Applied Macroeconomics: Unemployment and Inflation
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Questions and Answers

What are the main variables of the labour market that impact business opportunities and productivity?

  • Labour force and labour market functioning (correct)
  • GDP and inflation rate
  • Unemployment rate and economic growth
  • Interest rates and exchange rates

    • Define frictional unemployment and explain its cause.

    Frictional unemployment is the transitory situation where an unemployed person is gathering information on available vacancies and searching for the job that best suits their characteristics. It is caused by frictions in the labour market such as lack of information and mobility.

    Full employment is compatible with the presence of seasonal unemployment.

    True

    NAIRU stands for Non-Accelerating __________ of __________ and __________ Unemployment.

    <p>Inflation, Real, Unemployment</p> Signup and view all the answers

    What factor affects wages in negotiation?

    <p>Depends on how easy it is for the company and the employee to find substitutes</p> Signup and view all the answers

    What factors may affect wages according to the text?

    <p>Type of position, qualifications, market situation</p> Signup and view all the answers

    What is the Phillips curve equation when wages are divided by prices?

    <p>Real wage = F(u, z)</p> Signup and view all the answers

    What is the term used for the unemployment rate when wages depend on expected prices and natural rate of unemployment is considered?

    <p>Non-Accelerating Inflation Rate of Unemployment (NAIRU)</p> Signup and view all the answers

    What is the term used for the interest rate expressed in a basket of goods?

    <p>Real interest rate</p> Signup and view all the answers

    Why is price stability important?

    <p>Price stability is important because it helps to maintain the value of money and prevents negative effects on production, employment, competitiveness, and redistribution of resources.</p> Signup and view all the answers

    What is the Consumer Price Index (CPI) based on?

    <p>Prices of goods and services chosen and weighted according to their importance in the budget of a representative household</p> Signup and view all the answers

    What is the Harmonised Index of Consumer Prices (HICP) and its significance?

    <p>The Harmonised Index of Consumer Prices is similar to CPI but standardized across European countries, aiding transparency and policy implementation. It excludes energy goods and unprocessed food, reflecting economic structure with lower volatility and monetary policy effects.</p> Signup and view all the answers

    Sustained inflation can only occur due to monetary causes.

    <p>True</p> Signup and view all the answers

    The commonly used leading indicator of the CPI is __________________.

    <p>Underlying inflation</p> Signup and view all the answers

    ¿Cuál de las siguientes afirmaciones describe la tasa de actividad laboral?

    <p>Porcentaje de la población en edad laboral que participa en el mercado laboral</p> Signup and view all the answers

    ¿Qué es el desempleo friccional?

    <p>Situación transitoria en la que se encuentra una persona desempleada mientras recopila información sobre vacantes disponibles y busca el trabajo que mejor se adapte a sus características.</p> Signup and view all the answers

    La deflación es beneficioso para el consumo y el crecimiento económico.

    <p>False</p> Signup and view all the answers

    ¿Qué implica la NAIRU? Es la tasa de desempleo a largo plazo consistente con el PIB potencial, caracterizada por no tener presiones __________.

    <p>inflacionarias</p> Signup and view all the answers

    ¿En qué dependen los salarios en una negociación según el texto?

    <p>Dependen de lo fácil que sea para la empresa y el empleado encontrar sustitutos.</p> Signup and view all the answers

    El salario real ($W/P$) se puede expresar como $W/P = F(u, z) / P$, lo que indica ________.

    <p>Relación entre el salario real y los precios esperados.</p> Signup and view all the answers

    ¿Qué es la tasa de desempleo no aceleradora de la inflación (NAIRU)?

    <p>La tasa de desempleo que no acelera la inflación</p> Signup and view all the answers

    Las expectativas de inflación pueden afectar la tasa de desempleo. (Verdadero/Falso)

    <p>False</p> Signup and view all the answers

    ¿Qué es la tasa de desempleo natural mencionada en el texto?

    <p>Cuando los precios son iguales a los precios esperados.</p> Signup and view all the answers

    ¿Por qué es importante la estabilidad de precios?

    <p>Para mantener baja la inflación y favorecer la competitividad empresarial.</p> Signup and view all the answers

    ¿Qué es el Índice de Precios al Consumidor (CPI)?

    <p>Es un índice que mide la variación de precios de bienes y servicios importantes para el presupuesto de un hogar representativo.</p> Signup and view all the answers

    ¿Por qué se prefiere el CPI como indicador de inflación?

