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Chapter 6

Chapter 6. Inflation & Unemployment. BUSINESS CYCLE. Aggregate Econ. Activity. (%  in real GDP). Boom/Inflation. Potential Growth Path. Actual Growth Path. Trough/Depression/Slump/Unemployment. years. NATIONAL INCOME EQUILIBRIUM. Y=E. Expenditure. Y 1 =C+I+G+(X-M). (RM). e 1.

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Chapter 6

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

  2. BUSINESS CYCLE Aggregate Econ. Activity (%  in real GDP) Boom/Inflation Potential Growth Path Actual Growth Path Trough/Depression/Slump/Unemployment years Lecturer: Pn. Azizah Isa

  3. NATIONAL INCOME EQUILIBRIUM Y=E Expenditure Y1=C+I+G+(X-M) (RM) e1  Yfe=C+I+G+(X-M) Inflationary Gap Y0 = C+I+G+(X-M) ef  Deflationary Gap e0 45° Real Output (National Income) Y0 Yfe Y1 Lecturer: Pn. Azizah Isa

  4. KEYNESIAN EQUILIBRIUM NATIONAL INCOME • Keynesian 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 inflationaryor deflationary-gap. Lecturer: Pn. Azizah Isa

  5. RELATIONSHIP OF INFLATION AND BOOMING ECONOMY • The higher the growth of an economy, the higher is the inflation rate. • Inflation is related to thedevelopment of an economy. Lecturer: Pn. Azizah Isa

  6. Definition of Inflation • as a criteria of a continuous increase in the general price levelof all goods in an economy for a specific time period. • as measured by the increased in CPI. Lecturer: Pn. Azizah Isa

  7. Measurement Of Inflation • The 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

  8. Year Consumer Price Index (CPI) Annual Change (%) INFLATION IN MALAYSIA 1998 95.8 5.3 1999 98.5 2.8 2000 100.0 1.5 2001 101.4 1.4 2002 103.2 1.8 2003 104.4 1.2 2004 105.9 1.4 2005 108.9 2.8 Table 8.1: The Consumer Price Index (2000 = 100) and Inflation Rate Lecturer: Pn. Azizah Isa

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

  10. TYPES/ CAUSES OF INFLATION • 1. DEMAND-PULL INFLATION • 2. COST-PUSH INFLATION Lecturer: Pn. Azizah Isa

  11. 1. Demand-Pull Inflation • ‘TOO 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

  12. Fisher’s 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

  13. Demand-pull Inflation Lecturer: Pn. Azizah Isa

  14. 2. Cost-Push Inflation • is 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

  15. Cost-Push Inflation Lecturer: Pn. Azizah Isa

  16. Effects of Inflation 1. On the individuals as gainers and losers: Gainers are: • Debtors:pay back loan, with less value of money. • Shareholders:higher dividend • Property owners:higher prices of assets owned. • Businessmen: making larger profit as prices for their goods produced and sold is higher. Lecturer: Pn. Azizah Isa

  17. Effects of Inflation Losers are: • Creditors: received less value for loans given out earlier. • Savers:lower value of money saved. • Fixed income earners: lower purchasingvalue of money. • Pensioners: value of money falls. Lecturer: Pn. Azizah Isa

  18. 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

  19. To curb the problem of inflation Using: 1) Monetary Policy 2) Fiscal Policy Lecturer: Pn. Azizah Isa

  20. To reduceInflation: with Surplus BudgetorTight 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 demandand closed-down the inflationary-gap while the real output (Y) falls. Lecturer: Pn. Azizah Isa

  21. Lecturer: Pn. Azizah Isa

  22. Unemployment in Malaysia “The 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

  23. UNEMPLOYMENT IN MALAYSIA Source: Economic Planning Unit and Ministry of Human Resources. Lecturer: Pn. Azizah Isa

  24. Unemployment with Business Cycle Unemployment rateis highduring 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. Lecturer: Pn. Azizah Isa

  25. 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

  26. Actual Rate and Natural Rateof Unemployment If the actual rate of unemploymentis more than thenatural rate of unemployment, than it is said that the economy is with the real problem of unemployment. Lecturer: Pn. Azizah Isa

  27. Who are considered as unemployed? Lecturer: Pn. Azizah Isa

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

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

  30. 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

  31. 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

  32. Measurement of Unemployment Unemployment Rate = no. of unemployed X 100% labour force Unemployed people are jobless labour force Lecturer: Pn. Azizah Isa

  33. LABOUR FORCE PARTICIPATION RATE = Labour Force X 100% Adult Population Lecturer: Pn. Azizah Isa

  34. 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

  35. 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 million • Unemployment 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

  36. EXERCISE 1: Lecturer: Pn. Azizah Isa

  37. TYPES OF UNEMPLOYMENT • FRICTIONAL UNEMPLOYMENT • STRUCTURAL UNEMPLOYMENT • CYCLICAL UNEMPLOYMENT • DISGUISED UNEMPLOYMENT/ HIDDEN UNEMPLOYMENT. • SEASONAL UNEMPLOYMENT Lecturer: Pn. Azizah Isa

  38. STRUCTURAL UNEMPLOYMENT • Changes 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

  39. CYCLICAL UNEMPLOYMENT • Caused 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

  40. 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 sectors • in cottage/rural industries. Lecturer: Pn. Azizah Isa

  41. 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

  42. POLICIES TO CURE Government measures: • FISCAL POLICY • MONETARY POLICY Lecturer: Pn. Azizah Isa

  43. NATIONAL INCOME EQUILIBRIUM Y=E Expenditure Y1=C+I+G+(X-M) (RM) e1  Yfe=C+I+G+(X-M) Inflationary Gap Y0 = C+I+G+(X-M) ef  Deflationary Gap e0 45° Real Output (National Income) Y0 Yfe Y1 Lecturer: Pn. Azizah Isa

  44. FISCAL POLICY Fiscal Policy attempts to regulate the economy by varying the level of government spending and the rate of taxation. 1. CONTRACTIONARY FISCAL POLICY (surplus budget) G – T < 0 G < T 2. EXPANSIONARY FISCAL POLICY (deficit budget) G – T > 0 G > T 3. BALANCED BUDGET POLICY G – T = 0 G = T Lecturer: Pn. Azizah Isa

  45. To reduce Unemployment/recession: Expansionary Fiscal Policy / Deficit Budget When government collects lesstax 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

  46. 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 . G • Thus, 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

  47. MONETARY POLICY • To curerecession/unemployment: Ease / Expansionary monetary policy. • To reduceinflation: Tight / Contractionary monetary policy. Lecturer: Pn. Azizah Isa

  48. Keynesian AD-AS Diagram General Prices AS Effect of Surplus Budget OR Tight Monetary Policy to reduce inflation P1 P2 I, G AD1 AD2 Real GDP Lecturer: Pn. Azizah Isa

  49. THANK YOU FOR LEND ME YOUR EARS. Lecturer: Pn. Azizah Isa

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