2.3 Macroeconomic Objectives Flashcards
What is unemployment?
When people are willing and able to work and actively seeking unemployment but unable to find work.
Why is low unemployment a key macroeconomic objective?
- Compliments economics growth - higher employment leads to greater national expenditure, tends to increase standards of living in economy.
- Increases tax revenues, income tax from employment, sales taxes from increase expenditure, stamp duty from sale and purchase of property.
- Reduces tax burden on government - less of a need for taxpayer to fund welfare benefits as more people are working.
- Prevents a brain drain from economy where skilled workers pursue better employment in other countries.
What does the unemployment rate calculate?
Percentage of labour force that is unemployed.
How is the unemployment rate calculated?
(number of unemployed people)/(labour force) x 100
Whom does the labour force consist of?
Consists of employed, self employed, unemployed - all those in work and actively seeking employment.
What does the United Nations International Labour Organisation (ILO) state the minimum age to enter the labour force?
15 is the minimum age to enter the labour force, no official upper limit.
How does the ILO measure a country’s unemployment?
Based on number of people who are:
- Willing to work but unable to find it
- Actively looking for work -looked for a job in last 4 weeks, able to start work in next 2 weeks
- Waiting to start a new job in next 2 weeks.
Why is unemployment bad for a country?
Represents inefficient use of scarce resources, hindering its potential national output.
What is hidden unemployment?
Some people escape official measure of unemployment - an underestimation of true rate of unemployment.
What are some examples of hidden unemployment?
Discouraged workers - not wiling to work so are excluded from the calculation.
Overstaffing - workers who are not fully utilised.
What is underemployment?
People are inadequately employed - employed but in jobs that do not fully use skills or abilities eg involuntary part time workers, overqualified workers education, experience and skills and qualifications beyond requirements of job.
How do regional disparities make measuring unemployment difficult?
Measurement of unemployment is average measure so ignores disparities in regional rates of unemployment.
How do ethnic disparities make measuring unemployment difficult?
Ethnic minority groups suffer from higher than average rates of unemployment for longer periods.
How do age disparities make measuring unemployment difficult?
Unemployment rates among the young and older people are higher than those officially reported for the nation.
How do gender disparities make measuring unemployment difficult?
Females tend to experience higher average rates of unemployment than men. Men also re enter the labour market quicker.
What are some economic consequences of unemployment?
A loss of GDP Loss of tax revenues Increases cost of unemployment benefits Loss of income for individuals Greater disparities in the distribution of income
How does a loss of GDP affect the economy?
Lower GDP (negative economic growth) has detrimental consequences on the economy including a fall in its international competitiveness.
How does a loss of tax revenues affect the economy?
Unemployment results in lower income and expenditure thus resulting in lower tax revenues for the government.
How does increased cost of unemployment benefits affect the economy?
Unemployment creates an increased opportunity cost of government expenditure on unemployment benefits. Prolonged periods of high unemployment can therefore lead to increased government debts.
How does a loss of income for individuals affect the economy?
Unemployment results in lower household incomes with negative consequences for individuals and their families. If prolonged unemployment can cause or increase poverty in the economy.
How does greater disparities in the distribution of income affect the economy?
As women, the youth, ethnic minority groups and those living in rural areas tend to suffer more form prolonged periods of unemployment the result will be greater discrepancies in the distribution of income and wealth.
What are some social consequences of unemployment?
Stress
Crime
Indebtedness
Social deprivation
How does stress from unemployment affect people?
Suffer from stress, depression, health problems and low self esteem. Prolonged periods of unemployment can lead to homelessness and family breakdowns such as arguments, separations and divorce.
How does crime from unemployment affect people?
Can cause deprivations and desperation thus leading to increased crime such as theft and vandalism.
How does indebtedness from unemployment affect people?
Lower income caused by unemployment leads to increase indebtedness for individuals, firms and the government. Indebtedness can cause bankruptcy leading to apostle poverty, hunger, disease and homelessness.
How does social deprivation from unemployment affect people?
The local community can differ if there is mass unemployment for example poverty and increased crime rates.
What is frictional unemployment?
Occurs when people are in transition between jobs due to the time delay between leaving a job and finding or starting a new one. Always present because it takes time for the labour market to match available jobs with suitable candidates.
What is structural unemployment?
Occurs when the demand for products in a particular industry continually falls thus reducing the demand for particular labour skills. Also be caused by changes in geographical locations of industries for cost advantages and labour market rigidities such as he unwillingness of workers to accept lower wage rates.
What is seasonal unemployment?
Caused by regular and periodical changes in demand for certain products.
What is cyclical unemployment?
Mmost severe type of unemployment as it can affect every industry in the economy. It is caused by a lack of AD which causes a fall in national income.
What are government policies to deal with frictional unemployment?
Improving information services to aid job seekers. However imperfect information in the labour marker can worsen frictional unemployment as people are unaware of available jobs.
What are government policies to deal with seasonal unemployment?
Improving the skills of seasonally unemployed workers helps to reduce occupational immobility. Policies to improve education and training will give these people a better chance of reemployment and the incentive to find work.
What are government policies to deal with structural unemployment?
Governments can introduce a broader range of vocational training programmes greater access to university courses to allow people to retain and offer more job training opportunities. However this comes at an opportunity cost to taxpayers.
What are government policies to deal with cyclical unemployment?
