Unit 2 Goals of Macroeconomics PDF

ECN201: Principles of Macroeconomics ONL-D Unit 2: The Goals of Macroeconomic Policy DR. VERONICA REID-JOHNSON  COURSE TOPICS o Unit 1 The Realm of Macroeconomics o Unit 2 The Goals of Macroeconomics Policy o Unit 3 Income and Spending o Unit 4...

ECN201: Principles of Macroeconomics ONL-D Unit 2: The Goals of Macroeconomic Policy DR. VERONICA REID-JOHNSON  COURSE TOPICS o Unit 1 The Realm of Macroeconomics o Unit 2 The Goals of Macroeconomics Policy o Unit 3 Income and Spending o Unit 4 Demand-side Equilibrium and Changes on the Demand Side WEEK 8: MSA o Unit 5 Supply-side Equilibrium o Unit 6 Fiscal and Monetary Policy o Unit 7 Money and the Banking System o Unit 8 International Trade UNIT 1: INFLATION AND UNEMPLOYMENT  Objectives  Maintaining a balance between high inflation and high unemployment  Potential GDP  Other measures of economic growth. Real GDP, GDP per capital, Labour productivity  Potential GDP Potential GDP is the real GDP that the economy would produce if its labour and other resources were fully employed. Potential GDP can be estimated in two steps: First, all the productive resources (or inputs) like labour, capital and other resources are counted. Then it is estimated how much output will be produced with these inputs if they are fully utilized.  BREAK-OUT – 10 mins  WHAT IS FULL EMPLOYMENT?  Able to and want to work has a job  Everyone is working and producing/labour is employed fully/used efficiency  Economic output is at its highest potential  Is not the same as zero unemployment  WHAT IS POTENTIAL GDP?  Level of output that economy would produce if labour and other resources are fully used  AD = AS  MAXIMUM sustainable output without increasing inflation  FULL EMPLOYMENT Full employment is an economic condition where all available labour and other resources are being used efficiently. However, it does not mean that there is zero unemployment. Key points about full employment: It is the maximum level of employment that can be achieved without causing inflation to rise. The economy is considered to be operating at or near its potential output (or potential GDP) when it achieves full employment.  Potential GDP Cont. Potential GDP refers to the highest level of output (goods and services) that an economy can sustainably produce over a period of time without leading to inflationary pressures. It represents the economy's long- run capacity when all resources— labor, capital, and technology—are used efficiently, at full employment.  Potential GDP Cont. Potential GDP is an estimate based on factors such as: LaboUr force participation rate: the share of the working-age population that is employed or actively looking for work. Capital stock: the total amount of physical assets used in production (e.g., machinery, equipment). Technological efficiency: the productivity of workers and firms using available technology.  Potential GDP Cont. The transformation of inputs into outputs involves an assessment of the economy’s technology. The more technologically advanced an economy is, the more output it will be able to produce. Over long periods of time, the growth rates of actual and potential GDP are normally quite similar. But the two often diverge sharply over short periods owing to cyclical fluctuations.  Relationship between Full Employment and Potential GDP At full employment, the economy is operating at its potential GDP. Any deviation from potential GDP often signals economic imbalances, such as inflation (when above potential) or unemployment (when below potential).  Other measures of economic growth  Real GDP  GDP per capita  Labour productivity UNIT 2: THE LABOUR FORCE & UNEMPLOYMENT  Objectives Discuss: Labour force Reasons for productivity slowdown Unemployment rate Employed vs unemployed Discouraged worker Types of unemployment Ways of alleviating the unemployment burden (unemployment insurance etc.)  Labour Force The number of people employed plus the number of people unemployed, that is, number of people holding or seeking jobs.  Labour force cont. LABOUR FORCE = Employed + Unemployed POPULATION = Labour force + not in labour force  Persons not in the labour force Individuals who are not working and are not actively seeking employment. This group includes a wide variety of people who may not be participating in the labour market for various reasons, such as retirement, education, caregiving, or personal choice. Unlike those classified as unemployed, these individuals are not counted in the official unemployment rate because they are not looking for work.  Categories Retirees: Individuals who have left the workforce after reaching retirement age. Students: Full-time students, especially those not working or actively looking for work. Homemakers: People who are primarily responsible for managing their households. Disabled Individuals: Those with disabilities that prevent them from working or seeking work. Others Not Actively Seeking Work: Discouraged workers, voluntarily not working  Discouraged Worker A discouraged worker is an individual who has stopped actively seeking employment because they believe there are no available jobs suited to their skills or due to unfavourable job market conditions. These workers are part of the broader group of unemployed, but they are not counted in official unemployment statistics because they are no longer actively looking for work.  