Chapter 7 Unemployment, Inflation, and Long-Run Growth PDF

‫البطالة‬ ‫التضخم‬ ‫النموَطويلَاألجل‬ * Ch7: Unemployment, inflation, and Long-Run Growth * Unemployment Unemployment Is a Key measure in macroeconomics, it measures how the economy is doing and helps to determine the dire...

‫البطالة‬ ‫التضخم‬ ‫النموَطويلَاألجل‬ * Ch7: Unemployment, inflation, and Long-Run Growth * Unemployment Unemployment Is a Key measure in macroeconomics, it measures how the economy is doing and helps to determine the direction of government policy on spending and taxes (fiscal policy) and the interest rates (monetary policy). * Measurement (‫ )قياس‬of unemployment: The employed (‫ )الموظَف‬is any person 16 years old or older: 1) Who works for pay (‫)يعملَمقابلَأجر‬, either for someone else or in his or her own business for 1 or more hours per week. 2) Who works without pay for 15 or more hours per week in a family enterprise. 3) Who has a job but has been temporarily (‫ )مؤقت‬absent (‫ )غائب‬with or without pay because of illness, bad weather, vacation, Labor-management disputes, or personal reasons, regardless (‫ )بغض النظر‬whether he or she was paid. Those who are not employed, fall into one or two categories: 1) Unemployed (‫)غيرَالموظفين‬. Or 2) Those who are not in the labor force (‫)األشخاصَخارجَالقوىَالعاملة‬. *Unemployed: A person must be 16 years old or older (‫ )أكبر‬who is not working, is available for work, and has made specific efforts to find work during the previous 4 weeks ( in other words, a person has the ability and willingness to work and searching for a job but do not find it). * Note: A person not looking for work because he or she does not want a job or has given up (‫ )استسلم‬looking is classified as not in the labor force. People not in the labor force include: full-time students (‫)الطالب المكرسين جميع وقتهم للدراسة‬, retires (‫)المتقاعدين‬, individuals in institutions, those staying home to take care of children, and discouraged (‫ )المحبطين‬job seekers. 1  Population = Labor force + Not in the labor force ‫ََََ السكان‬ Employed = Labor Force - Unemployed Labor force = Employed + Unemployed and Unemployed = Labor Force - Employed 𝐔𝐧𝐞𝐦𝐩𝐥𝐨𝐲𝐞𝐝 Unemployment Rate = * 100% 𝐋𝐚𝐛𝐨𝐫 𝐅𝐨𝐫𝐜𝐞 َ‫معدلَالبطالة‬ (Employed + Unemployed) * Unemployment rate: it is the ratio of the number of people unemployed to the total number of people in the Labor force. 𝐋𝐚𝐛𝐨𝐫 𝐅𝐨𝐫𝐜𝐞 Labor Force Participation Rate = * 100% 𝐏𝐨𝐩𝐮𝐥𝐚𝐭𝐢𝐨𝐧 ََ‫معدلَاإلعالة‬ Labor force Participation rate is the ratio of labor force to the population. 16 years old or older 2 *example: In U.S, in 2018, total labor force = 161921 million people, 155 215 million people were employed, and 6706 million people were unemployed, find the unemployment rate. Solution: 𝐔𝐧𝐞𝐦𝐩𝐥𝐨𝐲𝐞𝐝 Unemployment Rate = * 100% 𝐋𝐚𝐛𝐨𝐫 𝐅𝐨𝐫𝐜𝐞 𝟔𝟕𝟎𝟔 = * 100% (employed + unemployed) 𝟏𝟔𝟏𝟗𝟐𝟏 = 0.041 * 100% = 4.1 % *example: If total population was 256934 million people and the labor force was 155215 million, find the labor force participation rate. Solution: 𝐋𝐚𝐛𝐨𝐫 𝐅𝐨𝐫𝐜𝐞 Labor Force Participation Rate = * 100% 𝐏𝐨𝐩𝐮𝐥𝐚𝐭𝐢𝐨𝐧 𝟏𝟓𝟓𝟐𝟏𝟓 = * 100% 𝟐𝟓𝟔𝟗𝟑𝟒 = 0.60 * 100% = 60 % *example: If total population equals 150000 million & the population of 65 years or older (not in the labor force) was 113400 million people, find how much people in the labor force. Solution: Population = Labor force + Not in the labor force Labor force = Population - Not in the labor force = 150000 - 113400 = 36600 million 3  ‫أثرَ العاملَالمحبَط‬ *Discouraged – Worker effect: Who are discouraged workers?? Discouraged workers are people who stop looking for work (voluntarily ‫ بإرادتهم‬، َ‫ )اختياريا‬and are classified as having dropped out (‫ )انسحبوا‬of the labor force instead of being unemployed. Why discouraged worker exist? During recession, people may become discouraged about finding a job and stop looking for it. This lowers the unemployment rate because those discouraged people are no longer looking for work and are no Longer counted as unemployment. (Remember: During recession, output is low and firms decrease demand for labor). What is the discouraged- worker effect? Answer: The decline in the measured unemployment rate that results when people who want to work but cannot find work grow discouraged and stop looking, thus dropping out of the ranks of the employed and the labor force. (when discouraged people as a fraction of employed people stop Looking for jobs, then the unemployment rate falls). *Costs (or results) of Unemployment: In thinking about the social costs of unemployment, unemployment is not created equal in societies )‫)لمَتنشأَالبطالةَبينَالمجتمعاتَلنفسَاألسباب‬. In other words, causes of unemployment are different from one society to another and according to that, results (costs) of unemployment differs (‫ )تختلف‬between societies. *Two important questions: 1) Why should full employment be a policy objective of the federal government? ‫َعواقب‬ 2) What costs does unemployment impose on society? or (what are the consequences of unemployment?)  When we consider the various costs of unemployment, it is useful to categorize unemployment into three types (‫)أنواعَالبطالة‬: 1) Frictional unemployment. ‫البطالةَاالحتكاكية‬ 2) Structural unemployment.َ‫َالبطالةَالهيكلية‬ Note: 3) Cyclical unemployment.َ‫َالبطالةَالموسمية‬ Voluntarily: ‫اختياري‬ 4 Involuntarily: ‫اجباري‬ Many people are involved in the normal search for work, some are either newly entering ( ‫دخلوا‬ ‫ )مؤخ اَر‬the labor force, while others are switching (‫ )يستبدلون‬jobs. This unemployment is both natural (‫ )طبيعية‬and beneficial (‫ )مفيدة‬for the economy. 1) Frictional unemployment: It is the portion (‫ )جزء‬of unemployment that is due to (‫ )بسبب‬the normal turnover (‫)الدورانَالطبيعي‬ in the Labor market, it is used to denote (‫ )يدلَعلى‬short-run job/skill matching problems. (‫)عدمَموائمةَمؤهالتَالموظقَلمتطلباتَالوظيفة‬ * Example: A person who leaves his/her work and searches for a better job is considered unemployed (this type of unemployment is frictional unemployment). As long as job search takes some time, the frictional unemployment rate will not be zero. Frictional unemployment denotes short-run job/skill matching problems that last(‫ )تبقى‬a few (‫ )قليلة‬weeks. During it the economy is achieving the potential level of output ( ‫(إنتاجَمحتمل‬. 2) Structural Unemployment: It is the portion of unemployment that is a result of changes in structure (‫ )هيكل‬of the economy which results in a significant (‫ )جوهرية‬loss (‫ )خسارة‬of jobs in certain industries (‫)قطاعات‬. When the structure of the market changes from manufacturing (‫)التصنيع‬, it yielded part of its share of total employment to services (‫)الخدمات‬, finance (‫)المالية‬, insurance (‫ & )التأمين‬real estate (‫)العقارات‬. Structural unemployment denotes long-run adjustment problems in the labor market, those adjustments (‫ )التعديالت‬last for years. Although structural unemployment is an indication of a changing and dynamic (‫)حيوي‬ economy, it also brings with it cost to those who lose their jobs because their skills are obsolete(‫)عفاَعليهاَالزمان‬. 