Theme 2 Inflation + Unemployment Flashcards
Real wage inflexibility
Reducing wages to fix disequilibrium in the labour market solving unemplpyment
Technological unemployment
Machines replace workers
Regional unemployment
Industries are concentrated in some areas so have greater dependence on an industry which if collapses causing high rates of unemployment in that region
Voluntary unemployment
Chose to be economically inactive as make more money on benefits
Economically inactive
People who aren’t looking for work and aren’t in work
Underemployment
Working minimal hours means unemployed larger proportion of the time distorting unemployment figures
Unemployment in the economy represnts
A loss of potential output
The opportunity cost of each unemployed person is their
Foregone cost
Increased costs of benefits is considered a
Transfer of payment
Two impacts of unemployment on firms
Easier employment conditions: lower production costs, lower wage demand thus lower wages and higher profits
Falling demand: less consumers so less profit
Two impacts of unemployment on consumers
Lower prices as low demand
More inferior goods and less normal goods as lower income
Lower incomes cause a fall in consumer confidence and job security so demand for goods fall
Three costs of unemployed
Mental health problems (depression–NHS)
Standard of living (disposable income)
Social stigma/perception (lazy, idle)
Falling skill levels (cost-push inflation graph causing a decrease in potential real output)
Cyclical unemployment (low demand)
Demand deficiency Aggregate demand lowers Recession Fewer employed Demand-pull inflation graph Real output falls in recession Negative shift in demand for labour Supply and demand curve D2 is constrained by the decrease in real output so fewer workers are employed by firms
Inflation costs to consumers
Real wages fall if nominal wages stay that same and price levels increase
Inflation costs to firms
Menu and shoe leather costs
Inflation costs to government
Inflation reduces the real burden of national debt
Unemployment rate and an advantage of it
1.6million/economically active x 100
Can compare against other countries with different populations
Job seekers allowance rate is
Roughly £60-£70 depending on age
Advantages of the claimant count
Includes everybody
Cheaper and quicker to collect info
More details collected
Cons of claimant count
Not all countries do it whereas ILO is used in all countries
ILO pro
Most countries use it
ILO con
Only a sample
The ILO count is taken from the
Labour force survey
Cost push inflation graph
AS AD graph with AS2 to the left
Factors causing cost-push inflation
Increase in raw materials - due to the rise in world commodity prices increases in component cost causes negative shift in AS
Rising labour costs - negative shift in AS
Higher components costs from devaluation of the pound or increased supply of oil
M X V =
P x Y
What happens if only V is constant and not Y
Firms may increase Y real output if high levels of unemployment, recession, poor economic growth so there is no inflation
Measures of inflation
CPI
RPI
Why are items in the cpi weighted
To show the correct amount of income spent on an item as it is bought more often
How to calculate percentage change in inflation
New price - old price
/old price
X100
Geometric mean calculation
all numbers multiplied together then rooted by amount of numbers
Arithmetic mean
Add all numbers then divide by amount of numbers
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Rpi>Cpi
Rpi vs cpi
Rpi includes house prices, spending when abroad, council tax
Weights from ONS living cost and food survey
Cpi includes income tax and foreign students tuition fees and weights from National accounts data
Cons of RPI
Uses less accurate arithmetic mean
Not the standard measure
Cons of cpi
Doesn’t include house prices
Reasons for demand pull inflation (AS AD graph with AD2 right)
Depreciation of exchange rate - increases import price and reduces export price
Reduction in income tax
Rise in house prices
Stages of calculating the CPI
Price survey measuring then general price level of a representative basket of goods and services (from 20000 shops and 70000 locations - collected at beginning of month) using the living costs and food survey
Relative weightings are assigned to the different items included within the basket of goods and services based on the relative importance of household spending
Prices are measured and recorded on a monthly basis
Recorded priced are aggregated into an index that provided the general price level
Calculation of inflation from indexed figures
Why do the gov have low rates of inflation
- prevents fall in real income as nominal wages stay constant and price levels increase
- hinder international trading competitiveness
- consumer utility
- but doesn’t reduce real burden of national debt
What is inflation target
Target set by the government for the bank of England to meet of a 2% inflation rate which is symmetrical by 1%. It is adjusted via quantitative easing and changing interest rates
