IB Economics Unemployment and Inflation
Terms in this set (35)
Describes people who are not employed but are willing and able to work, and who are actively seeking employment
Unemployment Rate = # of unemployed/labor force x 100
Natural Rate of Unemployment
-Above this = inflationary gap
- below this = recessionary gap
Difficulties Measuring Unemployment (4)
- Hidden Unemployment (Discouraged workers) (Unused potential/capacity)
- Underemployment (workers working below capability)
- Disparities (geographical/Age/Ethnic/Gender = unequal)
- Phantom Unemployment (Lazy people using unem. benefit)
Consequences of Unemployment (6)
- Loss of GDP (output down = econ. growth down)
- Loss of government revenue (tax down = gov. support down)
- Cost of Unemployment benefits up (national debt up)
- Loss of income (savings up)
- Disparities up (wealth gap up)
- social problems (crime/stress/indebtedness/homelessness/family crisis up)
Frictional Unemployment :)
Unemployment due to movement between jobs/movement between school/job EX leaving job for better one
Unemployment due to permanent fall in demand for a particular type of labor (Changes in technology,labor costs,consumer tastes)
Seasonal Unemployment :/
Unemployment due to demand for certain workers falling at certain times EX Ski Instructor/Lifeguard
Unemployment due to Overall fall of demand for ALL labors from recession EX Recession
Why is Cyclical unemployment caused?
Fall in AD
Why is Structural unemployment caused? (2)
Fall in demand for particular labor skills, changes in location
Government policies for Unemployment
Seasonal = Incentive "off season" job
Frictional = unemployment benefits down
Structural = Interventionist/Market - Oriented policies
Cyclical = Fiscal/Monetary Policies (AD up)
A general & persistent increase in the average price levels in the Economy
Falling rate of inflation (still rising, but at lower rate)
A persistent fall in the average price level of the economy
Good Deflation = SRAS to the right (supply side)
Bad Deflation = AD to the left (demand side)
Stagflation is a period of rising inflation and falling output IE Supply side cost shock (changes in energy/oil prices) High inflation high unemployment...
Super fast rise in prices = low value of money
Who is hurt by Inflation?
- Fixed Incomers (No Bargaining Power)
- Savers (If inflation is higher than interest rates the money will actually be loosing its purchasing power or its "real" value)
- Creditors (money worth less over time; the loan that they gave someone is worth less than when it was initially given...)
What is a creditor?
A person or company to whom money is owed.
Who is helped by Inflation?
- Flexible Wages
- Long term contracts (price won't change IE rent)
Consumer Price Index (CPI)
Measures the change in prices of a basket of goods and services consumed by the average household
Consumer Price Index (CPI) Uses
- Policy Target
- COLA (Cost of Living Adjustment)
- Translate prices from nominal to real
Problems Measuring Inflation (4)
- Purchasing habits are not the same for all consumers
- Changes in Consumer tastes and preferences
- Quality of products changes
- Unusual changes in prices (energy/oil price changes (stagflation))
Producer Price Index
measures changes in prices of factors of production (shows what prices will do = can predict prices = combat inflation)
Inflation Rate = Year(X + 1) - Year(X)/Year(X) x 100
Consequences of High Inflation (5)
- Greater Uncertainty
- Loss of Purchasing Power (cost of living down)
- Less Saving (worthless money)
- Less export competitiveness (less people willing to trade)
- Higher Interest Rates (protect money up = loans down... banks need to make more money as their "real" profits are decreasing... so they increase interest rates to compensate)
Consequences of Deflation (3)
- High cyclical unemployment (AD down = savings up... firms likely to lay off workers)
- Less profit for debtors = bankruptcies (the value of the loan is increasing)
- Less profit for businesses = unemployment up
Who is a debtor?
A person or institution that owes a sum of money.
Demand-Pull Inflation :) - "Too many dollars chasing too few goods"
General price rises caused by people willing and able to buy more output than the economy can produce (changes in determinants of AD (C + I + G + (X - M))
- results in increase in AD
Cost-Push Inflation :( - "Too many goods chasing too few dollars" (too many suppliers, too few consumers)
General price rises caused by increase in prices of factors of productions(land/labor/capital), Wage-Price spirals, and increased taxes
- results in decrease in SRAS
Government policies for Demand-Pull Inflation :)
Deflationary Fiscal( tax up & spending down) Policy
Deflationary Monetary (tax down & spending up) Policy
Government policies for Cost-Push Inflation :(
Supply Side Policies (PL down, r GDP down, Unemployment up)
Economic Cost (3) of Inflation
- Shoe Leather Cost (wear and tear costs of using things due to inflation)
- Menu Cost (Frictional time to change prices at stores/businesses)
- Unit of Account Cost (concept of money's worth leads to certain choices)
Relationship between inflation and interest rates?
As interest rates are lowered, more people can borrow money, leaving them with more disposable income and thus allowing them to spend more, leading to inflation.
Relationship between inflation and exchange rates?
Low inflation leads to rising currency value as its purchasing power increases RELATIVE to other countries...
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