5  Natural rate of unemployment: ‫معدلَالبطالةَالطبيعي‬ It is unemployment at full employment. It refers to (‫ )تشير َإلى‬the unemployment rate that occurs (‫ )تحدث‬in a normal functioning economy, subject to some frictional & structural unemployment. Natural Rate of Unemployment = Frictional unemployment + Structural unemployment Estimates of the natural rate of unemployment vary from 4% to 6% 3) Cyclical Unemployment: It occurs due to business cycle. It is an unemployment that is above (‫ )تفوق‬both frictional and structural unemployment. Or in other words, cyclical unemployment is the unemployment above the natural rate of unemployment. for example: an increase in unemployment rate from 4.6 % to 9.3 % is due to cyclical unemployment. Since the 4.6 % of unemployment is due to natural unemployment (both frictional and structural). * Social Consequences of unemployment: In the great depression in 1930s - at the bottom were the poor (‫ )الفقراء‬and the fully employed about 25% of the labor force. Even those who kept their Jobs found themselves working part- time. Many of people lost all or part of their savings as the stock market crashed and thousands of banks failed. The U.S. economy suffered from a prolonged unemployment due to the great depression. Also families lose valued jobs in the more recent recession of 2008 – 2009 6  Inflation & Deflation. *Remember: Inflation: is an increase in the overall prices level of goods & services. Deflation: is a decrease in the overall price level of goods & services. Inflation is a key measurement in macroeconomics. *in macroeconomics, we are concerned with the increase in the overall price level of goods & services, but in microeconomics we are concerned with the change in the price of a particular product or service ( change in the price of individual good or service). * Two measures of inflation: (How to calculate the inflation rate?) 1) GDP deflator. (Remember: The percentage change in GDP deflator reflects the inflation rate). 2) Consumer Price Index (CPI). Is discussed in Ch7. Consumer Price Index (CPI) What is CPI? Answer: It is an economic indicator used to measure changes in the average price level of a basket (‫ )سلة‬of goods and services consumed by urban (‫ )الحضر‬households over time. The index is used to estimate the rate of inflation on deflation in an economy, and its changes influence (‫ )تؤثر َعلى‬the monetary policy decisions of the Federal Reserves (the central bank of U.S) about determining the interest rate. CPI is a key indicator to inflation and economic health. CPI is the most widely followed (‫ )متبع‬price index in measuring the inflation rate, unlike (‫ )علىَخالف‬the GDP deflator which is a fixed - weight index. CPI is computed by the Bureau of labor statistics using a bundle that represents the "market basket" of goods & services purchased monthly by the typical urban (‫ )الحضر‬consumers. The quantities of each good in the bundle that are used for the weights are based on extensive surveys (‫ )استبانات‬of consumers. The problem with CPI measure of inflation is that it doesn't account for substitution away (‫ )االبتعاد‬from high - priced goods. The CPI thus has a tendency (‫ )ميل َأوَنزعة‬to overestimate (‫ )يبالغ َفي تقدير‬the rate of inflation. This cause a problem with transfer payments of the government such as social security payments. If inflation rate is measured as a percentage 7 change in CPI and is biased upward (‫)متحيزَألنَتكونَقيمتهَمرتفعة‬, then the government spending is more than it otherwise would because transfer payments will grow rapidly. Chained CPI: a version of CPI published by the BLS in 2002, which uses changing weights instead of fixed weights. (this the difference between the CPI & the GDP deflator