    <p>Por su frecuencia mensual, amplio uso público y datos publicados que no están sujetos a revisión.</p> Signup and view all the answers

    ¿Cuál es el indicador utilizado por el BCE para orientar la política monetaria?

    <p>HICP</p> Signup and view all the answers

    ¿Qué representa la Curva de Phillips?

    <p>Muestra la relación entre desempleo e inflación en una economía.</p> Signup and view all the answers

    ¿Qué determina los salarios en un país según la Curva de Phillips?

    <p>El salario de reserva y la situación del mercado laboral.</p> Signup and view all the answers

    ¿Por qué un empleador podría pagar por encima del salario de reserva?

    <p>Para atraer y retener empleados calificados o en situaciones de alta demanda laboral.</p> Signup and view all the answers

    What does the Purchasing Managers’ Index (PMI) track?

    <p>variables such as production, new orders, stock levels, employment, and prices</p> Signup and view all the answers

    How is the PMI interpreted when its value is greater than 50?

    <p>Expansion</p> Signup and view all the answers

    Synthetic or composite indicators are constructed as a (simple or weighted) average of __________ indicators.

    <p>standardised</p> Signup and view all the answers

    What is the definition of the 'environment' in the context of a company?

    <p>All factors external to the company that have a significant influence on the company's strategy and which it cannot control.</p> Signup and view all the answers

    Why do companies care about the economic environment? What does being aware of the context help them with?

    <p>All of the above</p> Signup and view all the answers

    Quantitative indicators in macroeconomics are always measured in physical units.

    <p>False</p> Signup and view all the answers

    _______ is the difference between actual output (GDP) and potential output.

    <p>Output gap</p> Signup and view all the answers

    Match the following basic macroeconomic indicators with their definitions:

    <p>GDP Growth = Increase in the value of goods and services produced by an economy over time Unemployment Rate = Percentage of the labor force that is jobless and actively seeking employment Inflation Rate = Rate at which the general level of prices for goods and services is rising Government Debt = Total amount of money owed by a government to creditors</p> Signup and view all the answers

    Study Notes

    Labour Market

    • The labour market is closely related to the general level of activity and affects aggregate demand by determining the ability to pay and the size of the market.
    • It affects business opportunities and involves the receipt of remuneration, providing households with the necessary resources to purchase market goods and services.
    • The company is a demander of labour as an indispensable factor of production, which affects productivity.
    • The evolution of the labour force and the structure and functioning of the labour market affect the company: costs, revenues, and results.
    • Unemployment has costs for business and society: it reduces disposable income, instability, diverts resources to mitigate its effects, obsolescence, and demotivation.
    • Employment is a basic source of social participation.

    Main Variables of the Labour Market

    • GDP depends on the amount of labour used and its productivity, represented by the formula: GDP = N × AP.
    • Concepts of unemployment:
      • Structural unemployment: persists over time due to an inadequate economic structure.
      • Cyclical unemployment: derives from the cyclical behaviour of the economy.
      • Seasonal unemployment: derived from certain regularities occurring over time.
    • Labour ratios:
      • Activity rate: percentage of the working-age population participating in the labour market.
      • Unemployment rate: percentage of the labour force that is not employed.
      • Employment rate: percentage of the working-age population that is employed.
      • Temporary employment rate: percentage of employed with temporary contracts.
      • Part-time employment rate: percentage of employed with a part-time contract.

    Unemployment

    • Unemployment: the situation of members of the labour force who are actively seeking employment under current labour market conditions but are unable to find work because there are insufficient job vacancies.
    • Frictional unemployment: the transitory situation in which an unemployed person finds himself while gathering information on available vacancies and searches for the job that best suits his characteristics.
    • Reducing unemployment is an objective of economic policy because it generates costs:
      • Monetary costs
      • Non-monetary costs on households and individuals
      • Costs to public finances
      • Loss of domestic production
      • Loss of human capital
      • Social costs
      • Political costs
    • Full unemployment: the absence of involuntary unemployment, compatible with frictional unemployment and seasonal unemployment.
    • NAIRU (Non-Accelerating Inflation Rate of Unemployment): the long-term unemployment rate consistent with potential GDP, characterized by no inflationary pressures.

