1 14.Unemployment and Changes in the General Price Level

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14. Unemployment and Changes in the

General Price Level

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Chapter 14 : main menu

14.1 Unemployment

Concept Explorer 14.1

Theory in Life 14.1

Progress Checkpoint 1

14.2 Changes in the general price level




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Change in unemployment rate Every year, a lot of university graduates enter the labour mark

et and search for jobs. How will the unemployment rate be affected?

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When the graduates enter the labour market and search for jobs, total labour force increase. This may also affect the number of unemployed persons. Hence the change in unemployment rate is uncertain.

If all graduates can (cannot) successfully find jobs, the unemployment rate will decrease (increase). If some graduates can successfully find jobs, the change in unemployment rate depends on the following:


If then

% increase in unemployed

persons

>

% increase in total labour force,

unemployment rate will

increase.

=remain constant.

< decrease.

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Theory in Life 14.1

Labour force, the employed and the unemployed Are the following people in the labour force? If yes, are they e

mployed or unemployed?

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Theory in Life 14.1 Mabel, aged 27, who lost her job 3 months ago and has been searching for jobs for 2 weeks.

She is included in the labour force as an unemployed person, because she does not work for a payment but looks for a job.

Carmen, aged 19, who has entered HKUST to study a 3-year full-time global business studies program.

She is not included in the labour force, as she does not work for a payment nor search for a job.

Sonia Kass, aged 24, works as a full-time native English teacher in a local secondary school.

She is included in the labour force as an employed person, as she works for a payment.

Jason, aged 55, who works as a volunteer in a social service center after retirement.

He is not included in the labour force, as he is does not work for a payment nor search for a job.

Ah Chung, a construction worker aged 42, only works for an average of 5 hours a day. He wants to work more.

He is included in the labour force as an employed person, as he works for a payment.

He is also regarded as an underemployed person, as he wants to work more.

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Theory in Life 14.1

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1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003Year

%

Unemployment rate

Underemployment rate

Fig 14.1 Unemployment and underemployment rate in Hong Kong.(Source : Hong Kong Census and Statistics Department)

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Q14.1 For each of the following, determine whether the person is in the labour force. If yes, also determine whether th

e person is employed or unemployed.

(a) Laymen, aged 20, who is told by his employer to have a one-week unpaid holiday due to the outbreak of

SARS.

(b) Siu Ming, aged 14, who cannot find a job after completing Form 3.

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(a) He is included in the labour force as an employed person, as he has a formal job attachment but does not search for a job.

(b) He is not included in the labour force, as he is under 15.


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Q14.2 How will the unemployment rate be affected if

(a) some workers quit their jobs and become full-time students?

(b) some workers are fired by the PCCW?


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(a) As total labour force decreases but the number of unemployed persons remains unchanged, the unemployment rate increases.

(b) As total labour force remains unchanged but the number of unemployed persons increases, the unemployment r

ate increases.


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Q14.3 State and explain whether each of the following case is possible :

(a) An increase in the number of unemployed persons

and total labour force leads to an decrease in unemployment rate.

(b) A decrease in the number of unemployed persons and an increase in total labour force lead to an increase in

unemployment rate.


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(a) It is possible if the percentage increase in the number of unemployed persons is less than that of total labour force.

(b) It is not possible. The unemployment rate must decreas

e.


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The differences between CPIs and implicit price deflator of GDP

Why are different index series used? What are their differences?

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Consumer price indices Implicit price deflator of GDP

Coverage of output As CPIs cover the prices of selected consumers goods only, its coverage is limited.

As implicit GDP deflator covers the prices of all output included in GDP, its coverage is larger.

Reflecting cost of living The cost of living depends on prices of consumer goods. As CPIs focus on the prices of consumer goods, it is a better measure of the cost of living.

As implicit GDP deflator covers the prices of all output included in GDP, it is not a good measure of the cost of living.

Table 14.2 The differences between CPIs and implicit price deflator of GDP.

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Consumer price indices Implicit price deflator of GDP

Prices of imports Prices of imports are included in CPIs. Changes in import prices can be reflected.

Prices of imports are excluded in GDP. Changes in import prices cannot be reflected.

Consumption pattern and weight assignment

The consumption pattern of household may change over time. Therefore the baskets of goods chosen and the weights assigned in CPIs need to be adjusted regularly.

As implicit GDP deflator covers the prices of all output included in GDP, changing consumption pattern does not affect its validity in measuring price changes.


Table 14.2 The differences between CPIs and implicit price deflator of GDP.

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Therefore, CPIs perform better in reflecting changes in the cost of living, while implicit GDP deflator performs better in reflecting overall changes in the prices of all output.

Reminder :

A good may be more expenditure due to a higher quality. As CPIs and implicit GDP deflator only reflect price changes, they do not reflect possible quality improvement.


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Inflation Vs deflation How to tell whether there is inflation or deflation from the rate

of change of CPIs or implicit GDP deflator?


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It is quite easy to confuse inflation with deflation. The following table shows some more of their differences:

Inflation Deflation

1. General price level continuously rising continuously falling

2. Value of CPI & implicit

GDP deflator rising falling

3. Growth rate of CPI and

implicit GDP deflator positive positive

Table 14.3 The differences between inflation and deflation.

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Therefore,

If the rate of change of CPI or implicit GDP deflator is

continuously there is

(1) positive and rising, inflation.

(2) positive but constant, inflation.

(3) positive and falling, inflation (it is also called disinflation).

(4) zero, no inflation nor deflation.

(5) negative and rising, deflation.

(6) negative but constant, deflation.

(7) negative and falling, deflation.

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Q14.4 Given the following data :

2000 2001 2002 2003 2004

Composite CPI 100 107 115 118 113

Implicit price deflator of GDP

100 108 112 120 116

(a) Using the composite CPI, calculate the rate of price change in the period 2002 – 2003.

(b) Using the implicit price deflator of GDP, calculate the rate of price change in the period 2003 – 2004.

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(a) Rate of price change in 2002 - 2003 measured by composite CPI

=118 - 115

115x 100%

= +2.61%

(b) Rate of price change in 2003 - 2004 measured by implicit price deflator of GDP

= -3.33%

=116 - 120

120x 100%

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Q14.5 Mr. Chan is the owner of an apartment. Explain whether he would gain or lose in times of deflation if :

(a) his apartment has been let at a fixed monthly rent for the coming year, and

(b) the interest rate of his housing mortgage loan is adjusted according to the deflation rate.

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(a) He would gain because the purchasing power or real value of the fixed monthly rent he receives will increase in times of deflation.

(b) He would have no gain or loss because the purchasing power or real value of the interest he pays will remain unchanged in times of deflation.

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Q14.6 “In the past four years, the GDP at current market prices has been growing slower than the GDP at constant market prices.”

(a) What economic phenomenon is implied above?

(b) Provide a definition for the phenomenon you answered in (a)

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(a) Deflation. (b) It refers to a continuous decrease in the general price level.

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End of Chapter 14

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1 14.Unemployment and Changes in the General Price Level