when measuring inflation). *How to measure inflation by using the CPI method? Inflation rate equals the percentage change in CPI between two years. Example: current year (‫)السنةَالحالية‬ previous year (‫)الشنةَالسابقة‬ 𝑪𝑷𝑰 𝟐𝟎𝟐𝟎 − 𝑪𝑷𝑰 𝟐𝟎𝟏𝟗 Inflation Rate in 2020 = * 100% 𝑪𝑷𝑰 𝟐𝟎𝟏𝟗 previous year (‫)السنةَالسابقة‬ *Difference between CPI & GDP deflator when measuring inflation: CPI covers only consumer goods (‫ & )السلع َاالستهالكية‬includes prices of imported (‫)المستوردة‬ goods. GDP deflator covers all goods & services produced in the economy & does not include prices of imported goods. CPI uses changing weights but the GDP deflator uses fixed weights. ----------------------------------------------------------- * Other popular price indices are the Producer Price Indices (PPIs). Producer Price Indices also called wholesale price (‫ )سعرَالجملة‬indices. PPI => measures of prices that producers receive for products at various stages in the production process, not just the final stage. (Stages of production: finished goods, intermediate materials, and crude materials. ----------------------------------------------------------- 8  *Example: Year CPI 2013 35 2014 38.8 2015 40.5 2016 41.9 2017 43.2 2018 44.7 Required: Find the inflation rate in years 2014 and 2017 Solution: Year CPI Inflation rate (%) 2013 35 ----- 2014 38.8 9.4 2015 40.5 4.4 2016 41.9 3.5 2017 43.2 3.1 2020 44.7 3.5 Percentage change in CPI 𝐂𝐏𝐈 𝟐𝟎𝟏𝟒 − 𝐂𝐏𝐈 𝟐𝟎𝟏𝟑 𝟑𝟖.𝟖 − 𝟑𝟓 𝟑.𝟑 Inflation rate in 2014 = * 100% = * 100% = * 100% 𝐂𝐏𝐈 𝟐𝟎𝟏𝟑 𝟑𝟓 𝟑𝟓 = 0.094 * 100% Inflation rate = 9.4 % between years 2014& 2013 9  Percentage change in CPI 𝐂𝐏𝐈 𝟐𝟎𝟏𝟕 − 𝐂𝐏𝐈 𝟐𝟎𝟏𝟔 𝟒𝟑.𝟐 − 𝟒𝟏.𝟗 𝟑.𝟑 Inflation rate in 2017 = * 100% = * 100% = * 100% 𝐂𝐏𝐈 𝟐𝟎𝟏𝟔 𝟒𝟏.𝟗 𝟒𝟏.𝟗 = 0.031 * 100% Inflation rate between years = 3.1 % 2016& 2017 Costs of inflation: * Why do we worry (‫ )لماذاَنقلق‬about inflation (increase in prices)? Answer: Inflation has costs (consequences ‫ )عواقب‬such as: *First: Inflation may decrease the purchasing power (‫)القوةَالشرائية‬. Purchasing power: is the value of consumer’s dollar. For people, inflation is bad because it lowers the overall standard of living (‫)المستوىَالعامَالمعيشة‬ and raises the costs of living (‫ )تكاليفَالمعيشة‬by making goods & services more expensive. That is, it decreases people's purchasing power (‫)القوةَالشرائية‬. But we have to understand that inflation by itself doesn't necessarily (‫ )ليس َبالضرورة‬always reduce one's purchasing power, because during inflation, most prices - including input prices like wages tend to rise together and input prices determine both the incomes of workers and the incomes of owners of capital and land. *An example shows how inflation may decreases the purchasing power: If a consumer’s income (nominal income) = 100 and the price index of the good = 5 Find the real income of the consumer. * Nominal Income: income of a Solution: consumer (earnings). 𝑵𝒐𝒎𝒊𝒏𝒂𝒍 𝑰𝒏𝒄𝒐𝒎𝒆 𝟏𝟎𝟎 * Real income (‫)الدخل الحقيقي‬: Real Income = = = 20 𝑷𝒓𝒊𝒄𝒆 𝒊𝒏𝒅𝒆𝒙 𝟓 illustrates the purchasing power. Now, what will happen to the consumer’s purchasing power if the price index increased to 10 while income is fixed? At price = 5 the purchasing 𝑵𝒐𝒎𝒊𝒏𝒂𝒍 𝑰𝒏𝒄𝒐𝒎𝒆 𝟏𝟎𝟎 Real Income = = = 10 power of the consumer was 𝑷𝒓𝒊𝒄𝒆 𝒊𝒏𝒅𝒆𝒙 𝟏𝟎 higher than at price = 10 because his income doesn’t 10 change. So we notice that when the price index rises, but nominal income of the consumer doesn’t change (remains fixed) , real income decreases (purchasing power of the consumer decreases). fixed 𝑵𝒐𝒎𝒊𝒏𝒂𝒍 𝑰𝒏𝒄𝒐𝒎𝒆 𝟏𝟎𝟎 Real Income = = = 10 𝑷𝒓𝒊𝒄𝒆 𝒊𝒏𝒅𝒆𝒙 𝟏𝟎 *Note: Inflation doesn’t necessarily decrease the purchasing power of the