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Lecture - unemployment inflation growth

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11 views7 pages

Lecture - unemployment inflation growth

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aleeahmed958
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We take content rights seriously. If you suspect this is your content, claim it here.
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Unemployment, inflation, and growth

Major macroeconomic problems


> Key measures of economic progress of any country and any government.
> Misery index = sum of rate of unemployment and inflation.
> financial markets follow these numbers.
> Published on regular basis (PBS)
> Measures of unemployment and inflations
> Costs involved – anticipated v/s unanticipated unemployment and inflation.

Unemployment
Measuring unemployment – terminology
> Employed – 16 year or over/ self-employed or working with someone else / worked for one hour
during last week / earned the wages.
> 15 hours worked per week in family business
> working but on leave with or without pay.
> Unemployed – 16 year or above/ willing and looking for job / but not finding it / for last 4 weeks.
> Not in labour force – not looking for job/ does not want to do the job / disappointed so left the job
search.
> Labour force

> Population

> unemployment rate

> labour force participation rate


Components of the Unemployment Rate
> Unemployment Rates for Different Demographic and geographical Groups –
Age / gender / Education / provincial / urban and rural /
> Discouraged-Worker Effects - The decline in the measured unemployment rate that results when
people who want to work but cannot find jobs grow discouraged and stop looking, thus dropping out of
the ranks of the unemployed and the labour force.
> The Duration of Unemployment – unemployment duration is longer in recession and shorter in
boom. Unemployment psychology.
The Costs of Unemployment
> Key objectives of macroeconomic policy
– promote maximum employment, production, and purchasing power.
> Trade-off between unemployment and inflation – one declines at the expense of the other.

Understanding types of unemployment.


> Frictional – The portion of unemployment that is as a result of the normal turnover in the labor
market; used to denote short-run job/ skill-matching problems. Short-run phenomenon.
> Structural - The portion of unemployment that is as a result of changes in the structure of the
economy that result in a significant loss of jobs in certain industries. For example, Automation. Longer-
run phenomenon.
> natural rate of unemployment - The unemployment rate that occurs as a normal part of the
functioning of the economy.
> Sometimes taken as the sum of the frictional unemployment rate and the structural
unemployment rate.
> An interesting topic in economics is to estimate this rate.
> Cyclical - Unemployment that is above the natural employment i.e. frictional plus structural
unemployment.

Economic and social costs/consequences


> Why unemployment is a problem at all.
> neither evenly distributed across the population nor easily quantified.
> Distributional problems – uneven income distribution.
> Loss of output/production – Okun’s Law.
As a general rule - Okun’s law states that 1 extra point of unemployment costs 2 percent of GDP.
Inflation and Deflation

> price level change over time in market economies due to market forces.
> Major concern in micro is price changes in a product or industry.
> Major concern in macro is overall change in price level.
> Inflation is defined as an increase in the overall price level, whereas deflation is a decrease in the
overall price level.
Measures
> GDP deflator and price indexes –
> CPI/WPI or PPI/SPI
> Essential food items Index.
> SPI = Sensitive price index.
Producer → Wholeseller → Consumer
PPI → WPI → CPI
> CPI - A price index computed each month by PBS using a bundle that is meant to represent the
“market basket” purchased monthly by the typical urban consumer.
(Task: explore CPI calculation in Pakistan)
> Base period
> % change = [(Price in Period x – Price in Base period)/Price in Base Period]
> Problems with CPI - Fixed weight and Substitution problem - With fixed weights, it does not account
for consumers’ substitution away from high-priced goods.
> CPI based on fixed weights is biased upward. (e.g. if real rate is 5%, it will estimate 6%)
> This problem has important policy implications because government transfers such as Social
Security payments are tied to the CPI.
> Chained Consumer Price Index, which uses changing weights.
> PPI - The three main categories are finished goods, intermediate materials, and crude materials,
although there are subcategories within each of these categories.
> One advantage of some of the PPIs is that they detect price increases early in the production
process.
→ Class Task – Read CPI construction from PBS and other sources.
Costs of inflation – Why inflation is a problem?
> lowers purchasing power (increase poverty)
> Lowers living standard
> Money loses its value / it is no longer a good medium of exchange and store of value.

> Classical view: Why worry when with prices, income of people also increases, i.e. adjustment process
occurs automatically.
Mechanism : Price rise → Inflation rises → Income rise
> Problems: UNEVEN effects.
> Distributional effect: When income of some groups rises more than others while price hike is
same for all groups, leaving some groups hit harder than others.

> Expected (Anticipated) v/s Unexpected (Unanticipated) inflation.


> Anticipated inflation is not a big issue. Why? Indexing.
> But, it increases cost of cashholding, reduces demand for currency.
> Still a big problem for a common / layperson

Classical view – Adjustment of inflation through increase in income/ automatic adjustment process is
does not hold in the real world.
Why? Uneven impact of inflation on different groups.
When inflation strikes, income of some groups rises while that of others remains constant or even
declines in real terms.

> Costs of Unexpected inflation.


> Problem: It increases risk factor → You do not get involved in economic transactions/activity.
> Problem 2: Uneven wealth distribution. Mostly people with fixed income get hurt.
> Old v/s young.
> Retirees/pensioners
> Poor v/s rich
> Capitalists (those who own capital) v/s Labour (wage earners) – Wages increase slowly
while profits from capital increase rapidly.
> Lender v/s borrower. (Due to loss of purchasing power over time.)
> Equity holders/shareholders of companies.

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