Government might choose to use expansionary fiscal policy and or expansion policy to stimulate economic activity and hence to reduce the level of unemployment.
What is expansionary fiscal policy and how does it reduce unemployment?
A reduction in taxes and or increased government expenditure should all other things being equal boost AD and hence the derived demand for labour.
What is expansionary monetary policy and how does it reduce unemployment?
A cut in interest rates and or a devaluation of the currency should stimulate consumer and business confidence levels alongside increase consumption and net exports. In time this will boost the derived demand for labour in the economy.
What are supply side policies?
Government policies used to deal with imperfections in the labour market and to reduce unemployment caused by supply side factors.
What are some examples of supply side policies?
Investment in education and training - helps unemployed to gain new skills to find employment.
Reduction in trade unpin powers - mean that labour unions are not in such a strong bargaining position for higher wages in excess of inflation. Government intervention to reduce the influence and power of trade unions can help to reduce unemployment.
Employment incentives - offered to firms for training and hiring the long term unemployed eg the government can offer these firms tax allowances and or subsidies to reduce their costs of training and hiring workers.
Reviewing of unemployment benefits - ensure that there are incentives to seek employment rather than to rely on state welfare benefits. By making it more difficult for people to claim unemployment benefit people become more proactive in searching for jobs.
What are protectionist policies?
Trade barriers such as tariffs and quotas can be used to safeguard domestic jobs from the threat of international competition.
What is inflation?
Sustained rise in the average price level in an economy over time. On average the prices are rising. Governments set a target inflation rate as a key macroeconomic objective.
What is deflation?
Persistent fall in the average price level in an economy over time ie. the inflation rate is negative. Caused by a continual decline in aggregate demand and or an increase in aggregate supply caused by technological progress.
What is disinflation?
A fall in the rate of inflation ie. the prices are still rising but at a slower pace rather than an actual ball in the general price level. Can lead to deflation if not controlled with negative consequences for the economy and standards of living in the country.
How is deflation shown diagrammatically?
Deflation results in lower average prices, there is a fall in AD so the AD curve shifts to the left which causes national output to drop and the average price level also drops.
How is disinflation shown diagrammatically?
Disinflation is shown by a smaller proportional increase in average prices so an increase in AD where it shifts to the right causes national output to rise as well as prices rising. Disinflation occurs when the the of increase in AD slows down so the AD curve shifts again but by a smaller amount which reduces the rate of increase in the average price level.
How are inflation and deflation measured?
By using consumer price index (CPI).
What does CPI measure?
Measures the change in prices of a representative basket of goods and services consumed by the average household in the economy. Different statistical weights are applied to reflect the relative importance of the average household’s expenditure.
How are weightings of CPI decided?
Based on the proportion of the average household’s income spent on the items in the representative basket. Therefore items of expenditure that take a greater proportion of income are assigned a larger weighting.
When is a review or update required in the CPI?
Change in fashions and trend such as household expenditure on smartphones and tablet computers require a review or update of the weighting in the CPI.
What are the limitations of CPI?
Only considers expenditure of the average household whatever this might actually mean in a multicultural society in the real world.
Different income earners can experience a different rate of inflation because their pattern of expenditure is not necessarily or accurate reflected by the CPI. Eg. the average pensioner or university student will have different spending habits from a typical family household.
Inflation figures and calculations may not accurately reflect changes in consumptions patterns due to time lags in collecting data to compile the CPI.
What is the underlying rate of inflation or the core rate of inflation?
An adjusted measure of inflation that eliminates sudden volatile fluctuations in prices of essential items of expensive such as oil, food and energy.
What is the produce price index (PPI)?
Useful for predicting inflation or deflation by measuring changes in the prices of manufacturers and producers rather than retails who sell to consumers.
What three price indices does the PPI consist of?
Raw materials such as crude oil and copper.
Intermediate goods such as components and other semi finished goods sold to manufacturers and producers.
Finished goods that are sold to retailers.
How are menu costs a consequence of inflation?
Inflation impacts on the prices charged by firms. Catalogues, price lists and menus have to be updated regularly and this is costly to businesses.
How are shoe leather costs a consequence of inflation?
Inflation causes fluctuations in price levels so customers spend more time searching for the best deals be it physically or online. They might also have to make more regular cash withdrawals. Shoe leather costs therefore represent an opportunity costs for customers.
How are consumers affected by inflation?
The purchasing power of consumers declines when there is inflation ie there is a fall in their real income because money is worth less than before. Therefore as the cost of living increases consumers needs more money to buy the same amount of goods and services.
How are savers affected by inflation?
Lose out from inflation assuming there is no change in interest rates for savings. Hence inflation discourages savings as money becomes less effective as a store of value.
How are lenders affected by inflation?
Lose from inflation. This is because the money lent out to borrowers becomes worth less than before due to inflation.
How are borrowers affected by inflation?
Gain from inflation as the money they need to repay is worth less that when they initially borrowed it.
How are fixed income earners affected by inflation?
Fixed incomes earners such as salaried workers and pensioners whose pay does not change with their level of output are worse off than before as the purchasing power of their fixed incomes declines with higher prices.
How are low income earners affected by inflation?
Inflations harms the poorest members of society far more than those on high incomes. They tend to have a high price elasticity of demand for goods and services. By contrast those on high incomes and accumulated wealth are not so affected by higher prices.