consumer, how?? Gaining (‫ )الربح‬and losing (‫ )الخسارة‬of consumers during the period of inflation depends on whether the consumer’s nominal income rises faster or slower than the rises in prices of things he buys. For people having fixed income and prices of things they buy tends to rise, their purchasing power falls (their ability to purchase goods & services falls since their real income decreases). For elderly people (‫)كبارَالسن‬, income increases as social security increases, social security is fully indexed (adjusted to changes in prices). So, for example, if CPI increases by 5%, social security benefits also increase by 5%. Wages are also indexed to inflation through cost of living adjustments, if wages are fully indexed (adjusted to price changes), workers don't suffer from a fall in real income (their purchasing power will not decrease). ‫بمعنىَإذاَتعدلتَأجورَالعمالَبشكلَمناسبَالرتفاعَأسعارَالسلعَوالخدماتَعندهاَلنَتنخفضَالقوةَالشرائيةَللعامل‬ *Second: Inflation may change the distribution of Income (‫)توزيعَالدخل‬. Inflation affects the distribution of income between buyers and sellers of goods and services, during inflation when prices of goods and services increase, buyers are worse off (‫)أسوأ َحاأل‬ and sellers benefit. Inflation affects the distribution of income by distinguishing (‫ )التمييز‬between anticipated inflation (‫ & )التضخمَالمتوقع‬unanticipated inflation (‫)التضخمَغيرَالمتوقع‬. When contracts are made with anticipated (expected) inflation, there will not be any effects of inflation on the distribution of income but when they are made with unanticipated (unexpected) inflation, there will effects on the distribution of income, some will gain & some lose. * Anticipated inflation: occurs when people expects that the overall price level increases. * Unanticipated inflation: occurs when people do not know (do not expect) inflation is going to occur until the overall price level will increases. 11  ‫المدينين‬ ‫الدائنين‬ Debtors versus creditors & inflation: (‫ )المقترضين‬Borrowers of fund Lenders of fund (‫)المقرضين‬ * Inflation relates both the nominal interest rate and the real interest rate through Fisher equation. ‫معادلةَفيشر‬ Real Interest Rate = Nominal Interest Rate - Inflation Rate Fisher equation. Where: ‫تكلفة االقتراض‬ Published *Nominal interest rate (‫)سعرَالفائدةَاالسمي‬: interest rate paid by borrowers (cost of a loan). َ‫منشورة‬ It illustrates the amount of dollars borrowers will give to lenders to repay the loan. ‫ومعلنَعنها‬ *Real interest rate (‫)سعرَالفائدةَالحقيقي‬: interest rate adjusted to inflation. It illustrates the purchasing power not the amount of dollars. *An example illustrates the relationship between nominal interest rate, real interest rate and the inflation rate: If the nominal interest rate = 8 % and the inflation rate = 5% find the real interest rate. Sloution: real interest rate = 8% - 5% = 3%  During the period of unanticipated (unexpected) inflation, debtors (borrowers) benefit from inflation at the expense of creditors (lenders), because borrowers pay back a lower real interest rate in the future than they borrowed. So during unanticipated inflation, borrowers benefit (since they pay back lower real interest rate) & lenders disadvantage (since they receive lower real interest rate), or we can say, borrowers gain & lenders lose from inflation. Since nominal interest rate is fixed 12 *For example: If the nominal interest rate = 9% and the inflation rate = 4% then the lender will receive a real interest rate of 5% ( 9% - 4% ) ( 9% - 6% ) Now, if the inflation rate becomes 6%, the lender will receive 3% in this case the lender loses(‫ )يخسر‬since he receives a lower real interest rate of 3% from the borrower. ‫المدينين‬ ‫الدائنين‬ Debtors versus creditors & Deflation (‫ )المقترضين‬Borrowers of fund Lenders of fund (‫)المقرضين‬ *Why do we worry about deflation (decrease in prices)? Answer: Deflation has costs (consequences) such as: 1) Because, if prices fall & the fall is unanticipated, lenders will gain at the expense of borrowers. 