Economics Study Set 18

Business

Quiz 8 :

Economic Fluctuations, Unemployment, and Inflation

Quiz 8 :

Economic Fluctuations, Unemployment, and Inflation

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What is full employment? When full employment is present, will the rate of unemployment be zero? Explain.
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When full employment will be present
As the definition states full employment is present when rate of unemployment is at its natural level. This natural rate is not constant. At present natural rate of unemployment in USA is about 5%. This percentage may change from time to time. It will depend up on the following factors-
1. Frictional factors
2. Structural factors
Frictional factors: When unemployment arises due to non availability of perfect information then it is said to be causing from frictional factors.
It may happen both for employer as well as for employees. Employers may not know who the best suited candidate for their work is. They will always go for a person who is well qualified, have knowledge and adequate experience for the work. Selection of a new inexperienced person will mean less productivity. So, employer has to take time in selecting right person from potential labor force. Same thing happens for employees. They do not know which work is best suited for his skill. They go on apply for different employment opportunities, appear for interviews and finally get a suitable job.
Thus considerable time is lost in an effort to get proper selection. During this period worker has to remain unemployed. This is known as unemployment due to frictional factors.
Structural factors: It occurs due to some basic structural changes in the production activities which make it difficult to employ existing work force. Some major technological change in the production process requires some special skill for the performance of the work. Existing workers may not have the skill. So company is not engaging them. In this case unemployment will continue for a longer period of time until they acquire the required skill.
Due to above two reasons, some unemployment will always persists in the economy. This is normal employment. Percentage of normal unemployment may also change with the passing of time. If other than normal unemployment all other are employed, then full employment is considered as prevailing in the economy.
Zero Rate of unemployment:
Zero rate of unemployment is not possible in the economy. Some unemployment will be there. It is also good for the economy. Following are the reasons for existence of some unemployment in the economy-
1. Unemployment causing from adoption of new technology: Innovation is the fundamental requirement for the growth of an economy. New technology may be innovated which will take the place of old one. Industries using new technology will create employment opportunities. At the same time industries using old technology and are unable to convert them into new one will close down. So labor and other factors of old industries will get unemployed. It has happened after invention of computer. When computerized accounting systems was introduced in industries many new job opening was created. But at the same time employees maintaining accounts manually, passing the bills and doing other accounting job have lost their job and get unemployed.
2. Temporary unemployment for new entrants: Some new entrants in the labor force will always exist in the economy. They have just completed their schooling and now are searching for a job. Even if they are appointed, company has to give them necessary training to make them fit for the productive work. Thus a gap period will always be observed between entering in the labor force and getting properly employed in a job. During this period they have to remain unemployed.
3. Temporary unemployment for getting better job: Further there may be found some persons who have left the existing job on their own. They think that their skill is better suited for some other high level job. So by quitting the job they are searching a very appropriate job for them. Until the search process is over they have to remain unemployed. This type of unemployment is good for the economy, since it will make the best possible use of the capacity of a labor after he get reemployed in a better suited job. It is making effective allocation scarce factors possible.
4. Temporary unemployment for acquiring better skill: A company adopting new technology may retrench its laborers on temporary basis. Then proper training is provided to make them fit for new technology. Once they acquire the required skill, they get reappointed again. During this period they have to remain temporarily unemployed. This unemployment also will be effective in improving future productivity of the economy.
Thus a certain percentage of unemployment is inevitable. It cannot be zero. It is known as normal unemployment rate or optimum sustainable unemployment rate of the economy.

