus their
real income is not reduced.
Insurance companies lose as the
insurance payments rise in real
terms.
Policy-holders gain as the
compensation and returns rise in
real terms.
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Effects of Changes in Price
Level
 Effects
on choice of wealth :
 In
times of inflation, people would prefer to
hold physical assets instead of money.
 In times of deflation, people would prefer to
hold cash or interest-bearing financial
assets other than physical assets.
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Effects of Changes in Price
Level

Effects on government tax revenue :


In times of inflation, government tax revenue
would increase because higher money wage
makes a person's income exceeded the tax
allowances or fell into a higher tax bracket.
In times of deflation, government tax revenue
would fall because lower money income means
some people may be out of tax net or fall into a
lower tax bracket.
By Mr. LAU san-fat
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Effects of Changes in Price
Level
 Effects
on cost of production & exports :
 During
inflation, the prices of exports will
rise while its quantity falls because cost of
production rises due to higher prices of raw
materials.
 During deflation, the export prices fall and
thus stimulating the volume of exports.
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Business Cycle


Business cycle (BC) refers to the recurrent
fluctuations of economic performance (esp.
in terms of the real GDP) of an economy.
A business cycle is characterized by 4
phases:
1.
2.
3.
4.
Prosperity/Boom/Peak
Recession/Contraction
Depression/Trough
Recovery/Expansion
By Mr. LAU san-fat
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Business Cycle
By Mr. LAU san-fat
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Business Cycle

Characteristics of prosperity:




Unemployment rate is the very low/Full
employment is close
The real GDP growth rate is very high
The general price level starts to rise rapidly
Characteristics of recession:



Unemployment rate starts to rise
The real GDP growth rate is decreasing
The inflation rate is declining
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Business Cycle

Characteristics of depression:




Unemployment rate is the very high
The real GDP growth rate is very low or negative
The general price level is falling rapidly/Deflation
occurs
Characteristics of recovery:



Unemployment rate starts to fall/Employment rate
is rising
The real GDP growth rate starts to rise
Deflation rate starts to fall/The general price level
stops declining
By Mr. LAU san-fat
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Business Cycle-A Summary
Phase
Growth
Unemployment
Rate of
Rate
Real GDP
Changes in
the General
Price Level
Prosperity
Increasing
Very low
Rising rapidly
or very high
inflation rate
Recession
decreasing
Increasing
Decreasing or
deflation
Depression
Low or
negative
Very high
Falling rapidly
or very high
deflation rate
Positive or
increasing
Decreasing
Increasing
Recovery
By Mr. LAU san-fat
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Business Cycle-HK
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