HKCE Macroeconomics
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HKCE Macroeconomics Chapter 5: Unemployment, Price Fluctuations and Business Cycle By Mr. LAU san-fat CH5-Unemployment, Price F.. 1 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. By Mr. LAU san-fat CH5-Unemployment, Price F.. 2 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. By Mr. LAU san-fat CH5-Unemployment, Price F.. 3 Labor Force and Unemployment Aged 15 or Above Under-employed By Mr. LAU san-fat Unemployed Employed Labor Force CH5-Unemployment, Price F.. Whole Population 4 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? By Mr. LAU san-fat CH5-Unemployment, Price F.. 5 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% By Mr. LAU san-fat CH5-Unemployment, Price F.. 6 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% By Mr. LAU san-fat CH5-Unemployment, Price F.. 7 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% By Mr. LAU san-fat CH5-Unemployment, Price F.. 8 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 By Mr. LAU san-fat CH5-Unemployment, Price F.. 9 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 By Mr. LAU san-fat CH5-Unemployment, Price F.. 10 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 CH5-Unemployment, Price F.. 11 Measuring Changes in Prices Two methods for measuring a change in the general price level: Consumer price index (CPI) Implicit price deflator of GDP By Mr. LAU san-fat CH5-Unemployment, Price F.. 12 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 By Mr. LAU san-fat CH5-Unemployment, Price F.. 13 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 By Mr. LAU san-fat CH5-Unemployment, Price F.. 14 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. By Mr. LAU san-fat CH5-Unemployment, Price F.. 15 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% By Mr. LAU san-fat CH5-Unemployment, Price F.. 16 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% By Mr. LAU san-fat CH5-Unemployment, Price F.. 17 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. By Mr. LAU san-fat CH5-Unemployment, Price F.. 18 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. By Mr. LAU san-fat CH5-Unemployment, Price F.. 19 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 By Mr. LAU san-fat CH5-Unemployment, Price F.. 20 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 By Mr. LAU san-fat CH5-Unemployment, Price F.. 21 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. By Mr. LAU san-fat CH5-Unemployment, Price F.. 22 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. By Mr. LAU san-fat CH5-Unemployment, Price F.. 23 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. By Mr. LAU san-fat CH5-Unemployment, Price F.. 24 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. By Mr. LAU san-fat CH5-Unemployment, Price F.. 25 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. By Mr. LAU san-fat CH5-Unemployment, Price F.. 26 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. By Mr. LAU san-fat CH5-Unemployment, Price F.. 27 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 CH5-Unemployment, Price F.. 28 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. By Mr. LAU san-fat CH5-Unemployment, Price F.. 29 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 CH5-Unemployment, Price F.. 30 Business Cycle By Mr. LAU san-fat CH5-Unemployment, Price F.. 31 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 By Mr. LAU san-fat CH5-Unemployment, Price F.. 32 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 CH5-Unemployment, Price F.. 33 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 CH5-Unemployment, Price F.. 34 Business Cycle-HK By Mr. LAU san-fat CH5-Unemployment, Price F.. 35