2) Although (‫ )علىَالرغمَمنَأنه‬consumers benefit from low prices, deflation is not always good for the economy since it brings a worry (‫ )قلق‬that aggregate demand (‫ )الطلبَالكلي‬is too low to support full employment. This will be discussed in next chapters.  During the period of unanticipated (unexpected)deflation, creditors (lenders) benefit from deflation at the expense of debtors (borrowers), because borrowers pay back higher real interest rate to the lenders in the future than they borrowed. So during unanticipated deflation, lenders benefit (since they receive higher real interest rate) & borrowers disadvantage (since they pay back higher real interest rate), or we can say, lenders gain & borrowers lose from deflation. Since nominal interest rate is fixed. For example: If the nominal interest rate = 6% and the inflation rate = 3% then the lender will receive a real interest rate of 3% ( 6% - 3% ) ( 6% - (-1%) ) Now, if the inflation rate becomes -1% (deflation), the lender will receive 7% in this case the lender benefits since he receives a higher real interest rate of 7% from the borrower. 13  * Long - Run Growth * ‫النموَطويلَاألجل‬ * Output growth (‫)نموَالناتج‬: is the growth rate of the output of the entire economy. * Per - Capita output growth: is the growth rate of output per person in the economy. ( or the ratio of total output to total population). 𝑶𝒖𝒕𝒑𝒖𝒕 Per Capita output = the same as GDP per capita 𝑷𝒐𝒑𝒖𝒍𝒂𝒕𝒊𝒐𝒏 َ‫ََ نصيبَالفردَالواحدَمنَإجماليَاإلنتاج‬ If the population of a country is growing at the same rate as output then per capita output is not growing (Output growth is simply keeping up with population growth), but if the population of a country is growing at a lower rate than output then per capita output is growing. Per capita output is one of the measures of the economy welfare and the economic development. --------------------------------- * Output per worker (‫ )نصيبَالعاملَمنَاإلنتاج‬or labor productivity (‫)إنتاجيةَالعامل‬: 𝑶𝒖𝒕𝒑𝒖𝒕 Output per worker = 𝑳𝒂𝒃𝒐𝒓 Or labor productivity Number of workers (labor are part of the population) Not everyone in a country works, and so output per worker (‫ )نصيبَالعاملَمنَاإلنتاج‬is not the same as output per person (‫)تصيبَالفردَمنَاإلنتاج‬. (Remember: population = labor force + not in the labor force ) Output per worker is larger than output per person and it is a measure of productivity Productivity labor =Output Productivity growth: is the growth rate of output per worker. 14 * What determines the output growth rate? Or what causes economic growth?? 1) Increase the number of workers (Labor) and their quality (‫ )نوعيتهم‬through education, experience, and better health. Especially increasing the number of skilled labor. This is an investment in human capital. (‫)االستثمارَفيَ رأسَالمالَالبشري‬. 2) Increase the number of machines (fixed capital) and their quality, through replacing (‫ )استبدال‬the old machines with new ones, this will lead to an increase in labor productivity. 3) Improvements in the technology used in the production. (Technology is the knowhow) َََ‫َالمعرفة‬ Dear students please check the e-learning for further exercises on Ch6 & Ch7 15