PSCI 1500: Introduction to Economics Macroeconomic Problems: Unemployment MACROECONOMICS OVERVIEW Macroeconomics Study of the operation of the economy as a whole. 6 major Macroeconomics goals: 1. Low unemployment 2. Low and stable inflation 3. High economic growth, broad based development 4. Minimal domestic economic fluctuations 5. Minimal international economic fluctuations 6. Wise economic policy, governmental and nongovernmental efforts to influence the economy toward the macroeconomic goals. MACRORECONOMIC PROBLEMS 2 major macroeconomic problems are: • Unemployment • Inflation UNEMPLOYMENT LABOUR FORCE Defined as people from the total population above the 16 years of age, not in any institutions and who are either employed or unemployed but actively seeking for jobs. A DISCOURAGED WORKER An individual who wants to work but has been unsuccessful for a long period in finding a job and has given up seeking jobs. those who drop out of the labor force because after unsuccessful in finding job for a long period of time. UNEMPLOYMENT UNEMPLOYMENT Defined as labour force participants being available and willing to work but unable to find jobs. In other words, the available human resources for production are not being used/ underutilized. UNEMPLOYMENT RATE The percentage of the labor force unemployed and actively seeking jobs. that is UNEMPLOYMENT UNDEREMPLOYMENT An individual who works part-time or who are in jobs below their capability, but who are seeking full-time employment. In other words, human resources are not used to their fullest productive capability. FULL EMPLOYMENT The situation in the economy where all available resources are employed to produce goods and services. UNEMPLOYMENT RATE FORMULA UNEMPLOYMENT = NUMBER OF UNEMPLOYED X 100% RATE LABOUR FORCE UNEMPLOYMENT RATE TRY THIS 1. If the population of a country is 220 million people, its labor force consists of 115 million and 99 million people are employed, what is the unemployment rate? ANSWER – 13.9% 2. If the population of a country is 800,000 people, the number employed is 700,000 and the number of unemployed is 70,000, what is the unemployment rate ? ANSWER – 9.09% T YPES UNEMPLOYMENT Frictional Unemployment • Occurs when people are out of work for a short period of time while searching for a job. • Voluntarily, normal and temporary Cyclical Unemployment • Involuntary unemployment that results from a downswing in a business cycle, or recession • Continues until the economy breaks out of the recession. T YPES UNEMPLOYMENT Structural Unemployment • Involuntary unemployment that results when a worker’s job is no longer part of the production structure of the economy. • Because of a mismatch between skills and jobs, it continues indefinitely; no prospect for rehire. Seasonal Unemployment • Occurs when a person is able and willing to work but currently is without work • i.e. amusement parks may experience seasonal unemployment during the winter due to less people will visit the parks during this time. Effects on Individuals and Society EFFECTS OF UNEMPLOYMENT Effects on the Economy UNEMPLOYMENT Effects on Individuals and Society Unemployment intensifies an individual’s struggle with scarcity because spending habits and lifestyles are altered due to the lack of employment. Effects on the Economy Unemployment intensifies the scarcity problem, and the loss to society is the goods and services that might have been enjoyed. UNEMPLOYMENT & FULL EMPLOYMENT • Full Employment - All human resources available for production are fully utilized • Goal of Full Employment does not mean 100% of the labor force is working. • Rate associated with full employment has changed due to: • Changes in the composition of the work force - Affect gender, skills, demographic changes • Duration and quantity of government assistance programs - May influence people’s decisions to remain out of work. • Growth in temporary and part-time work - Jobs are plentiful and people are counted as employed. NATURAL RATE OF EMPLOYMENT Proper definition of full employment is critical, economist focused on the Natural Rate of Unemployment (NRU) rather than Full Employment to reflect the definition of current employment condition. Natural Rate of Unemployment (NRU) Concept of economic activity developed in particular by Milton Friedman and Edmund Phelps in the 1960s Considered to be consistent with level of unemployment that includes only frictional, seasonal and structural unemployment Is the equilibrium rate of unemployment - all those wanting to work have found employment and it is assumed that there is no cyclical unemployment . REVIEW Discuss 4 major types of