Azie Eco211 Chap6 Inflation and Unemplymnt 2008

Lecturer: Pn. Azizah Isa*Chapter 6Inflation & Unemployment

Lecturer: Pn. Azizah Isa

Lecturer: Pn. Azizah Isa*BUSINESS CYCLEAggregate Econ. Activity

Boom/InflationTrough/Depression/Slump/UnemploymentPotential Growth PathActual Growth Pathyears(% in real GDP)


Lecturer: Pn. Azizah Isa*NATIONAL INCOME EQUILIBRIUMReal Output (National Income) Expenditure(RM)Y0 = C+I+G+(X-M)Y1=C+I+G+(X-M)Y=E45Yfe=C+I+G+(X-M)Y0Yfe

Y1Inflationary GapDeflationary Gape0e1ef


Lecturer: Pn. Azizah Isa*KEYNESIAN EQUILIBRIUM NATIONAL INCOMEKeynesian assume that equilibrium output can be reached not necessarily at the full-employment. The equilibrium can be less or more than the full-employment equilibrium, causing the economy with the inflationary or deflationary-gap.


Lecturer: Pn. Azizah Isa*RELATIONSHIP OF INFLATION AND BOOMING ECONOMYThe higher the growth of an economy, the higher is the inflation rate.Inflation is related to the development of an economy.


Lecturer: Pn. Azizah Isa*Definition of Inflationas a criteria of a continuous increase in the general price level of all goods in an economy for a specific time period.

as measured by the increased in CPI.


Lecturer: Pn. Azizah Isa*Measurement Of InflationThe Rate Of Inflation: is measured by the rate of increase of price index, CPI. Inflation Rate = (CPI1 CPI0) X 100 CPI0

Negative Inflation is Deflation


Lecturer: Pn. Azizah Isa*INFLATION IN MALAYSIA

Table 8.1: The Consumer Price Index (2000 = 100) and Inflation Rate


Lecturer: Pn. Azizah Isa*Inflation as shown by the % change in CPI


Lecturer: Pn. Azizah Isa*TYPES/ CAUSES OF INFLATION1. DEMAND-PULL INFLATION2. COST-PUSH INFLATION


Lecturer: Pn. Azizah Isa*1. Demand-Pull InflationTOO MUCH MONEY CHASING FOR TOO FEW GOODS Fisher

AD > AS at full-employment, causes to shortage of goods and price hike.


Lecturer: Pn. Azizah Isa*Fishers Equation:

MV = PT where, M = money supply V = velocity of money in circulation P = general price level T = total transaction of outputs V and T are assumed constant; therefore, Money Supply, Prices (inflation)


Lecturer: Pn. Azizah Isa*Demand-pull Inflation


General AS

Price

P1

AD1

P0

AD0

real output

YFE

Diagram: Demand Pull Inflation as shown by the change in the

General Prices caused by an increase in The Aggregate

Demand.

Lecturer: Pn. Azizah Isa*2. Cost-Push Inflationis caused by the high rise in the cost of production. The cost increases can be caused by various factors: higher wage rate. larger profit mark-up. expensive raw materials domestically or from imported sources. increase prices of intermediate (capital) goods. higher taxes.


Lecturer: Pn. Azizah Isa*Cost-Push Inflation


General

Price Level

AS1 AS0

P1

P0

AD

Q1 Q0 real output

Diagram: Cost-push Inflation

Lecturer: Pn. Azizah Isa*Effects of Inflation1. On the individuals as gainers and losers:Gainers are:Debtors: pay back loan, with less value of money.Shareholders: higher dividendProperty owners: higher prices of assets owned.Businessmen: making larger profit as prices for their goods produced and sold is higher.


Lecturer: Pn. Azizah Isa*Effects of InflationLosers are:Creditors: received less value for loans given out earlier.Savers: lower value of money saved.Fixed income earners: lower purchasing value of money. Pensioners: value of money falls.


Lecturer: Pn. Azizah Isa*Other Effects of Inflation

may cause also to: Production of goods increases Savings depreciated in value (lower purchasing power of money) Deficit in Balance of Trade (domestic price increases and become less competitive in the international market)


Lecturer: Pn. Azizah Isa*To curb the problem of inflationUsing: 1) Monetary Policy 2) Fiscal Policy


Lecturer: Pn. Azizah Isa* To reduce Inflation: with Surplus Budgetor Tight Monetary Policy Since inflation is related to the booming of an economy, therefore to reduce inflation, economic growth has to be slowed down.

