The German-Jordanian University

Schools of Managerial Sciences

Principles of Macroeconomics Chapter 7: Long Run and Short Run Concerns: "Growth, Productivity, Unemployment, and Inflation"

Summary

Dr. Ihab Magableh

Director, Consultations and Training Center Head, Department of managerial Sciencs

2010/2011

Chapter 7: Long Run and Short Run Concerns: "Growth, Productivity, Unemployment, and Inflation"
The ideal economy is the one in which: Productivity (output per worker) Growth is high: rapid growth of output per worker Low Unemployment Low Inflation But, circumstances may change and the same economy suffers from high unemployment and inflation. Thus, many questions may arise: What determines Output, Unemployment, and Inflation? Or Why is Output growth or Output per worker sometimes high and sometimes low? 1. Long run (Output and Productivity Growth) Growth Theory Capital Labor Productivity : it concerns with what determine economic growth : Any thing that is produced and then used as an input to produce other goods and services. It could be tangible (building), intangible (skills). It also could be private or public : output per worker

What are the main long-run macroeconomic issues? Output growth. Output per worker (productivity). What are the main short-run macroeconomic issues? Unemployment or Employment Inflation or overall price level What are factors that affect output level? Such as an: Increase in inputs Increase in capital per worker Increase in quality of labor Increase in quality of capital Enhancement Technology Increase Number of hours worked 2. Recession, Depression, Unemployment Real GDP Recession Depression : The actual output of goods and services during a period of time. : a period in which RGDP declines for at least 2 consecutive quarters. In case of recession, output declines and unemployment increases. : a prolonged and deep recession.
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Unemployment Rate (UN) : is the ratio of unemployed(U) people to the labor force (LF) Labor Force (LF) : Employed (E) + unemployed (U) Population : Labor force + not in LF
UN = Unemployed U = Employed + unemployed E + U

Who are the employed? Who

are16 years and more Work for pay, for 1 or more hours per week Work 15 hours or more per week in a family business. Who has a job, but temporarily absent or without pay

Who are the not employed? Who Unemployed Not in the labor force Who are the unemployed? Who are
16 years old or older Looking actively for work during last 4 weeks. Available for job

Who are not in the Labor Force? Discouraged Not looking for jobs such as: Full-time students, Retired people, elderly parents, Housekeepers, and Discouraged. What is the Labor Force Participation Rate (LFPR)? LFPR= LF Population 16 years or more

What do we mean by Discouraged Workers Effects? During recession (for example) people may become discouraged about finding a job and stop looking for jobs This action lowers the Unemployment Rate, why? Because discouraged people no longer looking for work and no longer counted as unemployed. 3. Costs and Types of Unemployment: Some unemployment is inevitable (cannot be avoided) which means that it is part of the natural workings of the labor market. Some times we find unemployed people and job vacancies at the same time. Both firms (employer) and workers (employees) must acquire (get) information about labor market. Getting information costs money and time. Types of unemployment Frictional Unemployment : It is due to the normal working of the labor market; used to denote short run job/skills matching problems. It lasts
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Structural Unemployment Natural Rate of Unemployment Cyclical Unemployment

for few weeks : Portion of unemployment due to the changes in the structure of the economy. It lasts for years (Long run problem). It is inevitable and natural. : Frictional rate of unemployment + Structural rate of unemployment : The unemployment that due to recession and depression.

What are the costs of Unemployment? Crimes It costs the government Standard of living Output loss The Cost of Recession: The loss of real goods and services that other wise are produced Unemployment Welfare However, there is a benefit for recession which is the reduction in the overall price level (reduce inflation). 4. Inflation: Inflation Inflation Rate Sustained Inflation Deflation : is an increase in the over all price level. : is the percentage change in the over all price level. : An increase in the over all price level that continues over a significant period. : A decrease in the over all price level.

How do we measure the over all price level? They are two measures: GDP Deflator Consumer Price Index (CPI)
GDP Deflator : Measures the general price level of all goods and services that are domestically produced (including capital and intermediate goods) and are included in the GDP. GDP deflator = Nominal GDP Real GDP. : A price index computed each month using a bundle that is meant to represent the market basket purchased by a typical urban consumer. : Measures of prices that producers receive for products at all stages of the production process. = Nominal GDP Price level

CPI Producer Price Indexes (PPIs) Real Income

 2005 =

CPI 2005 CPI 2004 *100 CPI 2004

What are the costs of inflation?

Lowers the over all standard of living (decreases the purchasing power) for fixed income earners. Changes the distribution of income Harms lenders (creditors) and benefits debtors. Increases risk and slower economic growth. Increases administrative costs and leads to inefficiency in using resources.

Notes: You gain if your income rises faster than prices of goods and services. Inflation higher than expected benefits debtors and inflation less than expected benefits creditors. Real Interest Rate = Nominal Interest Rate Inflation Rate

Good Luck