Understanding Micro and Macro Economics: Unemployment, Inflation, and Economic Growth

1. Management in the Built EnvironmentLesson 7 – MACROECONOMICS

2. Learning Outcome of this lecture • Understand the difference between Micro and Macro Economics • Factors impacting the Micro & Macro Economics • Unemployment • Inflation • Production and Economic Growth

3. Definition of Micro and Macro economics Microeconomics is the study of individuals, households and firms' behavior in decision making and allocation of resources. It generally applies to markets of goods and services and deals with individual and economic issues. Macroeconomics is the branch of economics that studies the behavior and performance of an economy as a whole. It focuses on the aggregate changes in the economy such as unemployment, growth rate, gross domestic product and inflation.

4. Difference Between Microeconomics & Macroeconomics

7. Video on difference between Micro and Macroeconomics https://youtu.be/wvwgIiP4gjY

8. Goals and Problems of the Macroeconomy Macroeconomics is the study of the economy and brings us such topics as employment, production, unemployment, inflation, economic growth, money and government stabilization policies. Microeconomics on the other hand, focuses on decision making by individual units in the economy. Issues concerning employment, production and prices are the three main areas The major problems of the macroeconomy are concerned with 3 areas: Unemployment Falling production Inflation. They are also the basis of the major goals of the macroeconomy: Full employment, Full production and economic growth Stable prices.

9. Unemployment and full employment • Unemployment means that a resource available for production is not being used. •  There are 3 main sources of unemployment: • Frictional unemployment • Cyclical unemployment • Structural unemployment

10. Frictional unemployment This arises when job seekers voluntarily go out of work for a short period of time while they search for new prospects. Because frictional unemployment always exists, when we say that the economy is at full employment we do not mean that 100% of the labour force is working. Rather, full employment means that everyone in the labour force except the frictionally unemployed is working.

11. Cyclical unemployment Market economies do not produce goods and services at a constant rate over time. Rather, market economies go through upswings and downswings in production called business cycles. In a recession, workers producing those goods and services for which there is a decrease in demand, may be involuntarily laid off. Cyclical unemployment is a matter of serious concern because it is involuntary and continues until the economy breaks out of the recession. Some industries are more sensitive to others to changes in general economic conditions. When a recession is looming, consumers may postpone the purchases or even cancel, purchases of capital goods, such as heavy machinery and buildings, causing sales to decline. Auto, heavy machinery and construction workers are among those susceptible to cyclical unemployment.

12. Structural unemployment Like cyclical unemployment, structural unemployment is involuntary. It occurs when a worker loses a job because that job is no longer a part of the structure of the economy. The good or service the worker produced may no longer be demanded or may now be made in a way that eliminates that particular job. Unlike cyclical unemployment, structural unemployment offers no prospect for rehire in the future. A structurally unemployed worker would have to find a new occupation and this could mean that time and money are needed for retraining, and family and friends are left behind because relocation may be necessary.

13. Structural unemployment Structural unemployment imposes a real hardship on older workers close to retirement. Retraining could be costly and some employers prefer younger workers who might accept a lower salary and offer the potential for longer service. Continued technological advances, efforts by firms to operate more efficiently and foreign competition promise to bring about more structural changes in the economy and to threaten many types of blue-collar and white-collar jobs. Retraining workers and lifelong education have become increasing important to meet changing job requirements in countries around the world.

15. Definition of Unemployment rate in Singapore Long-term unemployed refers to persons who have been unemployed for a specified duration. In Singapore, Long-term Unemployed Persons are persons aged fifteen years and over who have been unemployed for 25 weeks or more (approximately 6 months or more).  This number expressed as a percentage of all unemployed persons is known as the Share of Long-term Unemployed. Long-term Unemployment Rate is defined as the percentage of long-term unemployed persons to the labour force. It tells us the proportion of long-term unemployed out of all persons working or seeking work.  Source : Singapore Ministry of Manpower

17. Summary Table: Singapore Unemployment – Released on 29th April 2019 Unemployment statistics is probably one of the most closely monitored indicators of the labour market. Persons are counted as unemployed, if they are not working, but are actively looking and available for work. The unemployment rate refers to the unemployed as a percentage of the labour force (also known as the economically active population).

18. VIDEO : Who are the unemployed in Singapore ? https://youtu.be/ipEhBLaEjqc

20. Definition of Inflation The rate at which prices increase over time, resulting in a fall in the purchasing value of money Inflation is a quantitative measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over a period of time. ... Often expressed as a percentage, inflation indicates a decrease in the purchasing power of a nation's currency.

21. Inflation in action Inflation occurs when there is an increase in the general level of prices. It does not mean that prices are high, but rather they are increasing. For eg, assume that over the past 2 years the price of Product XYZ has been stable at $100 in Country A and has gone up from $10 to $30 in Country B. Country B, not A, faces a problem with inflation. Inflation refers to price movements, not price levels. An inflation rate of 7% does not mean that all prices are increasing by 7%. Rather, it means that, on the average, prices are going up by that amount. An increase in the general level of prices by 2% or 3% a year does not have a problem. But when prices increase quickly by a large percentage such as 8% or 10% or more per year, inflation becomes a serious issue.

22. Consequences of inflation • When an economy experiences inflation, several problems emerge. Inflation can: • Intensify scarcity when income does not rise as quickly as prices. • Penalize some groups such as savers and lenders receiving low interest rates • Change the value of assets • Be politically and socially destabilizing.