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Explain why even an efficiently functioning economic system will have some unemployed resources.
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Production and consumption are two important activities of an economy. Production means creation of goods and services for the satisfaction of wants. It requires introduction of different factors of production. There are four such factors. They are land, labor, capital and organization. These factors are scarce. But human needs are unlimited. So it is the function of an economy to allocate those factors in such a manner that maximum welfare is achieved. Hence, an efficient economy ensures such allocation of scarce factors.
Not only proper allocation is needed it is also necessary that these scarce resources remain utilized. In other words no unemployment should exist. Classical economist has named this situation as full employment. According to them an ideal economy will exist only when full employment is found.
Let us consider the following reasons for which unemployment to some extent should always be there-
1. Unemployment causing from adoption of new technology: Innovation is the fundamental requirement for the growth of an economy. New technology may be innovated which will take the place of old one. Industries using new technology will create employment opportunities. At the same time industries using old technology and are unable to convert them into new one will close down. So labor and other factors of old industries will get unemployed. It has happened after invention of computer. When computerized accounting systems was introduced in industries many new job opening was created. But at the same time employees maintaining accounts manually, passing the bills and doing other accounting job have lost their job and get unemployed.
2. Temporary unemployment for new entrants: Some new entrants in the labor force will always exist in the economy. They have just completed their schooling and now are searching for a job. Even if they are appointed, company has to give them necessary training to make them fit for the productive work. Thus a gap period will always be observed between entering in the labor force and getting properly employed in a job. During this period they have to remain unemployed.
3. Temporary unemployment for getting better job: Further there may be found some persons who have left the existing job on their own. They think that their skill is better suited for some other high level job. So by quitting the job they are searching a very appropriate job for them. Until the search process is over they have to remain unemployed. This type of unemployment is good for the economy, since it will make the best possible use of the capacity of a labor after he get reemployed in a better suited job. It is making effective allocation scarce factors possible.
4. Temporary unemployment for acquiring better skill: A company adopting new technology may retrench its laborers on temporary basis. Then proper training is provided to make them fit for new technology. Once they acquire the required skill, they get reappointed again. During this period they have to remain temporarily unemployed. This unemployment also will be effective in improving future productivity of the economy.
Thus it can be safely concluded that for efficient functioning of the economy some unemployment is inevitable.

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People are classified as unemployed if they are not currently working at a job and if they made an effort to find a job during the past four weeks. Does this mean that there were no jobs available? Does it mean that there were no jobs available for which the unemployed workers were qualified? What does it mean?
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In an economy all civilians attaining the age of 16 years or more are considered as employable labor force. But some of them cannot enter in the actual labor force due to reasons like old age, illness, disablement, not acquired required qualifications etc. The persons not so disqualified will be considered in the employable labor force.
Non availability of job as a cause of unemployment:
It has been observed that all civilians coming under labor force do not get the job. Some of them always remain unemployed. If a person has got job it is not considered whether he has got a permanent job or a temporary job. Both types will be considered as employed.
Thus a person may temporarily not working due to his illness will not be considered as unemployed since he will join in the work immediately after his recovery. But when he is searching for a job since last four week and not getting the job and still unemployed, then he will be considered as unemployed.
However searching for a job does not mean there is no job in the economy. Job searching is required when labor market information is not perfectly available. A potential employee does not know where a job is available which will be suitable for his qualification. He may know where job of his quality is available, but he does not know the exact information of the employers who will pay him the appropriate remuneration. Also he has to know whether the working environment is congenial or detrimental. The extent of safety devices available, communication facilities etc are also a matter of concern. All these information gathering may take more than four weeks. After getting proper information he will start real searching effort for which he has to follow recruitment process of the concern. Thus he may have to wait for few more weeks before getting any job.
Also there may be a special situation persisting in the economy which may cause such delay in getting the job. It is known as cyclical factor: It happens when a recession prevails in the economy. During recession demand of the product decline. Employment opportunity will decrease. Some of the existing employees will be laid off. New job will be very difficult to get.
Thus not getting a job does not mean no job is available. It may be due to delay in getting proper information or cyclical factor persisting in the economy.
Non availability of suitable job:
Basic structural change in production sector of the economy is also responsible in many cases for prolonged delay in getting a job. Such structural change takes place if company introduces a major change in the product or a significant change in the technology of existing product.
When it happens company may go for lay off on temporary basis for its existing employees. After introducing suitable changes existing labor force is reinstated. Also new recruitments are undertaken. During this period, existing employees may require to undergo some training to acquire skills needed to work effectively in the new set up. If they fail to acquire it, then it may be difficult to get suitable job.
This factor may be responsible for such delayed. Existing skill of the labor may not be adequate for performing the job under new structural set up. Then he has to look for only those concerns that are using old technology where the person will be better suited. Such concern will be obviously less in number. Most of the concern will adopt such changes to remain competitive. Thus his searching process will take prolonged time. Period of unemployment will be extended.
Conclusion:
Thus delay in getting a job does not always mean that there is no job available or non availability of a job suitable for his quality. It may be due to delay in getting perfect information about the labor market.

