Escolar Documentos
Profissional Documentos
Cultura Documentos
10301
FOUNDATION
ECONOMICS
TOPIC 9 :
INFLATION AND
UNEMPLOYMENT
Objectives
At the end of the lesson, you should be able to:
1. define unemployment and employment.
2. explain how and why employment and
unemployment exist.
3. explain the causes and cures of unemployment
4. measure unemployment
5. contrast between the Classical and Keynesians
theory of employment.
6. Identify types of inflation, causes, etc..
Introduction
Economic growth or GDP expansion is not an
end in itself. It is a means to achieve certain
ends and the ends are: poverty reduction,
reduction in unemployment and inequality.
In this unit, the concept of unemployment and
income inequality will be discussed, defined,
measured and, finally you will know and
understand what causes them to occur and what
can be done to remedy them.
Unemployment
Human resources are seen as the most
important economic resource. The reason being
that, human beings are:
Durable and renewable resources
Quality of human material is the ultimate
determinant of economic success or failure of
nations. Without humans manmade resources
will not be produced and other natural resources
will remain idol.
Unemployment
Human beings are seen as factors of production,
and therefore must be utilized as much as
possible in anyway so as to enhance
productions levels in the economy.
The under-utilization of this resource brings
about unemployment and therefore declining
levels of GDP. Since the level of population
supports the level of GDP, it has a direct effect
on the level of GDP.
Unemployment
When a large proportion of a countrys
population is unemployed, GDP level becomes
relatively less as compared to a smaller
proportion being unemployed.
Unemployment is a state of joblessness that
can cause social problems such as law and
order, rural-urban drift, growth of urban
slums/squatter settlements, urban crime,
poverty, malnutrition, ill health, low level of
education, etc. This is because people need to
be employed to earn income and support
themselves to meet basic needs.
Unemployment
Besides social problems, unemployment can also cause
economic problems. The reasons stand from the fact
that the level of employment influences the level of
demand (aggregate demand).
If employment level increases, more people will earn
income, which will then increase their level of demand on
goods and services on the aggregate.
The increase in demand then fosters increases in supply.
That is, increases in demand must be met by increases
in supply to meet and clear market conditions.
To increase supply, production levels must then be
increased which means increases in the level of GDP.
Unemployment
The level of unemployment of labour can
be measured when the size of the labour
force is known. The size of the labour
force can be measured from many fronts,
as to how much labour should be included
in the labour force depends on how
countries define the extent of it.
Labour Force
The labour force consists of only the
economically active population that are readily
available. These are:
Those who are between age group of 15-65
years
Those that are able to work physically and
mentally
Those that are willing to work at the existing
wages
Those that are actively looking for work.
Labour Force
If more people are unemployed, they become
socially and economically handicapped and
become dependent on other people who are
fortunate.
Such people are known as dependents. A
large number of dependents can deteriorate
the lives of the rest of the population by
placing an extra burden on them. This problem
is mostly experienced in developing countries.
Types of Unemployment
1.
2.
Types of Unemployment
3. Frictional Unemployment
People quit one job and take up another
job. Before taking up the next job, they
are unemployed.
4. Seasonal Unemployment
This is unemployment due to seasonal
nature of activity or industry. E.g. coffee
picking season
Types of Unemployment
5.
6.
Cyclical Unemployment
This type of unemployment depends on the business
cycle. During an economic boom, unemployment will
fall, and will increase during times of economic
recessions.
Technological Unemployment
This type of unemployment occurs When a particular
job or work is capital intensive or labour intensive, that
is, it requires more capital than labour to do the job,
then more labour will be unemployed. On the other
hand, when a particular job or work is labour intensive,
Types of Unemployment
7. Structural Unemployment
This is another type of involuntary unemployment, which is
caused by a number of factors.
Firstly, some people can be forced out of employment because
the economy experiences structural changes within itself. For
instance, locally owned companies or firms who produce tinnedmackerel can lay off their workers if imported (foreign) tinnedmackerel puts them out of business.
Secondly, a structural change can happen if there is a mismatch
between demand for and supply of labour
Thirdly, changes in tastes and fashions of consumers can also
cause structural changes within the economy.