23. Inflation on Income and Interest Rate INCOME With inflation, a given amount of money or income, buys fewer goods and services. Expressed in another way, inflation causes real income to fall. INTEREST RATE Lenders, borrowers and savers refer to the price of money as an interest rate. Interest rates determine how much savers receive for their money and how much borrowers pay for loans, and how much lenders receive for making a loan. Those who savemay be hurt by inflation if the interest rate they receive is less than the rate of inflation.

24. Illustration of inflation on Income and Interest Rate Example: a couple has $100,000 in cash in 1994. They decided to save it for university fees for their future children and so they put the money in a bank, where it earned 3% annual interest. In 2019, when the money was needed, the $100,000 had grown to $209,378. Was this a good financial strategy? To see whether this was a sound financial strategy, we have to see how much better off the couple is in 2019, with the additional earned interest. Between the time they put their money in the bank and 2019, prices have risen. What they could have purchased for $100,000 in 1994, now costs $230,946 by the end of 2019. The interest they earned did not keep up with the rate of inflation. Their money could not purchase what it could have in 1994. On the other hand, borrowers can benefit from low interest rates, especially if inflation occurs.

25. Inflation and Wealth During inflation, many assets appreciate, or increase in value, as prices rise. Thus, the wealthy become wealthier. A home valued at $75,000 in 2004 might well be worth $200,000 today largely as a result of inflation. While inflation often benefits people who have wealth, it penalizes people who are looking to make asset purchases. As prices of real estate rise rapidly, people who want to purchase a home – the largest asset purchase for most people – find it more difficult. Young adults who are trying to purchase that first home, pay a high penalty for inflation.

26. Social and political consequences of inflation If prolonged or severe enough, inflation might lead to changes in leadership and changes in social and political institutions. Inflation is often a major issue in election campaigns as candidates trade blame and offer solutions.

27. Singapore –Inflation, consumer price (annual %) The value for Inflation, consumer prices (annual %) in Singapore was -0.50 as of 2016. As the graph below shows, over the past 55 years, this indicator reached a maximum value of 22,37 in 1974 and a minimum value of -1,84% in 1976. Inflation as measured by the consumer price index reflect the annual percentage change in the cost to the average consumer of acquiring a basket of goods and services that may be fixed or changed at a specified interval Why is Singapore one of the most expensive cities in the world but yet the inflation figures are low ?

28. Production and Economic Growth • Production is the creation of goods and services. • Production is linked to an economy’s standard of living and to its employment levels, it is important to measure the overall output, and to evaluate the capacity to produce.

29. Full production and Economic Growth • An economy achieves the macroeconomic goal of full production when it produces as much as possible with its available resources ie when the economy produces at its maximum capacity. • Production and employment are interrelated. When an economy reaches full employment, it also reaches full production. When resources are unemployed, an economy does not operate at its productive capacity. • The macroeconomic goal of economic growth means thatthe economy’s full production-full employment level of output growsover time ie the economy operates at maximum capacity and that capacity grows over time.

30. Output per capita / Economic Growth Output per Capita Growth by evaluating full production output per capita over time. If output increases but population grows more quickly, output per person decreases Economic Growth An economy’s production levels are based on the number of resources available to it. Thus, economic growth can occur only if more resources are available or resources are used more efficiently.

31. Measure of Production • Gross domestic product, or GDP, is the dollar figure that measures the value of all the finished goods and services produced in an economy in one year. • GDP counts only finished goods and services, which are those ready for sale to their final users. • It is also important to understand that GDP measures goods and services produced, not sold. • We do not count goods involved in secondhand sales, such as a student’s purchase of a 2015 car, because the car was counted in the GDP when it was originally produced.

32. Productivity • The amount of goods and services that an economy produces is influenced by the way in which its resources are used.   • The amount of output produced by an economy’s resources is called productivity. • Productivity measures output per worker. This measure takes labour plus other factors of production into consideration. • Productivity does not measure how hard a person works, but rather the output that results when labour is combined with other inputs. • For example, the product per hour of someone who is building a wall depends not just on the person but also on the equipment that is used. • Productivity increases when the equipment used on the job is technologically advanced and efficient.

33. Calculating real GDP • GDP figures are usually given in 2 forms – money GDP and real GDP. Money GDP measures the value of production in terms of prices at the time of production. • Real GDP is money GDP adjusted to eliminate inflation. It measures actual (real) production and shows how actual production, without price increases, has changed. This may give a better picture of the state of the economy.

34. Singapore GDP • Singapore's gross domestic product (GDP) is the most important measure to evaluate the performance of Singapore's economy (Economic Growth, GDP). • The Singapore Department of Statistics publishes GDP figures on a quarterly basis (GDP News).

35. SG’s Q1 2019 GDP :

36. SUMMARY • The fundamental goals of an economy are full employment, stable prices, and full production and economic growth. The 3 fundamental problems are unemployment, inflation, and falling production. • Full employment occurs when everyone in the labour force except the frictionally unemployed is working. • Inflation refers to an increase in the general level of prices. It reduces the purchasing power of money, hurts some groups in society more than others and may lead to social and political instability.

37. SUMMARY • An economy’s level of production and employment are related. Full production is reached when an economy operates at maximum capacity, or at full employment. Economic growth is an increase in the full employment level of output over time. Economic growth is based on the number and use of resources available to an economy. Technological change and human capital investments are important in achieving growth. • Gross domestic product (GDP) is a dollar figure that measures the value of all finished goods and services produced in an economy in 1 year. • It is important to measure productivity of an economy’s resources. Productivity is measured by output per worker, which combines the results of production from labour and other inputs.