Macroeconomic Objectives Flashcards
What are the macroeconomic goals of government?
Low employment (not zero?)
Sustainable level of government debt
Low and stable inflation
Economic growth
*Equity
Environment not included—market failure (negative externalities)
We could have all those things, but they’ll mean nothing for future generations if we don’t keep the environmental stuff in check. But it’s becoming more of the conversation (wasn’t a major objective that became part of all those economic objectives until recently).
Unemployment and difficulties in measuring
The existence of idle/underutilized resources (we generally use the term specifically in reference to the FOP of labor, so the people who are qualified to work and seeking work, but are without jobs)—not using something fully.
Unemployed/Underemployed = inside curve (goes for all resources).
“Discouraged workers,” underemployment (part-time workers [could do more]; people who were fired, but are on retraining programs; people who retired early, but would rather be working [maybe given some incentive?]) excluded.
How underutilized?
Official statistics may overestimate unemployment due to the parallel (?)/informal sector (no formal paperwork for ex. vendors, drivers, household help, maybe—and don’t know the exact # b/c informal [“don’t have proof”]), and national unemployment statistics do not account for regional differences (ex. different states).
Hard to keep track of everybody: there’s a lot of data out there, and figuring it out is tough (problem w/ unemployment figures). You’re not sending out surveys: you’re looking at it in a larger view. Unemployment benefits, tracked in system b/c actively seeking (on a monthly basis?). Could lie if wanted to make things look better or worse (so you get loans/aid [but trade, immigration, etc.—doesn’t want currency to appreciate?]). Some more anecdotal, others more data-driven. Not counted as unemployed if been doing it for a while and benefits going down and you’ve given up, no longer listed as unemployed (b/c no longer seeking).
Unemployment rate
Specific measure (unemployment rate rate, so dividing)
number unemployed (qualified and seeking [willing and able])/total labour force (those who are able to be in the work force)
Underemployment
People are in jobs in which they contribute less than they are capable of contributing. If you have a job (even if it’s way below what you’re qualified to have), you’re employed (even though you’re not using your skills to the extent that they can be).
Costs of unemployment (economic, personal + social)
Economic:
- Loss of income to the unemployed worker
- Loss of rGDP
- Loss of government revenue (income tax goes down??? [VAT? Buying less…])
- Increase in government expenditure (unemployment benefits—budget goes down)
- Costs to government of dealing with follow-on effects
Leading to…
- Government budget impacts
- Long term employment issues
- Increased income inequality and poverty
Personal + Social:
Personal
- Loss of confidence
- Psychological issues
- Drug, alcohol abuse
- Family issues
Social
- Increased crime as a perceived solution to poverty
- Loss of social cohesion
- Increased homelessness
Think of how it would affect you personally
Structural unemployment
Structure of economy has changed (ex. tech replacement—not making the same things…). Jobs replaced, new jobs introduced; some will be able to get new skills, others won’t (different skills [don’t match w/ what’s available in the economy]).
Caused by changes in demand for particular job skills, or changes in the geographic location of industries/jobs. Wrong skills.
Profession part of who you are?
In a bigger economy, may have the skills, but not in the right place (nobody lives there, nobody to do the jobs). At least a temporary structural gap. Helping people relocate, training…
We often use the term “labour rigidities,” meaning this FOP is not fully flexible or mobile (ex. minimum wage regulations, labour union activities, employment protection laws, generous unemployment benefits). Labor market not flexible enough to gain the skills, shift to where needed.
Fall in demand for labor means lower wages. Minimum wage is price floor (higher-than-equilibrium wages and lower qty of labor demanded). Rigidities lead to increase in COPs (supply shifts left, causing a fall in Q produced; employers hire fewer workers). Different for last, ofc…
Frictional unemployment
Workers between jobs (newly fired, seeking better jobs: assumed to be temporary and short-term [not due to lack of skills or suitability]). Often voluntarily, but not always. Skilled and suitable.
Can be a result of the lack of availability in the market (job websites, headhunters [?]).
Good for an economy. Moving to where they might be better valued. Govt not worried abt it: won’t do anything to make it go away. Usually not huge, and usually creating better productivity.
Seasonal unemployment
Demand for a particular type of labor varies based on the season/time of year.
ex. ski instructor (during summer), agriculture (don’t need people in between [to watch stuff grow])
Govt doesn’t really mind: knew it was coming, and it’s usually relatively small.
