3.3: Macroeconomic Objectives (NOT FINISHED)

What is unemployment?

People who are of working age and actively looking for work, but are not currently employed.

What is underemployment?

People of working age who:

- have part time jobs but want to work full time.

- have jobs that do not make full use of skills/education.

Ultimately, unemployment and underemployment is a...

Waste of scarce resources.

What is the labour force?

Total population all people who are employed or unemployed.

Who does the labour force exclude in the population? ()

- Children.

- Retired.

- Adult students.

- The disabled/ill who cannot work.

- Those who do not want to work.

How to calculate unemployment rate?

Unemployed / Labour force x 100%

What are the limitations of unemployment figures? (6)

- Does not include discouraged workers.

- No representation of underemployment.

- Does not include those in retraining programs.

- Doesn't include those who are retired but would rather work.

- Does not include those in the underground economy.

- Doesn't consider different groups (region, gender, age).

What are the economic costs of unemployment? (8)

- Loss of real output.

- Loss of income for the unemployed.

- Loss of tax revenues for government.

- Costs of unemployment benefits to government.

- Costs of dealing with social problems to government.

- Larger budget deficit or small budget surplus.

- More unequal distribution of income.

- Unemployed may struggle to find work in future.

What are the personal and social costs of unemployment? (9)

- Loss of self-esteem.

- Psychological stress.

- Lower health levels.

- Family tensions and breakdowns.

- Suicide.

- Poverty.

- Crime and violence.

- Drug use.

- Homelessness.

When is full employment reached?

When real GDP = potential GDP; when equal to natural rate.

What is the natural rate of unemployment?

Amount of unemployment when employment is considered to be maximised; unavoidable.

What makes up the natural rate of unemployment? (3)

- Structural unemployment.

- Frictional unemployment.

- Seasonal unemployment.

What are the types of unemployment?

- Structural unemployment.

- Frictional unemployment.

- Seasonal unemployment.

- Cyclical unemployment.

How to manipulate cyclical unemployment?

Manage aggregate demand.

How to manipulate natural unemployment?

Manage aggregate supply.

What is structural unemployment?

Unemployment caused by:

- change in demand for particular skills.

- change in geographical location of jobs.

- labour market rigidities.

What can cause a change in demand for particular labour skills, leading to structural unemployment? (2)

- Technological changes.

- Change in structure of economy.

What can cause a change in the geographical location of jobs, leading to structural unemployment?

Firms may relocate to other regions or countries.

What labour market rigidities can lead to structural unemployment? (4)

- Minimum wage legislation.

- Labour unions / wage bargaining.

- Employment protection laws.

- Generous unemployment benefits.

ANYTHING PREVENTING DEMAND AND SUPPLY FORCES.

What is frictional unemployment?

Unemployment caused when workers are between jobs.

Why may workers be between jobs, causing frictional unemployment? (4)

- Have been fired.

- Search for a better job.

- Waiting to start a new job.

- Employer went out of business.

What is seasonal unemployment?

Unemployment caused by the demand for labour changing on a seasonal basis in certain industries.

What are some examples of industries/jobs which experience seasonal unemployment? (5)

- Farm workers.

- Lifeguards.

- Gardeners.

- Tourism industry.

- Shop assistants.

What is cyclical unemployment?

Unemployment caused by declining aggregate demand (during recessionary/contractionary gaps).

What is inflation?

Sustained increase in the general price level.

What is deflation?

Sustained decrease in the general price level.

What is disinflation?

Decrease in the rate of inflation.

What are the causes of inflation? (2)

- Demand-pull inflation.

- Cost-push inflation.

What is demand-pull inflation?

Inflation caused by increased aggregate demand.

What is cost-push inflation?

Inflation caused by decreased short-run aggregate supply.

What are the consequences of a high rate of inflation? ()

- Redistribution of income.

- Greater uncertainty.

- Less savings.

- Less export competitiveness.

- Decreases economic growth.

- Allocative inefficiency.

- Social and personal costs.

What is hyperinflation?

Very high rates of inflation.

What are the consequences of hyperinflation? (6)

- Money loses value quickly.

- Inflationary spiral; consumers buy before price increases.

- Businesses invest in assets, not productive activities.

- Firms hold goods from sale; sell when price increases.

- Lenders lose.

- Political and social unrest.

What is an appropriate level of inflation?

2-3%.

Why is zero inflation avoided?

Too close to deflation.

