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HKCE Macroeconomics

HKCE Macroeconomics. Chapter 5: Unemployment, Price Fluctuations and Business Cycle. Labor Force & Unemployment. Labor force refers to all economically active persons aged 15 or above, including both employed and unemployed population.

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HKCE Macroeconomics

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  1. HKCE Macroeconomics • Chapter 5: Unemployment, Price Fluctuations and Business Cycle CH5-Unemployment, Price F..

  2. Labor Force & Unemployment • Labor force refers to all economically active persons aged 15 or above, including both employed and unemployed population. • An economically active person is able and willing to participate in production activities. • The employed population refers to persons who perform work for payment or profit. CH5-Unemployment, Price F..

  3. Labor Force & Unemployment • The unemployed population refers to those unemployed labor force who have no jobs but are still under searching. • The under-employed population refers to those employed persons who involuntarily work less hours. CH5-Unemployment, Price F..

  4. Labor Force and Unemployment Whole Population Aged 15 or Above Labor Force Employed Unemployed Under-employed CH5-Unemployment, Price F..

  5. Labor Force & Unemployment • Exercises: • Is a housewife regarded as unemployed? • Ah Wing is a F.3 student who is a private tutor at Friday nights. Is she employed? • A mild mentally retarded person who has graduated from a special workplace and is looking for a job. Is that person unemployed? • A young lady who cared some poor children carrying HIV in Cambodia last summer. Is she employed? CH5-Unemployment, Price F..

  6. Measuring Unemployment • Unemployment rate • Unemployment rate = (unemployed population/labor force) x 100% • Under-employment rate • under-employment rate = (under-employed population/labor force) x 100% CH5-Unemployment, Price F..

  7. Measuring Unemployment Exercise 1: • Given: • population aged 15 or above 100 000 • employed population 5 205 • unemployed population 1 225 • under-employed population 643 • Based on the above information, calculate: • labor force = 5 205 + 1 225=6 430 • unemployment rate =(1 225/6 430)x100%=19.1% • under-employment rate = (643/6 430)x100%=10% CH5-Unemployment, Price F..

  8. Measuring Unemployment Exercise 2: • Given that the unemployment rate is 5% and labor force is 10 000. Now, 1 000 new school leavers are seeking jobs. • Would there be an increase in labor force? • Yes, increase by 1 000 • Would the unemployment rate change if ALL of them can find a job? • Yes, fall by [(500/11 000)x100% =] 4.5%-5%=-0.5% • Would the unemployment rate change if NONE of them can find a job? • Yes, increase by [(1 500/11 000)x100%=]13.6%-5% =+8.6% CH5-Unemployment, Price F..

  9. Costs of Unemployment • Costs to Unemployed Individuals: • Lower living standard • Loss of skills/Skills become outdated • Psychological problems emerge • Costs to Society: • A fall in output • Increasing financial burden to society • Social and political problems CH5-Unemployment, Price F..

  10. Price Fluctuations • Inflation is a persistent increase in the general price level. • Deflation is a persistent decrease in the general price level. • The following situations are NOT considered as inflation/deflation: • An once-and-for-all change in general price • A persistent rise/fall in the price of one good CH5-Unemployment, Price F..

  11. Price Fluctuations • Remarks: • Under inflation/deflation, it does NOT implies that the prices of ALL goods and services change. • In times of inflation, the prices of some goods may fall while some may remain constant. • In times of deflation, the prices of some goods may increase while some may remain constant. CH5-Unemployment, Price F..

  12. Measuring Changes in Prices • Two methods for measuring a change in the general price level: • Consumer price index (CPI) • Implicit price deflator of GDP CH5-Unemployment, Price F..

  13. Measurement by CPI • Types of CPI: • Consumer price index(A), CPI(A) • Reflecting the effect of price changes on the lower expenditure group • Consumer price index(B), CPI(B) • Reflecting the effect of price changes on the middle expenditure group • Consumer price index(C), CPI(C) [formerly called Hang Seng CPI] • Reflecting the effect of price changes on the higher expenditure group • Composite consumer price index, Composite CPI CH5-Unemployment, Price F..

  14. Measurement by CPI • Types of CPI: CH5-Unemployment, Price F..

  15. Measurement by CPI • Remarks: • The lower expenditure group households tend to spend a higher proportion of their expenditure on necessities, such as food. • The higher expenditure group households tend to spend a higher proportion of their expenditure on housing, clothing and footwear and transportation. • Since the expenditure weightings of different expenditure groups differ, the price change of an item may have different impacts on different income groups. CH5-Unemployment, Price F..

