Unemployment (Macroeconomics)

So, unemployment - another well known phrase.

The definition of unemployment is the number of people in the workforce who are willing and able to work and actively seeking employment, but are not currently employed. It is measured in two ways: The Claimant Count and The Labour Force Survey.

The Claimant Count measures the number of people that are in receipt of unemployment related benefit. It's the cheapest way for the Government to measure unemployment, but not the most accurate method. The measure doesn't include anyone under 18 or anyone over 60, as well as many other social groups.

The Labour Force Survey is a survey of 60,000 people taken every 3 months. You are classified as unemployed if you are out of work, of working age, available to work in the next two weeks and in search of paid employment. This is more accurate than the Claimant Count and allows for European comparison as it's the method used in the rest of the continent.

The main types of unemployment are as follows:

• Structural/Occupational - Caused by changes in an industry.
• Frictional - Caused by people leaving their job ready to start a new one.
• Seasonal - Caused by the seasonal nature of some jobs.
• Cyclical - Unemployment caused by the economy, bust periods mainly in which there is low consumer demand.
• Regional/Geographical - Job vacancies in different locations to the people actually seeking jobs.

There are many consequences of unemployment. Firstly, tax receipts for the government fall, meaning they get less income and have less available to spend on public goods. Also, unemployment leads to a fall in demand levels in the economy and because of this businesses suffer a fall in revenue and profit. The Government, during periods of unemployment, has to spend more money on welfare benefits - leaving even less money to be spent in the economy. Finally, it can lead to an overall fall in peoples living standards. 

Unemployment, in a nut shell. Thanks.

Inflation (Macroeconomics)

Inflation is a term that is thrown around a lot, so therefore it's a well known term. However, i'll still write this post to add some details and other information.

Inflation is defined as a rise in the general level of prices over a period of time. It is measured using The Harmonized Index of Consumer Prices (HICP). It measures the average weighted increase in the prices of a typical basket of goods. Inflation was previously measured using the Retail Price Index (RPI).

Inflation can be caused by either demand-pull or cost-push factors. Demand-pull inflation occurs when there has been an increase in the level of demand in an economy - basically there are too many people chasing too few goods. This is illustrated by a rightward shift of the AD curve on an aggregate demand/supply graph.

The other type of inflation, cost-push inflation, is caused by firms raising their prices because of increased wage costs, cost of raw materials or components. Basically, anything that makes production more expensive and causes the firms to raise prices. This type of inflation may be down to imported inflation, which is when we import from abroad a good that's price has risen because of inflation in the country it came from.

To summarize: Inflation is when prices of goods rise over time, caused by either demand-pull or cost-push factors. That is all, in brief.

Thanks for reading.

The Trade Cycle (Macroeconomics)

In the economy, there are times in which people spend more and manufacturers produce more. There are also periods in which the opposite occurs.. telling us that the amount of economic activity fluctuates over time. Economic activity refers to the level of spending, production and employment in the economy at any given time. More economic activity normally means increased economic growth.

Economic activity is measured by GDP, which stands for Gross Domestic Product - the value of all goods and services produced within the economy in a given time period. The trade cycle describes the fluctuation in economic activity over time.

Here we have a diagram that maps out the fluctuation in economic activity. At the peak of the trade cycle there is high levels of demand and investment, pay increases, profits are high, increased house prices and strong inflationary pressures. 

In the recession period there is negative growth, meaning GDP is falling.. for two successful quarters (6 months). In this time there is normally falling demand, low investment, rising unemployment and a fall in profits and confidence. 

The slump is when the economy has hit the bottom of the trade cycle.. The only way is up after that (hopefully!). Here we have high unemployment, very low levels of demand and investment and low inflation. 

Finally, the recovery period. This is when the economy starts growing again - GDP rises again. We'd expect a rise in incomes, output and employment here. Also, there should be increases in demand and investment as the economy starts to grow again. 

One of the government macroeconomic goals is to achieve stable economic growth - meaning these fluctuations aren't desirable. Therefore the government takes measures to try and avoid the worst effects of the trade cycle - these are called counter-cyclical policies. They are: 

• Changes in the tax levels.
• Changes in public spending.
• Interest rate changes. 

That is the lowdown on the trade cycle, hope it helps. Thanks for reading. 

Economic Growth (Macroeconomics)

Economic growth is when an economies Real GDP increases, so a sustained increase in real output and income in a period of time. It can be shown by an outward shift on a PPF curve or a rightward shift of AD on an AD/AS diagram, providing there's enough spare capacity in the economy.

Economic growth is caused by anything that increases AD, providing there is enough spare capacity available. What also causes it is increases in the efficiency in using factors of production. What can cause this is improvement in education and training, improving labour mobility, increasing competition and obtaining more factors of production.

The benefits of economic growth include:

• Increased output, employment and income.
• Improved standard of living.
• Improved health, education and public services.

