chapter 3 - labour market Flashcards
what is demand pull inflation?
in intuitive terms is when demand outstrips supply and prices have to rise
what is cost push inflation?
a rise in the cost of production and has been represented by changes in conditions of supply which forces the prices to increase.
what is the quantity theory of money?
MV=PY where P is price level, M is quantity of money, V is the velocity of circulation, Y is output.
what is the simplified quantity theory of money?
M^(.)=P^(.) as the level of output is unchanging at the equilibrium and the velocity of circulation although not constant is severely constrained by existing payment technology and other institutional factor that cannot vary too much in a given time frame. so when you differentiate each side with respect to time then you reach that equation
what type of approach is the quantity theory of money and why?
the quantity theory of money is a monetary approach as inflation can only be affected by the quantity of money in circulation and therefore its a purely monetary phenomenon.. the direction of causation goes from money supply to prices.
what is the weintraub relationship?
Py=(R)(1+u)WN where P is price, y is output, R is the refinement(the need to compensate for any raw material costs and any other such factor) and W is wage and N is number of employees and 1+u is the markup
what is the equation for the eclectic view of inflation?
inflation = R^(.) + k^(.) + W^(.) - 𝜆^(.) where R is refinement differentiated to time, k is markup differentiated to time, W is wage differentiated to time, h is the output per worker differentiated to time
why causes price inflation to effectively arise under the eclectic approach?
it can arise for a number of reasons.
1) improvements in technology or the efficiency of labour should lead to lower prices for the same level of output as before
2) the price of raw materials can rise( or domestic currency depreciate) which will lead to greater inflation
3) wage inflation can be higher then the rate of change of output per worker leading to inflation
4) there could be profit inflation driven by changes in the mark up term
what are the strengths of the ecclectic approach to inflation?
it strength because the identidy is true by definition and has to hold ex post no matter what, so that its validity cannot be denied.
what is the weakness of the ecclectic approach to inflation?
its weakness because entirely seperater narratives have to be developed for each of the terms on the right hand side in order to make some plausible headway
what is the neoclassical labour market model?
it assumes that there is perfect competition. on the Y axis there is W/P or real wage and on the X axis there is number of workers
the labour supply is upward sloping as when the wage increases more workers will be willing to work. the labour demand curve is downward sloping as when the wage increases , capital becomes relatively cheaper so demand for labour falls. the number of workers in equilibrium is arrived at the wage for which demand equals supply and any unemployment at this rate is voluntary
what is incorrect about the neoclassical labour market?
the assumption that all unemployment being voluntary is implausible as there is not perfect competition
how can you account for involuntary unemployment in the labour market model?
by adding imperfect competition into the model which will shift both supply and demand labour curves to the left relative to the perfect competition counterparts. this will mean that the equilibrium wage occurs at a level of real wage that is higher then the one that would prevail in perfect competion thereby giving rise to some involuntary employment
why can we not move towards the perfectly competitive equilibrium in the labour market?
1) wage bargaining happens on a collective basis by unions who hold some market power enabling them to achieve better terms than those that individuals would obtain under atomistic bargaining
2) even if the above were not true, firms operate on the basis of efficiency wages aptly captured by the famous saying attributed to henry ford “if you pay people peanuts, you get lazy monkeys”, if a firm wants to attract and retain best workers they need to offer a higher wage, as a result some unemployment is involuntary
what is the equation of the price determined real wage (PRW) or price setting curve?
W/P =(1-u)h where W/P is the real wage and u is the markup above 1 and h is the output per worker. it is assumed that the output per worker is a constant enables the curve to be a straight line
