Summary 5 Measurement in the Macro-economy

RECAP

Macroeconomics is the branch of economics that examines the entire economy. In this case, macroeconomics will lead you into an investigation in the following issues;

1. Unemployment (Unit 7)

2. Inflation (Unit 6)

3. GDP Growth (Unit 5/U6)

4. International trade (Unit 4)

5. Balance of Payment and exchange rate issues (Unit 6)

PURPOSE OF PRESENTATION

This presentation provides a brief introduction to two important macroeconomic phenomenon i.e. unemployment and inflation.

UNEMPLOYMENT

TERMS RELATED TO UNEMPLOYMENT

1. Unemployment – all those people who are willing and able to work

but are unable to find jobs (Hardwick et al, 1994).

2. Unemployment Rate – (see below)

3. Participation Rate – Measures the labour force as a percentage of the

total population within the working age.

4. Discouraged Worker – A worker who withdraws from the labour

market because of poor job prospects

(Hardwick et al,1994)

5. Working Population – Employed plus the unemployed.

6. Labour Force – Those people in the economy who are willing and

able to work (within the working age).

7. Labour Productivity – The amount of output produced by a unit of

labour (Baumol and Blinder, 1999).

WHAT IS THE UNEMPLOYMENT RATE?

Defined: the number of people within the working population that is unemployed.

Formula: Unemployed X 100

Labour Force

e.g. 8 million X 100 = 5.3%

150 million

(source: Colander, 2006:525)

HOW IS UNEMPLOYMENT REPRESENTED IN ECONOMICS?

Generally, unemployment is represented using statistics that are presented using graphs, tables or other forms of appropriate representation that were generated by various agencies e.g. IMF, World Bank, ILO, Central Banks, other governmental agencies etc.

FIGURE: PPC ILLUSTRATING

UNEMPLOYMENT IN THE ECONOMY

A

Good Y Any point inside the PPC represents unemployment e.g. C. Once the PPC is not producing at a point along the curve AB and is producing at a point in side the curve means that there are unemployed resources that are available to increase the economy’s GDP.

 

KEYNESIAN CROSS: DEFLATIONARY GAP

GDP Capacity GDP

Deflationary Gap

Actual GDP

O Ye Y1 OUTPUT

CONCEPTUAL DIFFERENCES

How does the rate of unemployment differs from the participation rate?

The unemployment rate measures the percentage of the total workforce or labour force that is willing and able to work but cannot find jobs while, the participation rate examines the total labour force as a percentage of the total population.

 

TERMS RELATED TO INFLATION

1. Inflation – A persistent tendency for the general price level to rise (Hardwick et al, 1994).

2. Inflation Rate – The percentage increase in the retail price index over a period of one year.

3. Retail Price Index (RPI) – An index which aims to measure the change in the average price of a basket of goods and services that represents the consumption pattern of a typical household.

4. Consumer Price Index (CPI) – Is an index of inflation measuring prices of a fixed basket of consumer goods, weighted according to each component’s share of an average consumer’s expenditure (Colander, 2006: 531).

HOW IS INFLATION MEASURED?

Inflation is measured using an index i.e. RPI or the CPI.

Formula: Current Year – Base Year X 100

Base Year

E.g. 105 – 100 X 100 = 5%

100

N.B. the rate of inflation in this case is 5% and remember that the base year is always given an index of 100 .

REFERENCE

1. Baumol, William J, and alan S. Blinder. Economics: Principles and Policy. 8th Edition. USA: Dryden Press, 1999.

2. Colander, David C. Economics. 6th Edition. New York: McGraw – Hill/Irwin, 2006.

3. Grant, Stanlake. Introductory Economics.

7th Edition. Essex: Pearson Education Limited, 2000.

4. Hardwick, Philip, Bahadur Khan and John langmead. An Introduction to Modern Economics. Essex: Addison Wesley Longman Ltd, 1994.

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Summary macroeconomic issues

This summary note addresses three topics; inflation, balance of payment and exchange rate. These represent three major macroeconomic issues. Other macroeconomic issues include unemployment, growth and development.

(a)    Inflation

Inflation is the persistent rise in the average price level. What you need to know.

1.      Causes of inflation; demand pull (cause by too much spending in the economy especially when consumers have excess cash to spend in the economy/economy is doing well/booming), cost push inflation (rising cost of production due to wage hikes, oil price hikes etc) and extensive increases in the money supply (remember Germany in the 1920s). (Remember how to draw the diagrams to illustrate inflation).

2.      Consequences of Inflation – inflation could have many harmful effects with some positive effects.

causes poverty as cost of living increases – so the low income groups are worse affected, loss of confidence in the local currency which could lead to a run on the banks as people try to withdraw their entire life savings, savers are affected, less investment as banks are less able to give loans when people are saving/depositing little, pensioners with fixed income are affected, lenders are affected while borrowers gain, shoe leather effects as consumers search for better deals, menu effects as firms have to constantly change their price tags.

(b)   Balance of Payment

Balance of payment focuses on current accounts problems. Make sure you know that.

1.      What causes BOP disequilibrium/current account deficit; limited exports (lack of economic diversification), too much importing etc. 2. What can be done to address BOP disequilibrium (current account deficit)? i.e. economic diversification, trade barriers e.g. tariffs, subsidy and quotas, demand management policies (see mark scheme for ER for distinction between expenditure switching and expenditure dampening). N.B. These policies are not always effective.

(c)    Exchange rate – 1. types of exchange rate; fixed, flexible/floating and managed float (managed float is not the same as flexible/floating exchange rate); 2. How are they determined and illustrate these (using graphs) N.B. Fixed, determined by central bank/government and with this system government engages in constant open market operations i.e. buying the currency using foreign currency when the demand for the currency is low and it is losing value and selling the currency to purchase foreign currency when the currency is increasing in value. Flexible determine by market forces and explain what these are (diagrams). Manage float adopts elements of both (see your notes for diagram. 3. What is meant by devaluation/depreciation? 4. What is meant by revaluation/appreciation? 5. What are the advantages and disadvantages of both extreme types of exchange rate regimes?