Cyclical (demand deficient) unemployment
Cyclical unemployment. Associated with downturns in the business cycle, tends to follow the shape of the business cycle curve but with a slight lag. More of a Keynesian concept (do from that weird curve bit) but can be seen in both diagrams (decrease in demand [demand deficient]).
Typically by decrease in demand, but can be a supply shock (??). Need fewer people to make fewer goods.
Govt cares and will try to do stuff abt it. Trying to pull structural, frictional (may speed up process, but not a huge change), seasonal (don’t need ski instructors during summer) into the force to increase output (high-cost way to do it)??
Total and natural/full unemployment
structural + seasonal + frictional + cyclical = total unemployment
structural + seasonal + frictional = natural/full employment
so, full employment = zero cyclical unemployment
Employment in monetarist view
At Y < YP: recessionary gap
unemployment > natural/full
natural/full + cyclical
Output less, need fewer people = below Yp
At Y = YP
unemployment = natural/full
structural + frictional + seasonal
At Y > YP: inflationary gap
unemployment < natural/full
as a portion of the natural unemployed group finds work (at higher cost)
Yfe (natural rate) is difficult to pin exactly b/c things are always changing (in the real world, can’t just ceteris paribus things).
Govt/National/Sovereign debt
The amount of money owed by a government to its creditors.
Arises from the fact that a government may not always have a balanced (? govt revenues = govt expenditures [in a period]) budget.
If expenditures > revenues, there is a budget deficit (govt will borrow money by issuing bonds, which are securities issued by the government and paid for by third parties, who in turn generally receive a promise to repay the money with a specified rate of interest: it is effectively a loan to the government)
If expenditures c Revenues, there is a budget surplus (can be used to pay down debt levels)
Govt debt as a % of GDP? Whether of concern depends on many factors, including who owns the debt, and the government’s perceived ability to repay (in short and long run).
Impacts of govt debt
Debt servicing costs -
Interest paid on debt, becomes part of expenditure, so opportunity cost (and who owns it matters)
Credit ratings -
If implicit/explicit credit rating indicates high risk, have to have higher interest rates to attract lenders (higher debt level, higher risk)—bonds rated by various private firms.
Future taxation + govt spending -
Debt must be paid through budget surpluses (either reduction in spending or increase in taxes)
Lower private investment -
If confidence in govt is reduced (+ crowding out effect)
Possibility of a debt trap -
More debt needed to pay back interest, higher risk leads to higher interest rates, leads to higher interest payments…
Lower economic growth impacts on AD (C,I, G components)
Increased income inequality??
Inflation
Sustained increase in the general price level of goods and services in an economy.
On average, prices are increasing, though not for all items at the same level.
Deflation + effects
Sustained decrease in the general price level of goods and services in an economy.
Causes: decrease in AD, increase in AS.
Quite uncommon, and generally more feared than inflation (even a little bit can be very damaging).
Rare due to wages being “sticky downward” and due to Oligopoly behavior.
More of a concern to central bankers than inflation (tougher psychology)
Don’t typically see it.
Usually, something big causes it.
W/ inflation close to zero, and something slows it, could very quickly lead to deflation.
Deflation b/c of AS is b/c productive possibilities bettered (so economists less worried abt this than abt AD).
Economy at least growing (more people probably employed, ceteris paribus)
W/ AD, economy has probably shrunk, so less employment.
Flip around winners and losers of other side (inflation)…
Winners: Those on fixed incomes or wages, lenders, savers/holders of cash.
Losers: Those paying fixed incomes or wages, borrowers (government).
Increase in real value of debt
Uncertainty
Deferred consumption, leading to a deflationary cycle (delay purchases b/c waiting for prices to go down: feeds into itself)
Risk of bankruptcy and financial crisis
Inefficient resource allocation (price signalling is distorted)
Ineffectiveness of government policy
Small upside: lower domestic prices (increase consumption of domestic goods, so there are fewer imports and more exports, increasing [X - M])
Govt policy for deflation is difficult
*Nominal GDP would go down b/c same amt produced, but at a lower price level
W/ rGDP, if caused by supply, increase, and if by deman
Disinflation
Decrease in the rate of inflation over a period of time (so, if inflation was 8% in Q1 and 7% in Q2, the economy experienced inflation, but also disinflation: prices continued to rise but at a slower rate).