unemployment by giving appropriate examples to support your answer. OVERVIEW OF INFLATION • Inflation • A continuous increase in the general price level of goods and services in the economy. • Hyperinflation • Extremely rapid increases in the general price level (high rate of increase in price level). • Deflation • A decrease in the general price level of goods and services in the economy. • Disinflation • Slowing of the inflation rate/reduction in inflation rate. DEMAND-PULL INFLATION CAUSES OF INFLATION COST-PUSH INFLATION CAUSES OF INFLATION Demand-Pull Inflation • • • • • Pressure on prices from the buyers’ side of the market Tends to occur when spending is greater than the productive capability of the economy (Dd>Ss) This is when the economy is at full/nearly full employment, capacity of producing is maximum, people have income and spend, increasing demand. From business side, they will increase investment and spend on new business plants. Spending pressure (demand pressure) will lead to the rise in the price level . CAUSES OF INFLATION Cost-Push Inflation • • • • Upward pressure on prices from the sellers’ side of the market Also known as supply-shocks inflation (shortage to the availability of supply of goods and services) Occurs due to increased costs of inputs, borrowing, and even attempts to increase profit. As price of factors of production increase, the seller’s cost increase and this will be passed to the consumers. ROLE OF EXPECTATION Effect from the Role of Expectation towards inflation i. Demand-pull side : fear of high price, current spending increase, gives upward pressure to the current price ii. Cost-push side : firm expects cost will increase, will raise price in anticipation of the future higher cost EFFECTS OF INFLATION Inflation & Income Inflation causes the real income to fall Real Income - income measured in terms of the goods and services that can be purchased with a particular amount of money income. Nominal Income - income measures in terms of current currencies. People with fixed income (i.e. fixed salary, hold government bonds etc..) are easily affected by inflation, and the standard of living as a whole will decline. COST OF LIVING ADJUSTMENTS COLA - Cost of Living Adjustments (COLAs) is a way to reduce the effects of inflation to those with fixed income. Arrangement whereby an individual’s automatically increase with inflation. wages Adjusts salaries based on changes in a cost-of-living index (normally used the Consumer Price Index). MEASURES OF INFLATION Measures of Inflation - Price Index Measures changes in the price of an item or a group of items using a percentage scale. 1. Consumer Price Index (CPI) measures changes in the price level of consumer goods and services typically purchased by households 2. Producer Price Index (PPI) measures changes in the prices of goods that businesses buy, for further processing or for sale to a consumer. 3. GDP Price Index measure the price changes for the entire economy. INFLATION RATE CALCULATION INFLATION = CPI current year – CPI previous year X 100% RATE CPI previous year Where CPI = Consume Price Index MEASURES OF INFLATION The Consumer Price Index (CPI) reflects the prices of all goods and services bought by consumers. Constructing a Price Index uses base year which is the year against which prices in other years are compared in a price index. Example - Calculating the CPI and inflation rate • • • • • Base Year is 2013. Basket of goods in 2013 costs RM1,200. The same basket in 2014 costs RM1,236. CPI = (RM1,236/RM1,200) x 100 = 103. Prices increased 3% between 2013 and 2014. EFFECTS OF INFLATION Inflation & Interest Rate Interest Rate - The price of money; determines the return to savers and lenders of money, and the cost to borrowers Real Rate of Interest - Nominal rate of interest minus the inflation rate (adjusted for inflation) With inflation : Savers and lenders will lose if the interest rate does not rise as much as the rise of inflation rate. Borrowers will lose if the interest rate is higher than the inflation rate. EFFECTS OF INFLATION Inflation & Wealth Wealth measures the value of what people own, i.e. stocks, real estate, cash, precious metals etc., as opposed to income (what people earn) Inflation will appreciate the assets, thus it will benefit those who have assets and hurt those who just started to own wealth or those who wants to purchase assets. Inflation & Political Environment It will reflect the election campaign, changes in leadership, consequently changes in the socio-political environment REVIEW 1. Discuss two types of inflationary pressures. 2. Discuss the effect of inflation.
