Chapter 5

advertisement
Chapter 5
The macroeconomic
environment
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics by Jackson and McIver
Slides prepared by Muni Perumal
5-1
Learning objectives
• Describe the business cycle — the periodic
fluctuations in output, employment and price
levels that have characterised our economy
• Examine unemployment in detail — its definition and
measurement, and the structure of unemployment
• Discuss the economic and social problems
associated with unemployment
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics by Jackson and McIver
Slides prepared by Muni Perumal
5-2
Learning objectives (cont.)
• Understand the causes and consequences
of inflation, a problem that plagued us through
the 1970s and 1980s
• Discuss the history and changes in structure
of Australia’s balance of payments, with emphasis on
the current account of the balance of payments
• Discuss the relationship between the current account
balance and the level of national savings
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics by Jackson and McIver
Slides prepared by Muni Perumal
5-3
The business cycle
• The recurrent, somewhat cyclical, increases
and decreases in the level or rate of growth
in economic activity that typify the pattern of
progress of our economy’s real GDP over time
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics by Jackson and McIver
Slides prepared by Muni Perumal
5-4
The Australian business cycle & rate of
inflation
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics by Jackson and McIver
Slides prepared by Muni Perumal
5-5
Phases of the business cycle
• Peak
– Temporary maximum economic activity
• Recession
– Decline in output and employment to low or
negative levels
– A depression is a severe and prolonged recession
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics by Jackson and McIver
Slides prepared by Muni Perumal
5-6
Phases of the business cycle
(cont.)
• Trough
– Output and employment bottom out at their lowest
levels
• Recovery
– Output and employment expand towards the fullemployment level or capacity level
• Secular/growth trend
– The average (or trend) rate of expansion or
contraction
of an economy over the long term (25, 50 or 100
years)
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics by Jackson and McIver
Slides prepared by Muni Perumal
5-7
The business cycle
Level of business activity
Peak
Peak
Peak
Trough
Trough
Time
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics by Jackson and McIver
Slides prepared by Muni Perumal
5-8
Causes of business cycle
Variety of explanations/theories:
• Innovation
• Political events
• Random events
• Purely monetary phenomenon
• Immediate determinant — aggregate expenditure
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics by Jackson and McIver
Slides prepared by Muni Perumal
5-9
Business cycle
Non-cyclical fluctuations
• Seasonal variations in business activity are
regular fluctuations in the tempo of business activity
that are independent of the business
cycle and occur particularly in the retail industry
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics by Jackson and McIver
Slides prepared by Muni Perumal
5-10
Business cycle
• Cyclical impact: durables and non-durables
– Capital goods and consumer durables most greatly
affected by business cycles
– Consumer non-durables least affected
• Postponability
• Monopoly power
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics by Jackson and McIver
Slides prepared by Muni Perumal
5-11
Growth in motor vehicles registrations, new
dwellings approved and retails sales in Australia
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics by Jackson and McIver
Slides prepared by Muni Perumal
5-12
Types of unemployment
• Frictional
– Workers ‘between jobs’, temporarily laid off due
to seasonality and new entrants
– Allows movement of labour from low to high
productivity
– Inevitable and partly desirable
• Structural
– Mismatch in skills and geographic location
– Not employable without additional training,
education
and geographical movement
– Arises due to changes in labour demand caused
by changes in consumer demand and technology
• Cyclical
– Unemployment caused by the business cycle, or
Copyright  2007due
McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics by Jackson and McIver
toMuniinsufficient
aggregate demand or total spending5-13
Slides prepared by
Perumal
Full employment
• The full-employment rate of unemployment
is called the ‘natural rate of unemployment’
– Equals the sum of frictional and structural
unemployment
– Cyclical unemployment = zero
• Domestic output consistent with the natural rate
of unemployment is potential output or GDP
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics by Jackson and McIver
Slides prepared by Muni Perumal
5-14
Australia: unemployment rate
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics by Jackson and McIver
Slides prepared by Muni Perumal
5-15
Measuring unemployment
• Part-time employment
– Underemployed workers, prefer more hours of work
• Discouraged workers or the ‘hidden unemployed’
– Those who become discouraged and drop out
of the labour force but would return if a suitable
job prospect arose
• Discouraged workers, participation rate and
the unemployment rate
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics by Jackson and McIver
Slides prepared by Muni Perumal
5-16
Cost of unemployment
Economic costs
• Output forgone, measured in terms of the
GDP gap
– The amount by which the actual level of GDP
falls short of the potential GDP
• Okun’s law shows the relationship between
the unemployment rate and the GDP gap
• Unequal burdens
– Unemployment is borne more heavily by some
groups than others
Non-economic costs
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics by Jackson and McIver
Slides prepared by Muni Perumal
5-17
Inflation
• Inflation is a continuous rise in the general
price level
• The inflation rate is measured as follows:
Inflation
rate
=
Current year index – Previous
year index
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics by Jackson and McIver
Slides prepared by Muni Perumal
× 100
Previous year index
5-18
Theories of inflation
Two general theories of inflation:
• Demand-pull inflation
– Caused by excess demand for output
• Cost-push inflation
– Rise in prices arising from increased cost
of production due to:
 Wage push
 Profit push
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics by Jackson and McIver
Slides prepared by Muni Perumal
5-19
The price level and the level of
unemployment
Range 3
Price level
P
Range 1
Fullemployment
output
Q
Output and employment
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics by Jackson and McIver
Slides prepared by Muni Perumal
5-20
Inflation & redistribution
• Most severe when inflation is unanticipated
• Fixed-nominal-income receivers
– Inflation penalises people living on fixed nominal
income
• Savers
– The value of savings will decline if inflation is higher
than the interest rate
• Debtors and creditors
– Inflation tend to benefit borrowers at the expense
of the lenders
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics by Jackson and McIver
Slides prepared by Muni Perumal
5-21
Anticipated inflation
• Real interest rate
– The percentage increase in the purchasing power
that a lender receives from a borrower in exchange
for the borrower’s use of the lender’s funds
• Nominal interest rate
– The percentage increase in money that the lender
receives from the borrower
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics by Jackson and McIver
Slides prepared by Muni Perumal
5-22
Output effects of inflation
• Stimulus of demand-pull inflation
– High level of spending required for higher output and
lower unemployment also causes some inflation
• Cost-push inflation and unemployment
– Hyperinflation
– Wage-price inflationary spiral
 A continuous cycle of money wage and price rises
that feed on each other
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics by Jackson and McIver
Slides prepared by Muni Perumal
5-23
Australia’s current account
problem
• Three factors
– Gradual deterioration in the terms of trade
– High freight and transport costs
– Dependence on large levels of capital inflow
• Current account problems in the 1970s, 1980s,
1990s and into the 2000s
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics by Jackson and McIver
Slides prepared by Muni Perumal
5-24
Components of the current account
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics by Jackson and McIver
Slides prepared by Muni Perumal
5-25
The capital and financial account balance
1959–60 to 2001–02
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics by Jackson and McIver
Slides prepared by Muni Perumal
5-26
National savings
• National savings represents savings from
national income
• Used to finance gross capital formation
• Continuous fall in household savings in Australia
in recent years:
– Increases in household wealth
– Replacement of direct savings with alternatives
such as superannuation
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics by Jackson and McIver
Slides prepared by Muni Perumal
5-27
Australia: net national savings, 1959–60
to 2004–05
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics by Jackson and McIver
Slides prepared by Muni Perumal
5-28
Download