Transcript Unemployment - Har Wai Mun

UBEA 1013: ECONOMICS
CHAPTER 8:
INTRODUCTION TO MACROECONOMICS
8.1 Introduction
8.2 Concern of Macroeconomics
8.3 Government policy
8.4 Economics school of Thought
(Intro only)
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UBEA 1013: ECONOMICS
8.1 Introduction to Macroeconomics
• Microeconomics examines the behavior
of individual decision-making units—
business firms and households.
• Macroeconomics deals with the economy
as a whole; it examines the behavior of
economic aggregates such as aggregate
income, consumption, investment, and the
overall level of prices.
– Aggregate behavior refers to the
behavior of all households and firms
together.
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• Connection to microeconomics:
• Macroeconomic behavior is the sum of
all the microeconomic decision made
by individual households & firms
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• Four of the major concerns
of macroeconomics:
– Output growth
– Inflation
– Unemployment
A) Society welfare
B) Government policy
a) Fiscal
b) Monetary
c) SS side stimulation
Economics school
of thought
(Theories)
a)
b)
c)
d)
e)
f)
Classic
Keynesian
Monetary
Development
Marxist
etc
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8.2 Concerns of macroeconomics:
(a) Output Growth
 long-run economics growth
 short-run fluctuations
>> Business cycle
• The main measure of how an economy is doing is
aggregate output:
– Aggregate output is the total quantity of goods
and services produced in an economy in a
given period.
The business cycle is the cycle of short-term ups and
downs in the economy.
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Expansion and Contraction:
The Business Cycle
• An expansion, or boom, is
the period in the business
cycle from a trough up to a
peak, during which output
and employment rise.
• A contraction, recession,
or slump is the period in
the business cycle from a
peak down to a trough,
during which output and
employment fall.
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• It has become conventional to classify an
economics downturn as a “technical recession”
when aggregate output declines for two
consecutive quarters.
• A prolonged and deep recession becomes a
depression.
• Policy makers attempt not only to smooth
fluctuations in output during a business cycle but
also to increase the growth rate of output in the
long-run.
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(b) Inflation
• Inflation is an increase in the overall price level.
• Hyperinflation is a period of very rapid increases in
the overall price level. Hyperinflations are rare, but
have been used to study the costs and
consequences of even moderate inflation.
• Deflation is a decrease in the overall price level.
Prolonged periods of deflation can be just as
damaging for the economy as sustained inflation.
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• Stagflation (stagnation + inflation) occurs when the
overall price level rises rapidly (inflation) during
periods of recession or high & persistent
unemployment (stagnation) .
• Unanticipated inflation is an inflation that takes
people by surprise. Thus, it is the inflation that either
higher or lower than expected.
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Three price indexes were used as measurements of
inflation or overall price levels are as follow:
•GDP deflator = Nominal GDP / Real GDP
•Consumer Price Index (CPI) is a price index
computed in a given period using a basket of goods
purchased by typical consumer. It is the most popular
price index.
•Producer Price Index (PPI) measure price changes
for products at all stages in the production process.
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Cost of inflation:
• Inflation changes the distribution of income. Those
who are living on fixed incomes are particularly hurt by
inflation
• Inflation that is lower than expected benefits creditors
and hurt the debtor and vice versa .
• When unanticipated inflation occurs regularly,
investment risk increases
>> investor could be reluctant to invest and make
long-term commitment
>> slow the economic growth
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(c) Unemployment
Definition: Is the percentage of the labour
force that is unemployed
unemployed
unemployment rate =
employed + unemployed
Labor force:
Who qualified as “labour force”?
Who can be said as “employed”?
Who can be said as “unemployed”?
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•
An employed person is any person 16 years old or
older:
1. who works for pay, either for someone else or in
his or her own business for 1 or more hours per
week,
2. who works without pay for 15 or more hours per
week in a family enterprise, or
3. who has a job but has been temporarily absent,
with or without pay.
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•
•
An unemployed person is a person 16 years
old or older who:
1. is not working,
2. is available for work, and
3. has made specific efforts to find work
during the previous 4 weeks.
A person who is not looking for work, either
because he or she does not want a job or has
given up looking, is not in the labor force.
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Population
Labor force
Not in labor force
Employed
< 16
Unemployed
> 55
Discourage workers
Discouraged workers are people who want to work
but cannot find jobs. They grow discourage and
stop looking for jobs
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Population
Labor force
Not in labor force
Labor force
< 16
Labor force
> 55
Discourage workers
population = labor force + not in labor force
labor force = employed + unemployed
labor force
labor force participation rate =
population
unemployed
unemployment rate =
employed + unemployed
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Three types of unemployment
1. Frictional unemployment is the portion of
unemployment that is due to the normal working of
the labor market; used to denote short-run job/skill
matching problems.
2. Structural unemployment is the portion of
unemployment that is due to changes in the
structure of the economy that result in a significant
loss of jobs in certain industries
3. Cyclical unemployment is the increase in
unemployment that occurs during recessions and
depressions .
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The natural rate of unemployment is the
unemployment that occurs as a normal part of the
functioning of the economy.
Sometimes taken as the sum of frictional
unemployment and structural unemployment.
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8.3 Government Policy
•
There are three kinds of policies that government
has used to influence the macroeconomic as below:
1. Fiscal policy: Refer to government policies
concerning taxes and spending,
2. Monetary policy: Consist of tools used by the
central bank to control the quantity of money in
the economy,
3. Supply-side policy: Are government
policies that focus on stimulating
aggregate supply .
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8.4 Economics School of Thought (Theories)
• Classical economists applied microeconomic
models, or “market clearing” models, to
economy-wide problems. E.g. Adam Smith
theory of “Invisible hand of the free
competitive market”.
• However, simple classical models failed to
explain the prolonged existence of high
unemployment during the Great Depression.
This provided the impetus for the
development of macroeconomics.
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• In 1936, John Maynard Keynes published The
General Theory of Employment, Interest, and
Money.
• Keynes believed governments could intervene
in the economy and affect the level of output
and employment.
• During periods of low private demand, the
government can stimulate aggregate demand
to lift the economy out of recession.
End
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