    Inflation Indicators and Business Competitiveness

    • General price level: the weighted average of the prices of goods and services in an economy.
    • Inflation rate: the percentage change in the general price level between two consecutive periods.
    • Types of inflation:
      • Price stability: the general price level rises, but below a level set as optimal (usually between 2% and 3%).
      • High inflation: a sustained and widespread increase in the price level of a country's goods and services above a certain rate over some time.
      • Deflation: a sustained and widespread fall in the price level of goods and services in a country.
      • Hyperinflation: an extremely high inflationary rate (typically around 50%).
    • Authorities target inflation rate rather than price level.
    • Elements to observe when setting the optimal rate:
      • It should not distort the allocation of resources.
      • It should not harm the competitiveness of the economy.
      • It should be compatible with an acceptable level of economic activity and employment generation.

    Measuring Inflation

    • Consumer Price Index (CPI): prices of a series of goods and services chosen and weighted according to their importance in the budget of a representative household.
    • Harmonised Index of Consumer Prices (HICP): like the CPI, but constructed with the same criteria in all European countries, favouring transparency and facilitating the implementation of monetary policy.
    • Underlying inflation: change in the prices of goods and services in the CPI, but excluding energy goods and unprocessed food.
    • GDP deflator: changes in the prices of all goods and services that make up a country's GDP.### Inflation Indicators and Business Competitiveness
    • The Consumer Price Index (CPI) is widely used and facilitates communication with the public, making monetary authorities' actions more credible.
    • The CPI is published monthly, and its data is not subject to revision.
    • Underlying inflation is a leading indicator of the CPI, calculated through IPSEBENE in Spain.
    • The usual breakdown of the CPI compared to underlying inflation is as follows:
      • Unprocessed food
      • Energy products
      • Processed food
      • Non-food non-energy industrial goods
      • Services

    Causes of Price Growth and Inflation

    • "Inflation is always and everywhere a monetary phenomenon" (Milton Friedman and Anna Schwartz).
    • Real causes, such as rightward shifts in aggregate demand and leftward shifts in aggregate supply, can affect inflation.
    • Monetary causes are the primary drivers of sustained inflation.

    Phillips Curve

    • The Phillips curve is a graphical representation of the relationship between unemployment and inflation.
    • Pricing by firms depends on costs, and the production function is assumed to be Y = AN, implying constant labor productivity.
    • The marginal cost is W, and wages are determined by collective and individual bargaining.
    • Factors that determine wages include:
      • Reservation wage
      • Labor market situation
      • Negotiation and efficiency wages
      • Type of position, qualifications, and market situation
    • The Phillips curve equation is πt = πe + (m + z) - αu, where πt is the inflation rate, πe is the expected inflation rate, m is the markup, z is a supply shock, α is a parameter, and u is the unemployment rate.

    Formation of Expectations and the Modified Phillips Curve

    • Expectations are formed based on past inflation rates, and the parameter θ represents the degree of backward-looking behavior.
    • The modified Phillips curve, also known as the Phillips curve with expectations, is πt = πt-1 + (m + z) - αu.
    • When θ = 1, we have the accelerationist Phillips curve, πt - πt-1 = (m + z) - αu.

    Non-Accelerating Inflation Rate of Unemployment (NAIRU)

    • The NAIRU is the unemployment rate at which inflation is stable.
    • The equation for NAIRU is πt - πt = -α(u - un), where un is the natural rate of unemployment.
    • The NAIRU can be used to estimate the non-accelerating inflation rate of unemployment.

    Combining IS-LM with the Phillips Curve

    • The IS-LM model can be combined with the Phillips curve to analyze the relationship between unemployment and inflation.
    • The equation for the Phillips curve in terms of output is πt - πet = α(Yt - Yn), where Yt is the actual output, Yn is the natural output, and α is a parameter.
    • The IS relationship is Y = C(Y - T) + I(Y, r) + G, where Y is output, C is consumption, T is taxes, I is investment, r is the real interest rate, and G is government spending.

    Real Interest Rate and Monetary Policy

    • The real interest rate is the interest rate expressed in a basket of goods.
    • The central bank does not directly set the interest rate at the natural level due to political reasons, delays, and lack of knowledge of potential output.
    • A period of recession may be necessary if the central bank needs to stabilize and reduce inflation.

    Expectations and the Phillips Curve

    • Dynamic expectations can lead to a period of recession if the central bank needs to stabilize and reduce inflation.
    • Deflationary spiral or deflation trap can occur in a severely depressed economy.
    • Rising energy costs can lead to deflationary pressures and an increase in the unemployment rate.