Key Characteristics of Discouraged Workers Not Actively Seeking Work: They have given up looking for a job, typically because they feel their efforts are futile. Willing to Work: Despite not searching for employment, discouraged workers are willing to work if opportunities arose. Reasons for Discouragement: Common reasons include a perceived lack of suitable job openings, lack of required skills, or discrimination based on age, race, or gender. Exclusion from Unemployment Rate: Since unemployment rates only include those who are actively seeking work, discouraged workers are not reflected in this statistic, which can understate the true level of joblessness in the economy.  Labour Productivity  It is the amount of output a worker turns out in an hour (or a week or a year) of labour.  If output is measured by GDP, it is GDP per hour of work.  It is the growth rate of productivity that determines whether living standards will rise rapidly or slowly.  FACTORS THAT MAY CAUSE PRODUCTIVITY SLOW DOWN  Lagging or lack of investment  High energy prices  workforce skills – not having more highly skilled and better trained workers who are more productive on the job (efficiency)  Technological slowdown – sugar industry  EMPLOYED: Any person 18 years old or older: (1) who works for pay, 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; or (3) who has a job but has been temporarily absent, with or without pay.  Unemployed Unemployed is a person who is 18 years old or older, is not working, is available for work, and has made specific efforts to find work during the previous 4 weeks.  Unemployment Rate Unemployment Rate = Unemployed X 100 Labour force Labour force participation rate : Labour force/population x100 Disguised unemployment A situation where individuals are employed, but their work is insufficient or underutilized, meaning they could contribute more to the economy if they had better or full employment. This often happens when workers are in part-time or low-skill jobs but are capable of and willing to work more. Disguised unemployment Examples : Part-time workers seeking full-time jobs: Individuals working part-time hours but wanting and needing full-time work, yet unable to find it. Seasonal workers in agriculture: Farmers or laborers who are fully employed during peak seasons but remain underemployed or idle for the rest of the year. Underemployed graduates: Highly educated individuals working in low-skill jobs, such as a university graduate working as a barista while searching for a job that matches their qualifications.  Unemployment cont. When an economy grows more slowly than its potential it fails to generate more new jobs for its ever-growing labour force. As a result the unemployment rate rises. Conversely, GDP grows faster than potential leads to fall in unemployment rate.  BREAK-OUT – 15 mins  What is unemployment?  Who are the unemployed?  Define the four types of unemployment. Types of unemployment  Frictional Unemployment  Structural Unemployment  Cyclical Unemployment  Seasonal Unemployment Frictional Unemployment  This unemployment is due to normal turnover in the labour market.  It includes people who are temporarily between jobs because they are changing their occupations or moving from one location to another, or are unemployed for similar reasons. Frictional Unemployment  A major advantage of frictional unemployment is that people move from a lower paying job to a higher paying job and it is very common during periods of economic growth or when individuals improve their qualifications and skills.  Example, a teller from one bank being appointed as Supervisor in another bank and decides to take a break for 2 month.  Examples Moving between jobs Entering the work force Career changes Structural Unemployment  This type of unemployment refers to workers who have lost their jobs because they have been displaced by automation.  Their skills are no longer in demand, or because of similar reasons. Structural Unemployment  Examples of this can be sugar cane cutters being replaced by machines, telephone operators being replaced by automated voice mail boxes etc.  Examples Tellers -> ABMs, online banking Carpenters - > declining industry* Self-check in Cashiers - > self-check out Machines replacing workers on assembly lines Coal miners – solar/environmental Cyclical Unemployment  This type of unemployment is due to a decline in the economy’s total production.  Cyclical unemployment rises during recessions and falls as prosperity is restored.  During recessionary period the GDP is decreasing and there is no demand for goods and services due to which the manufacturers/producers decrease the production of goods and services. Cyclical Unemployment  Economists are worried about this type of unemployment because if not controlled by Government measures the economy can go depression.  