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The following Table presents the 2011 population, employment, and unemployment data among working age persons for several countries. TABLE B img a. Calculate the number of people in the labor force for each country. b. Calculate the labor force participation rate for each country, and put the figures in the blanks provided. Which country had the highest labor force participation rate? Which country had the lowest? c. Calculate the unemployment rate for each country, and put the figures in the blanks provided. Which country had the highest unemployment rate? Which had the lowest?
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Suppose that the consumer price index at year-end 2011 was 150 and by year-end 2012 had risen to 160. What will be the inflation rate during 2012?
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"When employees are dismissed from employment for reasons other than poor performance, unemployment benefits should replace 100 percent of their prior earnings while they are searching for a new job." Do you think this proposal is a good one? Why or why not? If instituted, would the policy influence how quickly laid-off workers would find new jobs? What impact would the policy have on the unemployment rate?
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Use the following data to calculate (a) the labor force participation rate, (b) unemployment rate, and (c) the employment/population ratio: img
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List the major phases of the business cycle and indicate how real GDP, employment, and unemployment change during these phases. Are the time periods of business cycles and the duration of the various phases relatively similar and therefore highly predictable?
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How are the following related to one another? a. the actual rate of unemployment b. the natural rate of unemployment c. cyclical unemployment d. potential GDP
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Classify each of the following as employed, unemployed, or not in the labor force: a. Brown is not working; she applied for a job at Walmart last week and is awaiting the result of her application. b. Martinez is vacationing in Florida during a layoff at a General Motors plant due to a model changeover, but he expects to be recalled in a couple of weeks. c. Green was laid off as a carpenter when a construction project was completed. He is looking for work but has been unable to find anything except a $10-per-hour job, which he turned down. d. West works 70 hours per week as a homemaker for her family of nine. e. Carson, a 17-year-old, works six hours per week as a delivery person for the local newspaper. f. Chang works three hours in the mornings at a clinic and for the last two weeks has spent the afternoons looking for a full-time job.
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Is the natural rate of unemployment fixed? Why or why not? How are full employment and the natural rate of unemployment related? Is the actual rate of unemployment currently greater or less than the natural rate of unemployment? Why?
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"My money wage rose by 6 percent last year, but inflation completely erased these gains. How can I get ahead when inflation continues to wipe out my increases in earnings?" What's wrong with this way of thinking?
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The nominal salary paid to the president of the United States along with data for the consumer price index (CPI) are given for various years below. img a. Calculate the president's real salary measured in the purchasing power of the dollar in 2000. b. In which year was the real presidential salary the highest? c. The president's nominal salary was constant between 1920 and 1940. What happened to the real salary? Can you explain why?
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Data for nominal GDP and the GDP deflator (2005 = 100) in 2009 and 2010 for six major industrial countries are presented in the accompanying Table. TABLE A img a. Use the data provided to calculate the 2009 and 2010 real GDP of each country measured in 2005 prices. Place the figures in the blanks provided. b. Use the data for the GDP deflator to calculate the inflation rate of each country. Put your answers in the blanks provided. c. Which country had the highest growth rate of real GDP? Which had the lowest? d. Which countries had the highest and the lowest inflation rates? e. Which one of the countries had the most inflation during this period?
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What impact will high and variable rates of inflation have on the economy? How will they influence the risk accompanying long-term contracts and related business decisions?
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