Summary 5 Measurement in the Macroeconomy

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.