    Labour Market

    • The labour market is closely related to the general level of activity and affects aggregate demand by determining the ability to pay and the size of the market.
    • It affects business opportunities and involves the receipt of remuneration, providing households with the necessary resources to purchase market goods and services.
    • The company is a demander of labour as an indispensable factor of production, which affects productivity.
    • The evolution of the labour force and the structure and functioning of the labour market affect the company: costs, revenues, and results.
    • Unemployment has costs for business and society: it reduces disposable income, instability, diverts resources to mitigate its effects, obsolescence, and demotivation.
    • Employment is a basic source of social participation.

    Main Variables of the Labour Market

    • GDP depends on the amount of labour used and its productivity, represented by the formula: GDP = N × AP.
    • Concepts of unemployment:
      • Structural unemployment: persists over time due to an inadequate economic structure.
      • Cyclical unemployment: derives from the cyclical behaviour of the economy.
      • Seasonal unemployment: derived from certain regularities occurring over time.
    • Labour ratios:
      • Activity rate: percentage of the working-age population participating in the labour market.
      • Unemployment rate: percentage of the labour force that is not employed.
      • Employment rate: percentage of the working-age population that is employed.
      • Temporary employment rate: percentage of employed with temporary contracts.
      • Part-time employment rate: percentage of employed with a part-time contract.

    Unemployment

    • Unemployment: the situation of members of the labour force who are actively seeking employment under current labour market conditions but are unable to find work because there are insufficient job vacancies.
    • Frictional unemployment: the transitory situation in which an unemployed person finds himself while gathering information on available vacancies and searches for the job that best suits his characteristics.
    • Reducing unemployment is an objective of economic policy because it generates costs:
      • Monetary costs
      • Non-monetary costs on households and individuals
      • Costs to public finances
      • Loss of domestic production
      • Loss of human capital
      • Social costs
      • Political costs
    • Full unemployment: the absence of involuntary unemployment, compatible with frictional unemployment and seasonal unemployment.
    • NAIRU (Non-Accelerating Inflation Rate of Unemployment): the long-term unemployment rate consistent with potential GDP, characterized by no inflationary pressures.

    Inflation Indicators and Business Competitiveness

    • General price level: the weighted average of the prices of goods and services in an economy.
    • Inflation rate: the percentage change in the general price level between two consecutive periods.
    • Types of inflation:
      • Price stability: the general price level rises, but below a level set as optimal (usually between 2% and 3%).
      • High inflation: a sustained and widespread increase in the price level of a country's goods and services above a certain rate over some time.
      • Deflation: a sustained and widespread fall in the price level of goods and services in a country.
      • Hyperinflation: an extremely high inflationary rate (typically around 50%).
    • Authorities target inflation rate rather than price level.
    • Elements to observe when setting the optimal rate:
      • It should not distort the allocation of resources.
      • It should not harm the competitiveness of the economy.
      • It should be compatible with an acceptable level of economic activity and employment generation.

    Measuring Inflation

    • Consumer Price Index (CPI): prices of a series of goods and services chosen and weighted according to their importance in the budget of a representative household.
    • Harmonised Index of Consumer Prices (HICP): like the CPI, but constructed with the same criteria in all European countries, favouring transparency and facilitating the implementation of monetary policy.
    • Underlying inflation: change in the prices of goods and services in the CPI, but excluding energy goods and unprocessed food.
    • GDP deflator: changes in the prices of all goods and services that make up a country's GDP.### Inflation Indicators and Business Competitiveness
    • The Consumer Price Index (CPI) is widely used and facilitates communication with the public, making monetary authorities' actions more credible.
    • The CPI is published monthly, and its data is not subject to revision.
    • Underlying inflation is a leading indicator of the CPI, calculated through IPSEBENE in Spain.
    • The usual breakdown of the CPI compared to underlying inflation is as follows:
      • Unprocessed food
      • Energy products
      • Processed food
      • Non-food non-energy industrial goods
      • Services

    Causes of Price Growth and Inflation

    • "Inflation is always and everywhere a monetary phenomenon" (Milton Friedman and Anna Schwartz).
    • Real causes, such as rightward shifts in aggregate demand and leftward shifts in aggregate supply, can affect inflation.
    • Monetary causes are the primary drivers of sustained inflation.