However, there also costs of economic growth. These are:

• Degrading of the environment by using up resources and creating waste.
• Increased stress and a faster pace of life.
• Increased inequality, difference between rich and poor.

That's the basics of economic growth, you can come to your own conclusion about whether it is desirable in large quantities etc. Thanks.

The Circular Flow of Income (Macroeconomics)

The circular flow of income is basically exactly what it says it is, it shows the flow of income around the economy. It is best shown visually using this diagram:

This diagram shows the circular flow of income around the economy, as well as the flow of goods and factors of production. We can see "Rent, wages and profit" travelling from the firms to households. These are all payments for the factors of production you can see flowing in the opposite direction, from households to firms, next to the arrow. "Payment for goods and services" is flowing from households to firms and as you can see on the arrow next to that, goods and services are travelling in the opposite direction. So from this we can see that money flows around the economy in a circular motion, from firms to households and back to the firms again.

However, this would assume that no more money ever enters or leaves the economy, which we know is almost always untrue. So therefore, we can add a few more things to the diagram. Firstly injections into the economy. Injections means money being put into the economy from an external source. The three main types of injection and government spending, exports and investment. All three of these add additional money into the circular flow of income. Secondly leakages from the economy. This means money that exits the economy for one reason or another. The three main types of leakages are taxation, imports and savings. All these three factors reduce the amount of money in the circular flow of income.

That's it for the basics on the circular flow of income. Thanks for reading, sorry about the delay.

The Multiplier (Macroeconomics)

The Multiplier is a concept developed by John Maynard Keynes. He was a famous economist born in 1883, he passed away in 1946. His concept said that "any increase in injections into the economy (investment, government expenditure or exports) would lead to a proportionally bigger increase in National Income." Basically, this translates to any new money being pumped into the economy will have a larger effect on GDP than the initial injection.

Why is this? Well, because one persons spending is another persons income, and that income will increase their purchasing power and hence their spending.

Lets try an example. Say i had £100 in my pocket. I gave all that money to my friend for looking after my dog for the day. Then, that person puts £25 into savings and spends the remaining £75 on a new TV from a guy they met. This guy then saves £25 and uses the remaining £50 to pay a neighbor to wash his car. This cycle could go on and on, but lets leave it there and say the neighbor puts all £50 into savings. The initial £100 has now exited the economy. However, on its way through the economy it has had a larger effect on GDP. The £100 turned into (100+75+50) £225 worth of spending in the economy.. and thus shows that the multiplier is a true theory.

The multiplier has a few equations related to it:

• The Multiplier = 1 ÷ MPW
• Change in GDP = Initial injection x (1 ÷ MPW)

MPW stands for marginal propensity to withdraw. This is the proportion of any extra income that we save, spend on imports or is taxed. 

That's the theory behind the multiplier effect, briefly put. Thanks for reading. 

Aggregate Demand & Supply (Macroeconomics)

A classic AD/AS diagram has two axis. On the y axis (vertical one) we have price levels. Reading of this axis we will be able to see if the price levels in the economy have increased or decreased, thus seeing if there's been inflation or deflation in the economy. On the x axis (horizontal one) we have real GDP. The real part just means the figure has been adjusted slightly so it's in line with inflation. From the axis we will be able to read off the GDP of the economy so we can determine whether the economy has grown or shrunk. Also, we can determine from this axis whether unemployment has risen or fallen.

When we bring both aggregate demand and aggregate supply together and model them on the same diagram the two curves cross. This point is know as the macroeconomic equilibrium. This means both aggregate demand and aggregate supply are equal. 3 of the Governments's main objectives are to achieve full employment, low and stable inflation and to achieve steady economic growth. All of these can be viewed on an AD/AS diagram. Here is a standard AD/AS diagram:

As you can see, the AD curve hits the LRAS curve at the point where the LRAS curve begins to become vertical. This means that full employment has been achieved, or thereabouts. If AD was to shift to the left, it would mean unemployment has increased and the government would have to attempt to stimulate aggregate demand again to increase employment. It would do this by increasing any of the factors... (AD = C+I+G+(X-M)).

The government set the Bank of England the objective of stable prices (a target of 2% inflation). For this to be achieved, aggregate demand must not exceed the point of full employment on the diagram. If this would happen, you can see that price levels would increase dramatically and price levels rising is inflation.

To achieve economic growth, the AD curve would need to shift to the right - meaning Real GDP will have increased. To achieve this growth without inflation, the LRAS curve would need to shift to the right as well as the AD curve if the economy was operating at full employment. This would create some extra capacity for the economy to expand into.

There you have the three government objectives displayed and explained on a diagram. That's it for AD/AS diagrams.. Refer back to the individual posts about aggregate demand or aggregate supply if you're confused. Next up will be a short introduction to the multiplier effect. Thanks.