  16. Measurement by CPI • If CPI in the current period is larger than 100, it means there is inflation while deflation occurs if it is less than 100. • Inflation rate = [(CPI in the current period – CPI in the last period)/CPI in the last period]x100% CH5-Unemployment, Price F..

  17. Measurement by Price Deflator of GDP • Implicit Price Deflator of GDP =(GDP at current market prices/GDP at constant market prices)x100 • If the implicit GDP deflator is larger than 100, it means there is inflation, however, deflation occurs if it is less than 100. • Inflation rate = [GDP deflator in the current period – GDP deflator in the last period)/GDP deflator in the last period]x100% CH5-Unemployment, Price F..

  18. GDP Deflator vs. CPI • As the implicit price deflator of GDP has a wider coverage of goods and services, it is a better measure of the changes in the general price level than CPIs. CH5-Unemployment, Price F..

  19. GDP Deflator vs. CPI • As the implicit price deflator of GDP has a wider coverage of goods and services, it is a better measure of the changes in the general price level than CPIs. • However, CPIs is good for understanding the effects of price changes on different income groups. CH5-Unemployment, Price F..

  20. Effects of Changes in Price Level • Effects on purchasing power of money: • Inflation reduces the purchasing power of money. • Deflation raises the purchasing power of money CH5-Unemployment, Price F..

  21. Effects of Changes in Price Level • Effects on real income: CH5-Unemployment, Price F..

  22. Effects of Changes in Price Level • Effects on cost of living: • Inflation means a persistent increase in the general price level and thus raising the cost of living. • Deflation means a persistent fall in the general price level and thus decreasing the cost of living. CH5-Unemployment, Price F..

  23. Effects of Changes in Price Level • Effects on Fixed Income Earners: • Inflation reduces the purchasing power of the fixed income earners as the real value of their fixed money income is not allowed to be adjusted upwards. • Deflation raises the purchasing power of the fixed income earners as the real value of their fixed money income is not reduced. CH5-Unemployment, Price F..

  24. Effects of Changes in Price Level • Effects on Income Redistribution (The Redistributive Effect): • The redistributive effect would occur if the inflation/deflation is unexpected or unanticipated. • As income will be re-distributed, some people would gain and some lose. CH5-Unemployment, Price F..

  25. Effects of Changes in Price Level • Redistributive Effects under Inflation CH5-Unemployment, Price F..

  26. Effects of Changes in Price Level • Redistributive Effects under Deflation CH5-Unemployment, Price F..

  27. Effects of Changes in Price Level • Effects on choice of wealth : • In times of inflation, people would prefer to hold physical assets instead of money. • In times of deflation, people would prefer to hold cash or interest-bearing financial assets other than physical assets. CH5-Unemployment, Price F..

  28. Effects of Changes in Price Level • Effects on government tax revenue : • In times of inflation, government tax revenue would increase because higher money wage makes a person's income exceeded the tax allowances or fell into a higher tax bracket. • In times of deflation, government tax revenue would fall because lower money income means some people may be out of tax net or fall into a lower tax bracket. CH5-Unemployment, Price F..

  29. Effects of Changes in Price Level • Effects on cost of production & exports : • During inflation, the prices of exports will rise while its quantity falls because cost of production rises due to higher prices of raw materials. • During deflation, the export prices fall and thus stimulating the volume of exports. CH5-Unemployment, Price F..

  30. Business Cycle • Business cycle (BC) refers to the recurrent fluctuations of economic performance (esp. in terms of the real GDP) of an economy. • A business cycle is characterized by 4 phases: • Prosperity/Boom/Peak • Recession/Contraction • Depression/Trough • Recovery/Expansion CH5-Unemployment, Price F..

  31. Business Cycle CH5-Unemployment, Price F..

  32. Business Cycle • Characteristics of prosperity: • Unemployment rate is the very low/Full employment is close • The real GDP growth rate is very high • The general price level starts to rise rapidly • Characteristics of recession: • Unemployment rate starts to rise • The real GDP growth rate is decreasing • The inflation rate is declining CH5-Unemployment, Price F..

  33. Business Cycle • Characteristics of depression: • Unemployment rate is the very high • The real GDP growth rate is very low or negative • The general price level is falling rapidly/Deflation occurs • Characteristics of recovery: • Unemployment rate starts to fall/Employment rate is rising • The real GDP growth rate starts to rise • Deflation rate starts to fall/The general price level stops declining CH5-Unemployment, Price F..

  34. Business Cycle-A Summary CH5-Unemployment, Price F..

  35. Business Cycle-HK CH5-Unemployment, Price F..

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