    Phillips Curve

    • The Phillips curve is a graphical representation of the relationship between unemployment and inflation.
    • Pricing by firms depends on costs, and the production function is assumed to be Y = AN, implying constant labor productivity.
    • The marginal cost is W, and wages are determined by collective and individual bargaining.
    • Factors that determine wages include:
      • Reservation wage
      • Labor market situation
      • Negotiation and efficiency wages
      • Type of position, qualifications, and market situation
    • The Phillips curve equation is πt = πe + (m + z) - αu, where πt is the inflation rate, πe is the expected inflation rate, m is the markup, z is a supply shock, α is a parameter, and u is the unemployment rate.

    Formation of Expectations and the Modified Phillips Curve

    • Expectations are formed based on past inflation rates, and the parameter θ represents the degree of backward-looking behavior.
    • The modified Phillips curve, also known as the Phillips curve with expectations, is πt = πt-1 + (m + z) - αu.
    • When θ = 1, we have the accelerationist Phillips curve, πt - πt-1 = (m + z) - αu.

    Non-Accelerating Inflation Rate of Unemployment (NAIRU)

    • The NAIRU is the unemployment rate at which inflation is stable.
    • The equation for NAIRU is πt - πt = -α(u - un), where un is the natural rate of unemployment.
    • The NAIRU can be used to estimate the non-accelerating inflation rate of unemployment.

    Combining IS-LM with the Phillips Curve

    • The IS-LM model can be combined with the Phillips curve to analyze the relationship between unemployment and inflation.
    • The equation for the Phillips curve in terms of output is πt - πet = α(Yt - Yn), where Yt is the actual output, Yn is the natural output, and α is a parameter.
    • The IS relationship is Y = C(Y - T) + I(Y, r) + G, where Y is output, C is consumption, T is taxes, I is investment, r is the real interest rate, and G is government spending.

    Real Interest Rate and Monetary Policy

    • The real interest rate is the interest rate expressed in a basket of goods.
    • The central bank does not directly set the interest rate at the natural level due to political reasons, delays, and lack of knowledge of potential output.
    • A period of recession may be necessary if the central bank needs to stabilize and reduce inflation.

    Expectations and the Phillips Curve

    • Dynamic expectations can lead to a period of recession if the central bank needs to stabilize and reduce inflation.
    • Deflationary spiral or deflation trap can occur in a severely depressed economy.
    • Rising energy costs can lead to deflationary pressures and an increase in the unemployment rate.

    The Impact of Macroeconomics on Business

    • Companies care about the economic environment because it has a significant influence on their strategy and performance.

    Why Do Companies Care About the Economic Environment?

    • The environment includes all factors external to the company that it cannot control.
    • There are two types of environment:
      • General environment: involves the company from a generic perspective, including the socio-economic system.
      • Specific environment: the part of the environment closest to the company's usual activity, including the sector of economic activity.

    Analysis of the General Environment

    • Involves diagnosing the current and future situation of the environment from a global point of view.
    • Goal is to detect threats and opportunities that the environment offers to the company's performance.
    • Three levels of analysis:
      • Global level: socio-cultural, economic, scientific, and technological dimensions.
      • Country level: analysis of the economic environment in a specific country.
      • Town level: analysis of the economic environment in a specific town or region.

    Importance of Considering the Macroeconomic Environment

    • Scarce resources: companies need to be aware of the context to make informed decisions.
    • Monitoring variables: companies need to monitor macroeconomic variables to anticipate changes and make adjustments.

    Types of Information

    • Internal information: company-specific data.
    • Market information: data about the market, including competitors and customers.
    • General information: data about the general environment, including macroeconomic indicators.

    Macroeconomic Indicators

    • Quantitative indicators: measured in physical or monetary units, providing objective information.
    • Qualitative indicators: subjective assessments of the situation, providing valuable information for economic analysis.
    • Examples of qualitative indicators:
      • Harmonised Business Confidence Index (HBCI): measures business confidence and expectations.
      • Consumer Sentiment Indicator (CSI): measures consumer spending intentions and perceptions of the economy.
      • Purchasing Managers' Index (PMI): measures the performance of specific sectors of the economy.

    Synthetic or Composite Indicators

    • Constructed as a (simple or weighted) average of standardised indicators.
    • Goal is to create indicators that approximate the behavior of macro-variables.

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    Description

    This quiz covers the labour market variables, inflation indicators, and the Phillips curve in the context of applied macroeconomics.

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