Unit 10 : macroeconomic objectives 1 (low unemployement, low and

stable rate of inflation)

10.1: Low unemployment
Unemployement base:

Unemployement
Refers to people of working age who are actively looking for a job but who are not employed

Calculate it:
- Labor force participation rate (lfpr): nombre of people who are employed+ people
seeking work (fraction of popu:16-64)

N: total unemployement person in eco that are seeking

%:Unemployement rate: (number of unemployed/labour force)*100

Difficulties (not consider):

- - - hapiness popu ( suiside)
- Discouraged worker: bcs bad experience and past
- Underemployement: people that are seeking and do not work full time but can do
half period job that are not counted (geek eco perso)
- Hidden unemployement: there are people that are not seeking (for many reason:
familly responsablity, disablility,pursuing ed, ect…) and are not counted as part of the
labor force
- Informal eco: au black, handing pay (street vending, domestic work…)
- Misclassifiaction: error in data collection or diff method to survey (humain mistacs)
- Seasonal employement: seasonal flucturations in employement( ski station, tourism,
agriculture)
- Voluntary unemployement: some pers choose to remain unemployed (preference)
Costs:

Eco cost:
Eco cost of unemployement: overall impact: + unemployed= -consumer spending =- demand
=- production = slower eco growth
Loss of real output: produce less than they can normally (bcs unemployed +++)
Loss of income for unemployed workers: not have income for work (even id=f they have aid)
worse off financially
A loss of tax revenue for gov: not income = not pay income tax= less tax gov
Costs to the gov of unemployement benefits: pay des aides pour les gens au chomage
Costs to the gov of dealing with social prblm resulting from unemployement
Larger budget deficit or smaller budget surplus: occurs when: deficit budget: tax less than
expenditures
More unequal distribution of income: unemployed= poorere compare to emplyed= remain
income level
Unemployed people may have difficulties finding work in the future: not find work easy bcp
out of work for a long time

Personal and social cost

Personal prblm : loss of income, people must borrow to survive= -self esteem, = ++ stresse,
care prblm, familly tension, suscide…
Greater social prblm: high rates of unemployement unqually distributed,+ poverty = + crime,
violence, drug, homelessness
Types and causes of unemployement

Structural unemployement
Occurs as a result of changes in demand for particular types of labour skills, changes in the
geographucal location of industries and therefore jobs, and labour maket

 Changes in demand for particular labour skills

Decrease in demand for a specific skills or occupations, could be: tech innovation,
automation, changes in the composition of industries or workers with outdated skills

 Changes in the geografical location of jobs

Large firm or industry moves its physical location from one region to another, fall in demand
for labour in one region and increase in the new region.

D decrease bcs more machinerie so become D2 so Q2 if

the supply also decrease so new equilibrium with fall in
wages or no decrease in supply so demand dosen’t match
and unemployement ++ bue wage stay the same. Could be
same at the opposite if demand is too high compare to the
demand if you change the location

 Labour market rigidties: factors preventing the forces of supply and demand from
operating in the labour market, include:

- Minimum wage
- Labour union activities and wage bargaining with employers
- Employment protection laws (pay for fire workers)
- Generous unemployement benefits

Frictional unemployement
Between jobs (need to leave btw re etre embauché, in search of better job, also part of
natural unemployement but not a serius brblm take in consideration

Seasonal unemployment
Demand for labour changes on a seasonal basis bacause pd variations in needs

 Structural, frictional and seasonal unemployment: the natural rate od unemployment

Natural rate of unemployement= structural+structural+frictional +seasonal
unemployement; it’s the level of unemployement that persists even when the eco is
operating at its potential output
 Cyclical (demand-deficient) unemployment
Deficiency in demand, eco produce less than the potential output
 Yp=eco: producing potential output: 0 cyclical
unemployement (occurs during deflationary, eco
produce less than pootentiel output; less demand)

 The four types of unemployement in relation to the AD-AS model

10.2: Low and stable rate of inflation

Inflation, disinflation and deflation

Inflation: sustaine increase in the genral price level on goods and services in the entire eco
Deflation: sustaine decrease In the general price level..
Disinflation: inflation at a lower rate (inflation but slow): refers to the decrease in the rate of
inflation

Measuring inflation /deflation

Consumer price index(CPI): measure of the cost of living for the typical houshold and
compares the value of a basket of goods and services in one year with the value of the same
basket in a base year. (ex: bouteille de lait 5$ y a 3 ans et ajrd 6$)
Claculate (for a year): value of basket in a specific year/value of same basker in base year
(last year) *100

Constructing a weighted price index:

1. Find the year and then base year
2. Formula
3. See if increase each year inflation, if decrease each year deflation

CPI to calculate the rate of inflation

Percentage change in the price index or change in the value of the basket
(Final value CIP-initial value CIP)/ initial value CPI *100

Calculating real income

Real income= nominal income/CIP *100
Prblm with CPI
 different rates of inflation for diff income groups: change in average prices but diff
pers have diff consumption depending on their income levels
 different rates of inflation depending on regional or cultural factors: yaya prefer le
indan food et donc conomera + de food indien et aura une inflation peut etre diff
 changes in consumption patterns due to consumer substitutions when relative price
change: make substitution, buying more units of cheaper goods (deflation) and less
of the more expensive (inflation)
 change in consumption patterns due to increasing use of discount stores and sales:
can’t calculate cip during discount
 change in consumption patterns due to the introduction of new products: can
influence consumer preferenes and spending habits, if cip fails to account for these
changes, it may not accurately reflect chnages in the cost of living
 changes in product quality
 international compatisons:
 comparability over time:

the core rate of inflation: certaine good have highly volatile price (change currently quickly
like oil)