Thus, reduces the aggregate demand and closed-down the inflationary-gap while the real output (Y) falls.


Lecturer: Pn. Azizah Isa*


Keynesian AD-AS Diagram

General Prices

AS

AD1

AD2

Real GDP

P2

P1

G or I

Effect of Surplus Budget (G falls) or Tight Monetary (increased interest rate) policies to reduce inflation

NATIONAL INCOME EQUILIBRIUM

Real Output (National Income)

Expenditure

(RM)

Y0 = C+I+G+(X-M)

Y1=C+I+G+(X-M)

Y=E

45

Yfe=C+I+G+(X-M)

Y0

Yfe

Y1

Inflationary Gap

Deflationary Gap

e0

e1

ef

-GDP Gap


Lecturer: Pn. Azizah Isa*Unemployment in MalaysiaThe unemployment rate is lowest in the year 1997 but increase again in 1998 that is from 2.7% to 3.2% due the slowdown of the economy caused by the Asian Financial Crisis whereby our economy is hit by the large depreciation of Ringgit Malaysia (RM) relative to American Dollar (US$)[1]

[1 ] Economic Report 1999/2000. Ministry of Finance Malaysia, 1999.


Lecturer: Pn. Azizah Isa*UNEMPLOYMENT IN MALAYSIASource: Economic Planning Unit and Ministry of Human Resources.

YEARUNEMPLOYMENT RATE (%)19972.719983.219993.420003.120013.6200220033.53.6200420053.53.5


Lecturer: Pn. Azizah Isa*Unemployment with Business CycleUnemployment rate is high during recession.

The negative impact of the slowdown of the economic growth during recession may: less job opportunities. bankruptcies, closing down factories, delay of constructing new plants etc. thus, may reduced the number of economic activities in the economy.



Natural Rate of Unemployment The natural rate of unemployment is the level of voluntary unemployment when the labour market is in equilibrium.

Natural rate of unemployment is normally rated as 4% . Full-employment is related to this natural rate of unemployment, which includes(+) the frictional and seasonal unemployment.

It is not easy to omit this natural rate of unemployment in an economy. Therefore an economy at this natural rate of unemployment is said to be at full-employment.


Lecturer: Pn. Azizah Isa*Actual Rate and Natural Rateof UnemploymentIf the actual rate of unemployment is more than the natural rate of unemployment, than it is said that the economy is with the real problem of unemployment.



Who are considered as unemployed?


Lecturer: Pn. Azizah Isa*DEFINITIONSUNEMPLOYMENT: are people who are considered under the labour force but being unemployed (jobless).


Lecturer: Pn. Azizah Isa*Who are included in the Labour Force?


Lecturer: Pn. Azizah Isa*LABOUR FORCE: are people of age group 15 64 years and are willing and able to work either has been holding a job or yet searching for a job. Those that are not considered under the labour force includes:School children and university students although aged more than 15.Sick bed, old aged and housewives .


Lecturer: Pn. Azizah Isa*LABOUR FORCE

(willing and able to work of age 15 - 64yrs. either working or jobless)

= no. of employed + no. of unemployed


Lecturer: Pn. Azizah Isa*Measurement of UnemploymentUnemployment Rate = no. of unemployed X 100% labour forceUnemployed people are jobless labour force


Lecturer: Pn. Azizah Isa*LABOUR FORCE PARTICIPATION RATE

= Labour Force X 100% Adult Population


Lecturer: Pn. Azizah Isa*TOTAL POPULATION CONSTITUTES ALL OF THE: - CHILDREN - ADULT - OLD AGED - HOUSEWIVES(that are not considered under the labour force).Therefore, for calculating the rate of participation make sure that only adult population is considered into the measurement.


Lecturer: Pn. Azizah Isa*For example:Data collected from the year 1999 given as: 125.6 million employed people and 4.5 million was unemployed and the adult population was 205.8 million.