Example of this type of unemployment can be in hotel industries, bauxite industry.  Economists are more concerned with cyclical unemployment because during cyclical unemployment the GDP is decreasing. Seasonal Unemployment  This type of unemployment is due to change in seasons, for e.g. Jamaican cane cutters are employed only during cane harvesting season but become unemployed when the season is over.  The same applies for individuals who work in certain sectors of the Tourism industry, apple pickers from Jamaica to Florida etc.  Seasonal Unemployment Examples Cane cutters Tourism workers – winter tourist season Christmas workers Overseas farm workers Impact of High unemployment will have on a developing economy:  Loss output.  Crime and violence  Anxiety and depression  Suicide  Decline in health levels.  Loss of human capital. Methods to alleviate the problems of High Unemployment:  Unemployment insurance  Social welfare programs (unemployment benefits)  Increase government spending  reduction in tax rates  Increase exports UNIT 3: INTEREST RATE & CPI  Objectives Be able to explain:  Purchasing power  Real vs nominal interest rate  Index numbers  Consumer Price Index  Measure inflation using CPI  Deflate monetary figures using CPI  GDP Deflator PURCHASING POWER: The purchasing power of a given sum of money is the volume of goods and services that it will buy.  Inflation effects: Inflation redistributes income.  Those who lend money are often losers by inflation.  Borrowers often gain by inflation. Impact of inflation on an individual’s purchasing power:  Whether a person gains or loses during a period of inflation depends on whether his or her income rises faster or slower that the prices of the things he or she buys. Impact of inflation on an individual’s purchasing power:  Many social security benefits and pensions are indexed to inflation.  Inflation that is higher than expected benefits debtors.  Inflation that is lower than expected benefits creditors. THE REAL WAGE RATE:  The wage rate adjusted for inflation. Specifically, it is the nominal wage divided by the price index.  The real wage thus indicates the volume of goods and services that the nominal wages will buy. THE REAL WAGE RATE:  The purchasing power of wages (real wage rate) is not systematically eroded by inflation. or vice versa.  In the long run, wages tend to outdo prices as new capital, equipment and innovation increase output per worker. Calculation of real wage rate Real Wage Rate = Nominal wage rate x 100 Price index REAL AND NOMINAL INTEREST RATES:  The real rate of interest is the percentage increase in purchasing power that the borrower pays to the lender for the privilege of borrowing.  It indicates the increased ability to purchase goods and services that the lender earns. REAL AND NOMINAL INTEREST RATES:  The nominal rate of interest is the percentage by which the money the borrower pays back exceeds the money that she has borrowed, making no adjustment for any decline in the purchasing power of this money that results from inflation. Real interest rate = Nominal interest rate – expected inflation rate  CAPITAL GAIN: The Capital Gain is the difference between the price at which an asset is sold and the price at which it was bought.  PRICE INDEX:  Inflation is generally measured by the change in the sum of index of the general price level (average of all the prices in the economy).  An index number expresses the cost of a market basket of goods relative to its cost in same base period. Consumer Price Index (CPI):  CPI is the common measure of the price level.  A CPI is a price index computed each month by the STATIN using a bundle that is meant to represent the “market basket” of goods purchased monthly by an average family consisting of 4 -6 members living in a urban area. Consumer Price Index (CPI):  Price index includes all the goods produced in an economy and also referred as producers index where as CPI measures only goods and services purchased by an average household.  Calculation of Consumer Price Index: CPI in a given year = Cost of market basket in given year X 100 Cost of market basket in base year  Calculation of Inflation rate in a given year: Inflation rate in a given year when compared to the base year = CPI in a given year – CPI in base year X 100 CPI in base year When comparing 2 years = CPI Year 2 – CPI in year 1 X 100 CPI in year 1  Deflating Deflating is the process of finding the real value of some monetary magnitude by dividing by some appropriate price index (CPI).  Deflating Deflating monetary figures: Real spending in a given year = nominal spending in a given year x 100 CPI for that year  Deflating Deflating Real Wage: Real wage in a given year = Nominal (money) wage in given year x 100 CPI in the given year  Deflating GDP Deflator: The price index used to deflate GDP is called the “GDP Deflator”. Therefore the real GDP is equal to: Real GDP = Nominal GDP x 100 GDP Deflator  End of Unit 2 Review! Review! Review! then ask questions.