INFLATION

causes of inflation
demand pull inflation
caused by increases in ad, good position

- excess of ad over as at the full employement level

of output and is caused by an increase in ad(shift)
- demand and so price increase
Cost-push inflation
Cost of production increas, leading producers to increase their prices to maintain their profit
margins. +cost=+price
-
fall in AS bcs increase In wages or price of inputs.
- +input=-supply
- (shift to the left bcs less production cause
by increase in wages demanded by
employees so increase in input so increase
their price with high demand also but just
less production so more scarce)(exemple
des fermier qui a perdu la moitier de son
champs a cause d’un desastre naturel)
( prendre en compte que ca arrive a toute
les entreprise c’est pour ca que y’ a pas de
changement dans la demand car il augmente tous leur prix avec tout les
wages qui augment)

Costs of high rate of inflation

Hight inflation affect popu and eco
The relationship btw inflation purchasing power and nominal and real income
Power of your income decrease (what this money can buy (you can buy less quantity with
the same amount)) bcs inflation rise but not your income.
Ex: tu a 60$, un t shirt coute 20$ donc tu peux en acheter 3 mais si y’a l’inflation et qu’il
coute 30$ mtn tu peux en acheter 2 donc le power de ton income il decrease.
Costs of inflation
 Redistribution effects
Inflation redistribution income away from certain groups in the economy and towars other
groups.
- Fixed incomes or wages (not following inflation)
- People who receive incomes or wages that increase less rapidly than the rate of
inflation
- Holders of cahs: value of price decreses as price rises, less power
- Savers: inflatoin erodes the real value of saving over time
- Lenders(creditors): they receive repayments in money that’s worth less than when
the loan was made
 - Borrowers (debtors): have to repay less, same amount but diff power, so reduce the
real value of their debt
- Payers of fixed incomes or wages: if fixed obligations, become cheaper over time
- Payers of income or wages that increase less rapidly than the rate of inflation

 Uncertainty
inablility to predicr what inflation will be(people can’t predict futur changes in purchasing
power)
 effects on saving
savers lose if they receive no interest on their saving or if the rate of interest is lower than
the rate of inflation
 international(export)competitiveness
inflation can reduce country’s competitiveness by increasing the prices of its exports relative
to those of other countries, leading to decrease export bcs less demand, also cheaper for
popu from country with inflation (call: imbalance)
 effects on eco growth
inflaition can hinder eco growth by decrease consumer purchasing power, increase
production costs, and discouraging investment, reducing overall eco activity
 effects on resource allocation
inflation distorts resource allocation by encouraging speculative behavior, diverting
resources away from productive investments and favoring short term gains over long term
growth
 unequal distribution of social and personal costs
income doesn’t adapte at same time

hyperinflation
very high rate of inflation, +5% (-2% it’s very low(so have to be btw5 and 2)), +50% per
month, very high supply of money, neg consequences: inflationary spiral (inflation sets In
motion a series of events)
_ Appropriate rate of inflation? : gov prefer low and stable rate of inflation, not 0 because
can quickly become deflation and have more neg consequence, gov like 2-3%

DEFLATION
Causes of deflation
Why occurs rarely ?: the price of a particular good or services may fall over time, but it Is
rare to see the general price level of eco fall: - wages of workers do not ordinarily fall,
compani will not decrease their price to not have neg impact on profit, - larger oligopolistic
firms may fear price way: if one firms lower price other will decrease more more so will be
cut off, avoid to loweer their price

causes of deflation
distinguish two causes: -AD or +AS

-AD, new GDP lower, new price lower

+AS, new Y2 higher, new price lower

Costs of deflation
 redistribution effects: inflation price, +price = for fixed income, holders, savers
+holding but =debtors and payers loose on profit
 increase in the real value of debt: + power of money and debt
 uncertainty: create for firms, can’t enticipate
 deferred consumption, high and increasing cyclical unemployement: risk of a
deflationary spiral
deferred consumption:
consumers postpone spending (consumer purchase more when they see falling
prices, but are also discouraged borrowing by both consumers and firms bcs the real
value of debt increase as the price level fall)
 deflationary spiral:

 risk of bankrupticies and a financial crisis: +value of debt

 inefficient resource allocation : resource masallocation
 policy ineffectiveness

summing up deflation
high cyclical unemployement, with the risks of a deflationary spiral and a financial crisis,
reveal the special serious dangers of deflation
a positive effect of deflation_ increase international competitivness.

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Downturn: recetionary gap, down, less than potential output
Upturn: inflation, up, more than potential output

Kenesian : gov intervention

Classic model: less gov intervention
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10.3: Exploring the relationship btw unemployement and inflation

The relative costs of unemployment vs inflation

the misery index: eco well being, with combine unemployement and inflation rate
formula: unemeployement rate+inflation rate
++misery index= poor rco conditions
--misedy index= good eco conditions
The conflict btw low unemployement and low inflation

The trade-off btw unemployement and inflation (HL only)

PHILIPS CURVE
The short-run

- negative relationship betw unemployement and nominal wages (what he found first)
- negative relationship between unemployement and inflation, (contrast si un monte
l’autre descend ) (what people conclude with that)
- e point can’t be possible from phi theaory

- every eco faces a trade-off btw inflation and unemployement

shifting:
 -breakdown: bcs phi relationship inverse,
SRAS move bcs external factor (destruction, manufacture etc..) but AD doesn’t
- fixe AD so no low unemployemnt and low inflation. If price (inflation) increase, real
gdp (unemployement) decrease and inverse bcs opposite from phi theory

The long-run

- bcs vertical: no trade off btw inflation and unemployement; instead, the eco tends
towards a “natural rate of unemployement”, regardless of the inflation rate.