# HKCE Macroeconomics

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28 Οκτ 2013 (πριν από 4 χρόνια και 6 μήνες)

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By Mr. LAU san
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fat

CH5
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Unemployment, Price F..

1

HKCE Macroeconomics

Chapter 5: Unemployment, Price

By Mr. LAU san
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CH5
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Unemployment, Price F..

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Labor Force & Unemployment

Labor force

refers to all economically
active persons aged 15 or above,
including both employed and
unemployed population.

An
economically active

person is able and
willing to participate in production activities.

The
employed population

refers to
persons who perform work for payment
or profit.

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Labor Force & Unemployment

The
unemployed population

refers to
those unemployed labor force who have
no jobs but are still under searching.

The
under
-
employed population

refers to those employed persons who
involuntarily work less hours.

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Labor Force and
Unemployment

Whole

Population

Aged 15 or Above

Labor Force

Unemployed

Employed

Under
-
employed

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Labor Force & Unemployment

Exercises:

1.
Is a housewife regarded as unemployed?

2.
Ah Wing is a F.3 student who is a private
tutor at Friday nights. Is she employed?

3.
A mild mentally retarded person who has
graduated from a special workplace and
is looking for a job. Is that person
unemployed?

4.
A young lady who cared some poor
children carrying HIV in Cambodia last
summer. Is she employed?

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Measuring Unemployment

Unemployment rate

Unemployment rate
= (unemployed population/labor force)
x 100%

Under
-
employment rate

under
-
employment rate
= (under
-
employed population/labor force)
x 100%

By Mr. LAU san
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Measuring Unemployment

Exercise 1:

Given:

population aged 15 or above 100 000

employed population 5 205

unemployed population 1 225

under
-
employed population 643

Based on the above information, calculate:

labor force = 5 205 + 1 225=6 430

unemployment rate =(1 225/6 430)x100%=19.1%

under
-
employment rate = (643/6 430)x100%=10%

By Mr. LAU san
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Measuring Unemployment

Exercise 2:

Given that the unemployment rate is 5% and labor
force is 10 000. Now, 1 000 new school leavers are
seeking jobs.

Would there be an increase in labor force?

Yes, increase by 1 000

Would the unemployment rate change if ALL of
them can find a job?

Yes, fall by [(500/11 000)x100% =] 4.5%
-
5%=
-
0.5%

Would the unemployment rate change if NONE of
them can find a job?

Yes, increase by [(1 500/11 000)x100%=]13.6%
-
5%
=+8.6%

By Mr. LAU san
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Costs of Unemployment

Costs to Unemployed Individuals:

Lower living standard

Loss of skills/Skills become outdated

Psychological problems emerge

Costs to Society:

A fall in output

Increasing financial burden to society

Social and political problems

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Price Fluctuations

Inflation

is a persistent increase in the
general price level.

Deflation

is a persistent decrease in the
general price level.

The following situations are NOT
considered as inflation/deflation:

An once
-
and
-
for
-
all change in general price

A persistent rise/fall in the price of one
good

By Mr. LAU san
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Unemployment, Price F..

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Price Fluctuations

Remarks:

Under inflation/deflation, it does NOT
implies that the prices of ALL goods and
services change.

In times of inflation, the prices of some
goods may fall while some may remain
constant.

In times of deflation, the prices of some
goods may increase while some may
remain constant.

By Mr. LAU san
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Measuring Changes in Prices

Two methods for measuring a change in
the general price level:

Consumer price index (CPI)

Implicit price deflator of GDP

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Measurement by CPI

Types of CPI:

Consumer price index(A), CPI(A)

Reflecting the effect of price changes on the lower
expenditure group

Consumer price index(B), CPI(B)

Reflecting the effect of price changes on the middle
expenditure group

Consumer price index(C), CPI(C) [formerly called
Hang Seng CPI]

Reflecting the effect of price changes on the higher
expenditure group

Composite consumer price index, Composite CPI

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Measurement by CPI

Types of CPI:

Index

Monthly Expenditure
Range (at
1999/2000 prices)

% of Households
Covered

CPI(A)

\$4 400
-

\$18 100

50

CPI(B)

\$18 100
-

\$31 800

30

CPI(C)

\$31 800
-

\$64 600

10

Composite CPI

\$4 400
-

\$64 600

90

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Measurement by CPI

Remarks:

The

lower

expenditure group households
tend to spend a higher proportion of their
expenditure on necessities, such as food.

The
higher

expenditure group households
tend to spend a higher proportion of their
expenditure on housing, clothing and
footwear and transportation.

Since the expenditure weightings of
different expenditure groups differ, the
price change of an item may have different
impacts on different income groups.

By Mr. LAU san
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Measurement by CPI

If CPI in the current period is larger than
100, it means there is inflation while
deflation occurs if it is less than 100.

Inflation rate
= [(CPI in the current period

CPI in the
last period)/CPI in the last period]x100%

By Mr. LAU san
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Measurement by Price
Deflator of GDP

Implicit Price Deflator of GDP
=(GDP at current market prices/GDP at
constant market prices)x100

If the implicit GDP deflator is larger than
100, it means there is inflation, however,
deflation occurs if it is less than 100.

Inflation rate
= [GDP deflator in the current period

GDP deflator in the last period)/GDP
deflator in the last period]x100%

By Mr. LAU san
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GDP Deflator vs. CPI

As the implicit price deflator of GDP has
a wider coverage of goods and services,
it is a better measure of the changes in
the general price level than CPIs.