Finally, structural changes can also be caused by technological
changes. That is the introduction of modern technology can
replace labour in the production of goods and services.
Types of Unemployment
8. Disguised Unemployment
A situation where people are working in an office or
industry but they are not contributing much by way of
productivity because they are seen to be redundant.
9. Demand-deficit Unemployment
This is the typical Keynesian type of unemployment,
where unemployment is caused by deficiency in
aggregate demand. When aggregate demand falls,
unemployment increases, and when aggregate demand
increases, unemployment falls.
Note, aggregate demand refers to total demand in the
economy. That is the total of domestic demand (C + I +
G) and foreign demand (X M), and not the demand of
consumption (C) goods and services only.
Classical-Neoclassical Theory of
Employment
According to the classicals, the labour market should be
left on its own, and forces of supply and demand for
labour should determine the equilibrium wage rate and
the level of employment. The government or trade union
bargaining should not in any way intervene in the labour
market in setting wage rates that it thinks is best for the
market. They believe that wage adjustments set above
the market equilibrium wage rate will cause
unemployment, and the remedy for unemployment is to
cut wage rates to clear the labour market. This will result
in full employment. They believe that employment levels
determined by the demand and supply of labour is the
full employment level in the economy.
INFLATION
Inflation
Inflation is the increase in the overall level of prices,
expressed as a percentage. The opposite of inflation is
deflation, a general decline in the overall price level.
Price Indices are constructed to represent price levels of
goods and services. The price index that captures the
price changes of all goods and services provided in the
economy is the GDP price index or GDP deflator.
The most common price index is the consumer price
index (CPI), a fixed weight index, representative of an
average household consumption basket of goods and
services.
Two Types
Cost-Push Inflation Caused by the pressure
from the cost of production where producer is
faced with a high cost to which it pushes up the
price of its products resulting in general increase
in price levels.
Demand-pull Inflation Caused by the high
demand from the consumers attracts the prices
of certain products to rise causing a pull up of
prices leading to general increase in price levels
Inflation
Insight.
It is possible that people have come to enjoy rice more (new
flavour developed) that they are willing to pay that much.
Yet it is also possible that the quality of rice has remained roughly
the same, and over that time, the money used to buy the rice has
become less valuable.
Inflation
Inflation
Money Supply, Money Demand and
Monetary Equilibrium
The question then is what determines the value
of money.
The answer, as in many things in economics, is
supply and demand (in this case, of money).
Inflation
Next step in developing the Quantity Theory of Money then is to consider the
determinants of money supply and money demand.
Supply of Money
Through open market operations (OMO), the Central Bank (BPNG) can change the
quantity of reserves available to banks, which in turn influences the quantity of money
that the banking system can create. For our purpose now, we will take the supply of
money as a policy variable that the Central Bank can control directly.
Inflation
What ensures the quantity of money the
BPNG supplies equals the quantity of
money people demand? It depends on the
time horizon. In the long run, the overall
level of prices adjusts to the level at which
demand for money equals the supply.
The next slide shows us some facts on
inflation in PNG
Inflation
Quarterly headline inflation, as measured by the
Consumer Price Index (CPI), was 1.2 percent in the
December quarter of 2009, compared to 1.8 percent in
the September quarter. There were increases in all
expenditure groups, except the household equipment
& operations expenditure group, with the largest
increases recorded in the Rents, council charges, fuel
and power and Transport and communication
expenditure groups, which mainly reflected an increase
in fuel prices. By region, all urban areas recorded
increases, except Lae.
The quarterly exclusion-based
and trimmed-mean inflation recorded increases of 0.8
percent and 1.2 percent, respectively, in the December
quarter of 2009, compared to an increase of 0.9 and 1.4
percent, respectively, in the previous quarter.
Inflation
Annual headline inflation was 5.7 percent in the
December quarter of 2009, a drop from 11.2
percent in the December quarter of 2008.
The lower inflation mainly reflected the decline in
international food and fuel prices, low inflation in
PNGs main trading partners and fall in the
prices of seasonal produce.
Inflation
References
H.G.Mannur, Foundation Economics,
1995, Economics Department, University
of Papua New Guinea