Therefore:Labour Force = 125.6 + 4.5 = 130.1 millionUnemployment rate = ( 4.5 / 130.1 ) x 100 = 3.6% Labour Force Participation rate = ( 130.1 /205.8) x 100 = 63.2%


Lecturer: Pn. Azizah Isa*EXERCISE 1:


. The table below shows the total labor force and number of employed

people for country Semasa.

Year

Total labor force

( 000)

Employed

( 000)

2004

85,400

82,100

2005

96,750

86,500

A. Define labour force

B. Calculate the unemployment rate for the year

2004 and 2005

Lecturer: Pn. Azizah Isa*TYPES OF UNEMPLOYMENTFRICTIONAL UNEMPLOYMENTSTRUCTURAL UNEMPLOYMENTCYCLICAL UNEMPLOYMENTDISGUISED UNEMPLOYMENT/ HIDDEN UNEMPLOYMENT.SEASONAL UNEMPLOYMENT


Lecturer: Pn. Azizah Isa*STRUCTURAL UNEMPLOYMENTChanges in the structure or technology of the economy may lead to reduction in the number of job opportunities.Structural changes from labour intensive to capital intensive (furthermore with high technology use of robotics and highly sophisticated machineries).Structural changes from agricultural base to industrial sectors those lack of skills and less educated were ignored.


Lecturer: Pn. Azizah Isa*CYCLICAL UNEMPLOYMENTCaused by the downturn of the business cycle - economy moves towards recession (kemelesetan).Disruption of the economic growth causes the slowdown in all sectors of the economy, alas reduction in job opportunities.


Lecturer: Pn. Azizah Isa*DISGUISED UNEMPLOYMENT/ HIDDEN UNEMPLOYMENT.

where the industries are overstuffed with unnecessary additional workers sharing jobs available and does not contribute to extra productivity.in agriculture sectorsin cottage/rural industries.


Lecturer: Pn. Azizah Isa*Impact of Unemployment can be a cost to an economy.

Unemployment can affect:the individuals: distressed, lose self esteem, mentally disturbed.the family/society: lost family income, domestic violence, family splitting.the economy: create social and economic cost. curing social problems, training courses, special benefits, capital incentives. A cost to the economy cos economy is not at the stage of fully utilising the resources (underutilization).


Lecturer: Pn. Azizah Isa*POLICIES TO CURE Government measures:FISCAL POLICYMONETARY POLICY


Lecturer: Pn. Azizah Isa*NATIONAL INCOME EQUILIBRIUMReal Output (National Income) Expenditure(RM)Y0 = C+I+G+(X-M)Y1=C+I+G+(X-M)Y=E45Yfe=C+I+G+(X-M)Y0Yfe

Y1Inflationary GapDeflationary Gape0e1ef


Lecturer: Pn. Azizah Isa*FISCAL POLICY 1. CONTRACTIONARY FISCAL POLICY (surplus budget) G T < 0 G < T2. EXPANSIONARY FISCAL POLICY (deficit budget) G T > 0 G > T 3. BALANCED BUDGET POLICY G T = 0 G = T Fiscal Policy attempts to regulate the economy by varying the level of government spending and the rate of taxation.


Lecturer: Pn. Azizah Isa*To reduce Unemployment/recession: Expansionary Fiscal Policy / Deficit Budget When government collects less tax revenue but spends more on expenditure, G > T. Therefore, it cause to a larger effects on real output. Deficit Budget is implemented(dilaksanakan) to raise-up the economic activities.


Lecturer: Pn. Azizah Isa* Balanced Budget Policy When government expenditure is just equivalent to the tax revenue collection (G = T)

A balanced budget is also used to increase real output and economic growth. Its multiplier is equivalent to one (1). Y = 1 . GThus, the resulting increase in the equilibrium Y is exactly equal to the increase in G or T itself. Y = G = T


Lecturer: Pn. Azizah Isa*MONETARY POLICYTo cure recession/unemployment: Ease / Expansionary monetary policy.

To reduce inflation: Tight / Contractionary monetary policy.


Lecturer: Pn. Azizah Isa*Keynesian AD-AS DiagramGeneral PricesASAD1AD2Real GDPP2P1I, GEffect of Surplus Budget OR Tight Monetary Policy to reduce inflation


Lecturer: Pn. Azizah Isa*THANK YOUFOR LEND ME YOUR EARS.


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Azie Eco211 Chap6 Inflation and Unemplymnt 2008