By Mr. LAU san
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CH5
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Unemployment, Price F..

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GDP Deflator vs. CPI

As the implicit price deflator of GDP has
a wider coverage of goods and services,
it is a better measure of the changes in
the general price level than CPIs.

However, CPIs is good for
understanding the effects of price
changes on different income groups.

By Mr. LAU san
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Effects of Changes in Price
Level

Effects on purchasing power of money:

Inflation

money.

Deflation

money

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Effects of Changes in Price
Level

Effects on real income:

Conditions

Effects on Real Income

If % rise in money income > inflation rate

Real income increases

If % rise in money income < inflation rate

Real income falls

If % rise in money income = inflation rate

No change in real income

If % fall in money income > deflation rate

Real income falls

If % fall in money income < deflation rate

Real income rises

If % fall in money income = deflation rate

No change in real income

By Mr. LAU san
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Effects of Changes in Price
Level

Effects on cost of living:

Inflation

means a persistent increase in the
general price level and thus raising the
cost of living.

Deflation

means a persistent fall in the
general price level and thus decreasing the
cost of living.

By Mr. LAU san
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Effects of Changes in Price
Level

Effects on Fixed Income Earners:

Inflation

the fixed income earners as the real value
of their fixed money income is not allowed

Deflation

the fixed income earners as the real value
of their fixed money income is not reduced.

By Mr. LAU san
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CH5
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Unemployment, Price F..

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Effects of Changes in Price
Level

Effects on Income Redistribution (The
Redistributive Effect):

The redistributive effect would occur if the
inflation/deflation is
unexpected

or
unanticipated
.

As income will be re
-
distributed, some
people would gain and some lose.

By Mr. LAU san
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25

Effects of Changes in Price
Level

Redistributive Effects under Inflation

People who gain

People who lose

Borrowers/Debtors gain because
they pay less in real terms.

Lenders/Creditors lose as they

Bankers gain as their liabilities of
deposit falls in real terms.

Depositors lose as their interest
returns falls in real terms.

Employers gain as employment
contracts fix the amount of money
wage and thus they pay less in
real terms.

Employees lose as their money
income is fixed and thus their
real income is reduced.

Insurance companies gain as the
insurance payments fall in real
terms.

Policy
-
holders lose as the
compensation and returns fall in
real terms.

By Mr. LAU san
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CH5
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Unemployment, Price F..

26

Effects of Changes in Price
Level

Redistributive Effects under
Deflation

People who lose

People who gain

Borrowers/Debtors lose because
they pay more in real terms.

Lenders/Creditors gain as they

Bankers lose as their liabilities of
deposit rises in real terms.

Depositors gain as their interest
returns increases in real terms.

Employers lost as employment
contracts fix the amount of money
wage and thus they pay more in
real terms.

Employees gain as their money
income is fixed and thus their
real income is not reduced.

Insurance companies lose as the
insurance payments rise in real
terms.

Policy
-
holders gain as the
compensation and returns rise in
real terms.

By Mr. LAU san
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CH5
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Unemployment, Price F..

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Effects of Changes in Price
Level

Effects on choice of wealth :

In times of
inflation
, people would prefer to
hold physical assets instead of money.

In times of
deflation
, people would prefer to
hold cash or interest
-
bearing financial
assets other than physical assets.

By Mr. LAU san
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Effects of Changes in Price
Level

Effects on government tax revenue :

In times of
inflation
, government tax revenue
would increase because higher money wage
makes a person's income exceeded the tax
allowances or fell into a higher tax bracket.

In times of
deflation
, government tax revenue
would fall because lower money income means
some people may be out of tax net or fall into a
lower tax bracket.

By Mr. LAU san
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CH5
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Unemployment, Price F..

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Effects of Changes in Price
Level

Effects on cost of production & exports :

During
inflation
, the prices of exports will
rise while its quantity falls because cost of
production rises due to higher prices of raw
materials.

During
deflation
, the export prices fall and
thus stimulating the volume of exports.

By Mr. LAU san
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Business cycle (BC) refers to the recurrent
fluctuations of economic performance (esp.
in terms of the real GDP) of an economy.

A business cycle is characterized by 4
phases:

1.
Prosperity/Boom/Peak

2.
Recession/Contraction

3.
Depression/Trough

4.
Recovery/Expansion

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Characteristics of prosperity:

Unemployment rate is the very low/Full
employment is close

The real GDP growth rate is very high

The general price level starts to rise rapidly

Characteristics of recession:

Unemployment rate starts to rise

The real GDP growth rate is decreasing

The inflation rate is declining

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Characteristics of depression:

Unemployment rate is the very high

The real GDP growth rate is very low or negative

The general price level is falling rapidly/Deflation
occurs

Characteristics of recovery:

Unemployment rate starts to fall/Employment rate
is rising

The real GDP growth rate starts to rise

Deflation rate starts to fall/The general price level
stops declining

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Unemployment, Price F..

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-
A Summary

Phase

Growth
Rate of
Real GDP

Unemployment
Rate

Changes in
the General
Price Level

Prosperity

Increasing

Very low

Rising rapidly
or very high
inflation rate

Recession

decreasing

Increasing

Decreasing or
deflation

Depression

Low or

negative

Very high

Falling rapidly
or very high
deflation rate

Recovery

Positive or
increasing

Decreasing

Increasing

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