Why is deflation unlikely? (2)

- Difficult for wages to increase.

- Oligopolies avoid price wars.

What are the causes of deflation? (2)

- Decreased aggregate demand.

- Increased aggregate supply.

What are the consequences of deflation? (9)

- Redistribution effects.

- Increase in real value of debt.

- Uncertainty.

- Reduced consumption; wait for lower prices.

- Cyclical unemployment.

- Deflationary spiral.

- Bankruptcies; financial crisis.

- Inefficient resource allocation.

- Policy ineffectiveness.

What are price indices use for?

To measure inflation or deflation.

What is the consumer price index (CPI)?

A measure of the cost of living for a typical household.

How does the CPI work?

- A basket of typical goods is chosen.

- Value of basket calculated for a base year.

- Value of basket in future years compared to base years.

What are the problems with the CPI? (5)

- Typical basket; differs between consumers (culture, income).

- Does not consider change in product quality.

- Cannot be compared with other countries.

- Consumption patterns may change overtime.

- Consumption patterns change (substitutions, discounts/sales, new products).

Why is low inflation and low unemployment difficult to achieve simultaneously?

- Aggregate demand increases; high employment; inflation.

- Aggregate demand decreases; low employment; deflation.

What is the Philips curve?

A graph representing the negative relationship between unemployment and inflation.

What happens to unemployment if inflation decreases?

Unemployment increases.

What happens to unemployment if inflation increases?

Unemployment decreases.

What happens to inflation if unemployment increases?

Inflation decreases.

What happens to inflation if unemployment decreases?

Inflation increases.

What caused criticisms of the Philips curve?

Stagflation (simultaneous inflation and unemployment) caused by decreased SRAS.

What shifts the Philips curve?

Changes in SRAS.

What happens to the Philips curve if SRAS increases?

Shifts left (beneficial).

What happens to the Philips curve if SRAS decreases?

Shifts right (undesired).

What is the long-run Philips curve?

A vertical curve at the natural rate of unemployment (full employment) that illustrates how trade-off between inflation and unemployment is temporary; does not hold in the long run.

What is economic growth?

Increase in real GDP over a period of time.

How is economic growth calculated?

(final real GDP - initial real GDP) ÷ initial real GDP

What happens to real GDP per capita if real GDP grows faster than population?

Real GDP per capita increases.

What happens to real GDP per capita if population grows faster than real GDP?

Real GDP per capita decreases.

What is short-term economic growth? (2)

- Increases in aggregate demand.

- Increases in aggregate supply.

What is long-term economic growth?

Increase in LRAS or Keynesian AS.

What can cause long-term economic growth? (5)

- Technological improvements.

- Increased quantity of factors of production.

- Increased quality of factors of production.

- Increased efficiency.

- Institutional changes.

Describe short-term growth on the PPC.

Move closer to PPC.

Describe long-term growth on the PPC.

PPC shifts outwards.

What is productivity?

Quantity of output produced for each hour of work of the workforce.

What are the impacts of economic growth?

- Increased living standards.

- May lead to unsustainable resource use.

- May impact income distribution (no relationship).

What is government debt?

Amount of money government owes to lenders outside of the government.

What is the government budget?

Plan of government revenues and expenditures over a period of time.

What are some examples of government expenditures? (4)

- Wages for government employees.

- Provision of merit goods.

- Investment in infrastructure.

- Transfer payments.

What does it mean if there is a balanced budget?

Revenues = expenditure.

What does it mean if there is a budget surplus?

Revenues > expenditure.

What does it mean if there is a budget deficit?

Revenues < expenditure.

If revenues = expenditure, there is a...

Balanced budget.

If revenues > expenditure, there is a...

Budget surplus.

If revenues < expenditure, there is a...

Budget deficit.

What is sustainable debt?

Level of debt where government makes enough revenues to meet debt obligations (repayments).

How do governments borrow? (2)

- Government bonds.

- Borrow directly from financial institutions and overseas.

What are the consequences of high government debt? (7)

- Debt servicing costs.

- Poor credit ratings.

- Impacts future taxation and government spending.

- Increased income inequality.

- Lower private investment.

- Possibility of a debt trap.

- Lower economic growth.

What are some potential conflicts between macroeconomic objectives? ()

- Low unemployment and low inflation.

- High economic growth and low inflation.

- High economic growth and environmental sustainability.

- High economic growth and equity in income distribution.