Topic 10: 10.1 & 10.2 | Low unemployment and Costs of Unemployments

🎯Main Focus: The 4 Macroeconomic Objectives

These will be the central themes for the coming weeks:

1. Low and stable inflation

2. Low unemployment

3. Sustainable economic growth

4. Equitable distribution of income

📚 Key Definitions: Inflation Terms

• Inflation = A persistent increase in the average/general price level in an economy.

• Deflation = A sustained decrease in the average/general price level.

• Disinflation = A slower (decrease in) rate of inflation (prices still rise, but more slowly than before).

💥 Consequences of High Inflation

🚫 Negative Impacts:

My answers (which are also correct btw)

• Increased poverty and inequality

  • People can’t afford basic needs → this worsens poverty and inequality.

• Reduced real demand for goods/services (especially in cost-push inflation)

  • Cost-push inflation can lead to lower demand due to reduced purchasing power.

• Falling real wages – workers can buy less

  • Due to the lowered purchasing power, workers feel poorer, even if they’re earning "more" on paper.

• Lower profits for producers due to rising input costs

  • When input costs (like raw materials, fuel, wages) rise, profit margins shrink.

  • If producers can’t pass those costs to consumers (due to low demand), they suffer losses.

• Reduced consumer confidence and spending

  • As purchasing power decreases → less demand → lower revenue → less reinvestment → economic slowdown.

• Loss of trust in the government or central bank

  • Citizens blame the government for rising prices.

  • It hurts political stability, especially if inflation is high for a long time (→ think elections, strikes, protests).

• Lower GDP

  • Inflation can lead to a fall in Real GDP, particularly when:

    It’s cost-push inflation:

    • Prices go up because supply decreases (e.g., supply chain crisis, war, natural disasters).

    • Output falls → unemployment rises → GDP falls.

    • This is called stagflation: stagnant growth + inflation.

    Consumer spending drops:

    • If wages don’t keep up with rising prices → real income falls → people buy less.

    • Less consumption = lower Aggregate Demand (AD) → lower GDP.

    Business investment decreases:

    • Inflation creates uncertainty.

    • Businesses may delay investment → less economic growth.

According to the teacher

1. Decreased Purchasing Power

   • Prices rise faster than income → people can afford less.

   • Example: Potatoes cost 100 MZN → now 150 MZN. If your salary doesn’t increase, you buy less.

2. Real vs Nominal Income

   • Nominal income: The amount of money you earn.

   • Real income: What you can actually buy with that money.

   • If inflation increases and your salary doesn’t → your real income falls.

3. Falling Export Competitiveness

   • Domestic products become more expensive abroad → exports decrease.

   • People may import more (e.g. shopping in South Africa instead of Maputo).

   • → Leads to a decrease in Aggregate Demand (AD).

     • GDP : AD = C + I + G + (X - M) |and| AD=GDP, meaning that lower AD, means lower GDP.

4. Savers Lose Out

   • If interest rate at the bank = 5%, but inflation = 8% → your savings lose value.

   • You earn less than the inflation rate → real savings decline.

5. Lenders Lose, Borrowers Gain

   • If you lend money, and inflation rises, you get repaid with weaker money.

   • Borrowers win, lenders lose.

6. Fixed-Income Workers Struggle

   • Salaries that don’t adjust with inflation → loss of real income.

7. Widening Income Inequality

   • Low- and middle-income households suffer more.

   • They spend most of their money on basic goods → no buffer.

   • The rich get richer, the poor get poorer.

📊 Inflation Models

🔼 Demand-Pull Inflation

• Cause: A rise in aggregate demand (AD shifts right)

• Linked to:

  • Economic growth

  • Lower unemployment

• Triggers:

  • More government spending

  • More investment

• Seen as less harmful than cost-push inflation.

🔽 Cost-Push Inflation

• Cause: A fall in aggregate supply (AS shifts left)

• Linked to:

  • Higher prices and higher unemployment

• Triggers:

  • Natural disasters

  • Global supply issues

  • War, pandemics, fuel price hikes

• Considered more harmful and harder to control.

📈 Consumer Price Index (CPI)

• Used to measure inflation.

• Tracks the cost of a fixed “basket” of goods and services over time (e.g. food, transport, healthcare).

• Formula for CPI:

  • 🎯🎯

    

• Base year CPI is always 100.

🧮 Inflation Rate Calculation:

• 

• Positive % = Inflation

• Negative % = Deflation

🧠 Final Key Points to Remember

• Inflation doesn’t just affect prices—it reshapes the economy, especially:

  • Savings and spending habits

  • Trade balance (exports vs imports)

  • Wage contracts

  • Social equity and income inequality