Ch 9 Notes

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Transcript Ch 9 Notes

Chapter 9
Unemployment and Inflation
Copyright © 2015 by McGraw-Hill Education. All rights reserved.
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
I. Unemployment
1. Definitions:
(i) Population = number of people living in Thailand.
- Thailand (2014) = 67.725 million
(ii) Population can be divided into two groups: 67.725 million
(a) Working-age population  15 years of age and older.
- Thailand (2014) = 54.843 million
(b) Below 15 years of age.
- Thailand (2014) = 12.882 million
(iii) Working age population can be divided into two groups: 54.843 million
(a) In the labor force
- Thailand (2014) = 40.055 million
(b) Not in the labor force
- Thailand (2014) = 14.788 million
(iv) Labor force can be divided into two groups: 40.055 million
(a) Employed  full-time or part-time.
- Thailand (2014) = 39.695 million
(b) Unemployed  no work, and actively looking.
- Thailand (2014) = 0.360 million
2. Diagram to link all definitions:
3. Unemployment rate =
Labor Force
* 100
II. Shortcomings of Unemployment Rates
1. Does not distinguish between Full-time versus Part-time jobs
2. Does not measure discouraged workers
Types of Unemployment
III. Types of Unemployment
1. Frictional unemployment
- Individuals searching for jobs or waiting to take jobs soon.
- Example: Workers to do not like their jobs and quit.
2. Structural unemployment
- Occurs due to changes in the structure of the demand for labor
- Example: Computer diskette workers lose their jobs to USB key workers.
3. Cyclical unemployment
- Caused by the recession phase of the economy.
- Example: Recession in 1997 in Thailand, recession in 2008 in the United States.
Definition of Full Employment
IV. Natural Rate of Unemployment
1. Regardless of how well the economy is doing, unemployment will
always exist.
2. The natural rate of unemployment, NRU, is the sum of the
_________________________ + _______________________ rates.
- Thailand: ??? ___________________, Canada: Around 7%.
3. Actual unemployment can be above or fall below the NRU.
4. If the actual unemployment rate is equal to the NRU, then the
economy is at full-employment, producing potential GDP = Yp.
Okun’s Law
V. Okun’s Law
1. What happens when the actual unemployment rate is not equal to
the NRU?
2. If actual Un > NRU, we expect a (weak, strong) economy.
3. If actual Un < NRU, we expect a (weak, strong) economy.
4. But by how much?
5. Okun’s Law: (Actual Un – NRU) = - 0.5 (%ΔY - %ΔYp)
- Example 1:
- Example 2:
VI. Inflation
1. Inflation is defined as the percentage change in the general price
levels over a period of time (can be monthly, quarterly, yearly). The
equation for percentage change is:
% change in prices = inflation rate
= (Price indexnew – Price indexold) *100
Price indexold
2. The price index can be from Chapter 7, the nominal GDP divided by
real GDP *100 (which is called GDP deflator).
3. The price index can also be something called Consumer Price Index
Consumer Price Index (CPI)
1. CPI only concentrates on consumer goods, C, such as food and
cosmetics, and excludes goods and services bought by I, G, NX.
2. CPI examines a basket of goods and services that a typical consumer
consumes, holds the product types and quantities fixed, and then
evaluate how much more (or less) this basket costs over time.
3. The components inside the basket are revised only once every few
Consumer Price Index (CPI)
4. Thailand’s CPI
Consumer Price Index (CPI)
5. A numerical example: Base year 2013
Qty Prices
10 $50
Phones 1 $100
Movies 2 $10
Expenditure in new year
Expenditure in base year
x 100
Redistribution Effects of Inflation
VIII. Why does Inflation matter?
1. Inflation negatively affects fixed income earners
- Nominal income = money income, such as 1,000 baht per day.
- What we can buy with nominal income depends on inflation.
- The higher the inflation rate, the less we buy.
- How much we can buy with the 1,000 baht is real income.
- In general,
change in
real income
change in
nominal income
change in
price level
- Example: Money income rises by 10%, prices rise by 7%, our real income or
purchasing power rises by _______%.
Redistribution Effects of Inflation
2. Inflation affects borrowers and lenders
- Suppose you borrowed 100 baht in 2005, CPI=100.
- You buy 1 unit of good (gift basket) that costs 100 baht.
- You promised to pay back (to the bank or your friend) 105 in 2006.
- This is equivalent to 5% interest (nominal interest rate).
- Suppose the CPI in 2006 turned out to be 115.
- Is the lender gaining or losing from this deal, and by how much?
- In general,
real interest rate  nominal interest rate – inflation rate
- Extend from one person to one country: Countries with high inflation rates will
have a difficult time borrowing money in the international markets. It will also be
LO3 expensive (high interest rates) to borrow.