HKCE Macroeconomics

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HKCE Macroeconomics

• Chapter 5 Unemployment, Price Fluctuations and
  Business Cycle

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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.

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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.

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Labor Force and Unemployment
Whole Population
Aged 15 or Above
Labor Force
Employed
Unemployed
Under-employed
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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?

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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

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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 2256 430
• unemployment rate (1 225/6 430)x10019.1
• under-employment rate (643/6 430)x10010

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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)x10013.6-5
  8.6

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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

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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

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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.

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Measuring Changes in Prices

• Two methods for measuring a change in the general
  price level
• Consumer price index (CPI)
• Implicit price deflator of GDP

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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

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Measurement by CPI

• Types of CPI

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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.

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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 periodx100

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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 periodx100

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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.

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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.

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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

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Effects of Changes in Price Level

• Effects on real income

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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.

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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.

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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.

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Effects of Changes in Price Level

• Redistributive Effects under Inflation

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Effects of Changes in Price Level

• Redistributive Effects under Deflation

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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.

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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.

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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.

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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

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Business Cycle
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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

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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

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Business Cycle-A Summary
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Business Cycle-HK