Chapter 10-11, unemployment, inflation, economic growth

Question 1

Define unemployment

Answer 1

Unemployment refers to people of the working age who are actively looking for a job but who are not employed

Question 2

Define labour force

Answer 2

Labour force is defined as the number of people who are employed plus the number of people who are not employed

Question 3

How to calculate unemployment rate

Answer 3

unemployed people/labour force x 100

Question 4

Explain the difficulties in measuring unemployment
Tips: hidden unemployment, underemployment, underground market, distribution of unemployment

Answer 4

Hidden unemployment:
Discouraged workers are unemployed person who gave up in looking for a job

Underemployment:
It refers to people of the working age with part-time job when they rather work full time, or job that do not make full use of their skill or education.

People in retaining program

Underground market refers to market that is not registered and not reported to tax authorities.
People in underground market may be officially registered as unemployed

Distribution of unemployment
Unemployment may differ by region, gender, ethnic group and age

Question 5

Explain the costs of unemployment (give 4)

Answer 5

Economic cost:
Loss in real GDP, less workers -> less output
Loss in income for workers, financially worse off
Loss of tax revenue for government
Unemployment benefit
Cost to deal with social issues due to unemployment
Larger budget deficit
More unequal distribution of income
Unemployed people may have difficulty in finding job in the future

Personal and social cost:
Increase indebtedness, psychological issue and lower level of health
increase crime rate and violence

Question 6

List the four types of natural unemployment

Answer 6

Structural unemployment
Frictional unemployment
Seasonal unemployment
Cyclical unemployment

Question 7

Define structural unemployment

Answer 7

It occurs as a result of change in demand for particular labour skill, change in geographical location of an industry and jobs, labour market rigidities.

Question 8

Explain structural unemployment

Answer 8

Change in demand for a particular type of labour skill:
Technological change: automation of technology, workers in the factory becomes redundant
Structural change: the economy change from manufacturing into service sector, now require highly educated workers

Change in geographical location of the job or industry:
Large firm or industry geographically moved away, there will be fall of demand in one region. Those workers will be structurally unemployed

Labour market rigidities:
Labour market rigidities are the factors preventing the forces of supply and demand from operating in the labour market
- minimum wage
- labour union activities
- employment protection laws
- unemployment benefit

Question 9

Explain frictional unemployment, seasonal unemployment and cyclical unemployment

Answer 9

Frictional unemployment occurs when worker are between jobs
Just been fired
Employer went out for business
Looking for a better job
Waiting to begin a new job

Seasonal unemployment occurs when the demand for labour in certain industries changes on seasonal basis because of variation of needs.

Cyclical unemployment is the additional unemployment above the natural rate when the economy is in a deflationary gap.

Question 10

Define inflation

Answer 10

Inflation is the sustained increase in general price level

Question 11

Define deflation

Answer 11

Deflation is the sustained decrease in general price level

Question 12

Define disinflation

Answer 12

Disinflation refers to the decrease in inflation rate

Question 13

Define price index

Answer 13

A price index is a measure of average prices in one period relative to average prices in the base period

Question 14

Define consumer price index (CPI)

Answer 14

CPI is a measure of the cost of goods and services purchased by the typical household, it compares the value of the basket of goods and services in one year and the same basket in the base year.

Question 15

List 3 shortcomings of CPI

Answer 15

1. Different rates of inflation for different income earners (different consumption pattern)
2. Different rates of inflation depending on regional and cultural factors
3. Change in consumption pattern due to substitutes when relative prices change
4. Changes in consumption pattern due to introduction of new products
5. It does not reflect changes in quality of the product
6. International comparison
7. Comparability over time

Question 16

State two types of inflation

Answer 16

Demand-pull and cost-push

Question 17

Explain the consequences of inflation

Answer 17

Redistribution effect
real value of money decrease, receive fix income people worse off, save money worse off, bondholders worse off
who pay fix income better off

Uncertainty
cannot predict the price
unstable environment, less investment, AD decrease

Effects on saving
expect future price increase, now buy more, less saving
money in financial market decrease
Less investment, AD decrease

International export competitiveness
our export more expensive, less export

Inefficient resource allocation
distort signally and incentive function of price mechanism

Question 18

Explain the consequences of deflation

Answer 18

Redistribution effect
Uncertainty
Inefficient resource allocation

Increase in real value of debt

Deflationary spiral
Deflation -> expect price to decrease -> reduce consumption and investment -> AD decrease -> price continue to drop

Risk of bankruptcies and financial crisis
increase real value of debt
if economy is in recession, cause bankruptcies.
If bankruptcies become widespread, financial institutions will also be affected, lead to higher risk of financial crisis

Policy ineffectiveness (ch13)