IB Economics/Macroeconomics/Unemployment and Inflation

Unemployment: the state of being deprived of a job, however actively looking for one and willing to work.

Full employment and Underemployment: A society is almost never fully employed, but one of the goals is to reach full employment. Full employment has two conditions: Everyone who wants to work is working, and the rate of inflation is stable. When the economy is at full employment, there is no cyclical unemployment but still frictional and structural unemployment. This is defined as natural unemployment.

You are only classified as unemployed if you go and register with the government as available for work.
The labor force is defined as those of 16 years of age or older who are employed plus all those who are unemployed seeking work.

Unemployment rate: the number of people with no work expressed as % of the labour force

Cost of unemployment: There are numerous costs of unemployment. For one thing, demand-side unemployment may be a slippery slope. For another thing, there are social costs such as high crime rates. There is a loss in potential output. There is political unrest brought by high levels of unemployment.

Cost To Individual

Cost To Society

areas with high unemployment can see increased crime, vandalism and gang activity.

Cost To The Economy

the average unemployed person costs the British government 8000 pounds a year
loss of output
diminished tax base
increased transfer payments
increased taxes, increased burden
increased difficulty for labor market entrants - employers have more choices, they favor experienced workers
unemployed workers lose their skills

Advantages: spare labour-- could be attractive for investors, wages wont be high - they can pay people less as they know others are available.

Classical Unemployment: your wage is too high, the price of the good goes up and no one buys it so the firm moves to a cheaper country
Structural: Unemployment caused by the demand for your product falling e.g. coal mining, we use oil now. Some skills are no longer needed e.g. you are a trained draughtsman but we use computers now
Frictional: This is the desirable process of finding work, employers looking for the right worker. In order to help accelerate this process, governments assist people looking for jobs with programs and qualification surveys.
Seasonal: Unemployment caused by changes in seasons.e.g a ski resort is only open a few months a year
Cyclical/Demand-deficient: Unemployment resulting from business recessions that occur when total demand is insufficient to create full employment.
Regional Unemployment: if there is a coal mining area which closes down there will be large unemployment in that area
Voluntary Unemployment: you are unemployed by choice, you get money from the government anyway
real wage: is a form of dis-equilibrium unemployment that occurs when real wages for jobs are forced above the market clearing level. Traditionally, trade unions and wages councils are seen as the institutions causing this type of unemployment.

boost aggregate demand e.g. increase gov. spending, increase spending on public works (create more jobs), reduce taxes
interest rates reduced: more investment, more money borrowed, more money spend, more jobs
Supply side economics: train the workers make them more skilful. Also reduce taxes to increase working incentives
Lower the retirement ages/ raise school leaving age: it reduces unemployment however these days is unlikely
Conscription: the army counts as employment

→Frictional Unemployment: Desirable, reduce state benefits to unemployment

→Structural unemployment: Market oriented approach, interventionist approach

→Seasonal Unemployment: Rural urban migration

→Classical Unemployment: Change social legislation

→Demand deficient unemployment: fiscal monetary policy

Inflation is defined as a sustained rise in the average price level and a fall in the value of money.
Deflation is defined as a sustained fall in the average price level and a rise in the value of money.

Inflation may harm some individuals and benefit others. Individuals with liquid assets which are not collecting interest may be harmed. Individuals with fixed assets such as paintings, housing, etc. will benefit.
creates uncertainty
exports become less competitive
efficiency of the price mechanism is lost because inflation distorts the signaling power relative price changes. A consumer of firm witnessing the price of good X rising cannot be sure that it is now relatively more expensive as she cannot know whether the prices of other similar good have increased by the same percentage. This confuses the decisions of consumers and firms.
poor people are more vulnerable to inflation. They have fewer choices to hedge against inflation and, in addition, they cannot borrow money.
if actual inflation proves higher than expected inflation, then borrowers gain at the expense of lenders. The money they will be paying back will be worth less than expected.

consumers delay purchases since they come to expect further price decreases. Aggregate demand decreases due to fall in consumption, decreasing more average price level.
The real value of outstanding debt increases, therefore less consumption.
Firms are forced to cut prices to win over customers, squeezing their profit margins and forcing them to cut down on costs. Wages fall and layoffs follow so AD shifts further to left.
Since the real value of indebtedness increase some banks cannot service their loans. Banks accumulate loans that are not repaid and thus the risk of a banking crisis.
Monetary policies are unsuccessful because interest rates cannot be under zero
Expansionary fiscal policy may also prove ineffective as households may prefer to save and postpone spending.

exports become more competitive abroad and AD may increase as a result of a rise in net exports.

cost push: Inflation that occurs when there is an increase in the cost of production.
demand pull: Inflation that occurs when a sector of the economy increases the demand for goods and services.
excess monetary growth: The money supply increases, and prices increase.

(HL)

Methods of measuring inflation
Problems of the methods of measuring inflation
Phillips Curve
Short-run
Long-run
Natural rate of unemployment
Non-Accelerating Rate of Unemployment (NAIRU) - excluded from IB syllabus in 2003.