Understanding Economics

(Macro Economics 1)

Zainul Muchlas
INSTITUT ASIA MALANG 2019
MEASURING A NATION’S
INCOME
(Mengukur Pendapatan Nasional )
What’s in this chapter?

 What is Gross Domestic Product (GDP)?

 How is GDP related to a nation’s total
income and spending?
 What are the components of GDP?
 How is GDP corrected for inflation?
 Does GDP measure society’s well-being?
Microeconomics vs.
vs
Macroeconomics
Microeconomics
 Branch of Economics that deals with the behavior of individual
economic units – consumers, firms, workers, and investors – as well
as the markets that these units comprise
 The Study of Individual Choices Under Scarcity and Its Implications
for the behavior of prices and quantities in individual markets
 Some of topics studied : consumer choices, firm’s behaviors, market
structures, labor markets, uncertainty.
Macroeconomics
 Study of Economy ‘as a whole’
 Branch of Economics that deals with aggregate economic variables,
such as the level and growth, rate of national output, interest rates,
unemployment, and inflation
 Some of topics studied : inflation, economic growth, unemployment,
fiscal & monetary policies, saving and investment.
The Economy’s Income and
Expenditure

 People with higher incomes tend to have

higher living standards.
 Nations with higher incomes tend to have
higher living standards.

The total income of a nation’s economy is

measured by Gross Domestic Product (GDP).
It is one of the most widely used economic
measures.
10 Richest Countries by Nominal GDP
 United States of America. GDP = $16,724bn, GDP per capita =
52,839.
 China. GDP = $8,939bn, GDP per capita = 6,569.
 Japan. GDP = $5,007bn, GDP per capita = 39,321.
 Germany. GDP = $3,593bn, GDP per capita = 43,952.
 France. GDP = $2,738bn, GDP per capita = 42,990.
 United Kingdom. GDP = $2,489bn, GDP per capita = 39,048.
 Brazil. GDP = $2,190bn, GDP per capita = 10,957.
 Russia. GDP = $2,117bn, GDP per capita = 14,973.
 Italy. GDP = $2,068bn, GDP per capita = 33,909.
 Canada. GDP = $1,825bn, GDP per capita = 51,871.
All numbers are denominated in U.S. Dollars, Current Prices.

Source : International Monetary Fund, World Economic Outlook Database,

October 2013.

http://statisticstimes.com/economy/projected-world-gdp-ranking.php
10 Richest Countries by Nominal GDP per
capita

 Luxembourg. GDP per capita = $112,135.

 Norway. GDP per capita = $105,478.
 Qatar. GDP per capita = $98,737.
 Switzerland. GDP per capita = $80,472.
 Australia. GDP per capita = $68,939.
 United Arab Emirates. GDP per capita = $64,779.
 Sweden. GDP per capita = $60,019.
 Denmark. GDP per capita = $58,668.
 Canada. GDP per capita = $52,364.
 Singapore. GDP per capita = $52,178.
All numbers are denominated in U.S. Dollars, Current Prices.

Source : International Monetary Fund, World Economic Outlook Database,

April 2013.
History of World GDP
EXERCISE atau LATIHAN
 CARILAH INFORMASI TINGKAT GDP DAN
TINGKAT INFLASI SUATU NEGARA
(DITENTUKAN OLEH DOSEN)
 GUNAKAN LAMAN www.imf.org
 SETELAH DIPEROLEH DATANYA COBA
DIANALISA NEGARA TERSEBUT
TERMASUK NEGARA YANG:
 SANGAT SEHAT, SEHAT, CUKUP SEHAT,
KURANG SEHAT ATAU TIDAK SEHAT.
What does GDP measure?

 The total income of everyone in the

economy.
 The total expenditure on the economy’s
output of goods and services.

 For an economy as a whole,

Income = Expenditure
Income = Expenditure ??? (1)

 Every transaction has two parties : a

buyer and a seller.

Dollars received by a seller = Dollars spent by a buyer

Income = Expenditure ??? (2)
What does Circular Flow Diagram
Omit?

 The Government Sector, such as taxation,

government spending.

 The Financial System, such as matching

borrower’s demand of fund to lender’s supply
of fund.

 The Foreign Sector, such as financial assets,

currencies.
The Measurement of Gross Domestic
Product
 Definition of GDP :
1. …is the market value…
2. …of all…
3. …final…
4. …goods and services…
5. …produced…
6. …within a country…
7. …in a given period of time.
…is the market value…
 Goods are valued at the market prices. It
is measured on the currency of the
country.

 Activities which do not have any market

values are excluded. Such as, playing
piano for your own personal enjoyment,
sleeping for 24 hours a day (unless you
are paid for sleeping).
…of all…
 GDP measures the market value of all goods
produced and sold legally in the markets.

 When the goods are not produced and sold

legally in the markets, the transactions are
usually excluded due to its difficulty to measure
accurately.

 When the goods are only produced, but not sold

legally in the markets, these transactions are also
excluded.
…final…
 Final goods are goods which are consumed by
end-users.
 Intermediate goods are goods which are going to
be used for other productions by other producers.

 Why does GDP only measure the market value of

all final goods???
To avoid double counting.
 Another way to avoid double counting is by using
value added approach.
Value Added Approach
Cost of Value of Sales Value Added
Participants Materials ($) ($) ($)

Lumberjack 0 100 100

Furniture
100 200 100
Producer
Middle Person
200 350 150
(Sell to IKEA)

IKEA 350 425 75

Totals 650 1,075 425

…goods and services…
 Tangible goods
Such as, food, clothing, textbooks, laptops,
cars, apartments, machineries, shampoos,
PC games.

 Intangible goods (or services)

Such as, haircuts, law services,
housecleaning, financial services, concerts,
operas, teachers, singers, business
consulting services.
…produced…

 GDP only includes goods and services that

are currently produced.

 When someone sells used items to another

person, the value of used items are not
included. But the value added out of the
sale is included.
…within a country…

 GDP measures all goods and services

produced within a country.

 Regardless of the nationality of the

producers.
…in a given period of time…

 Usually it is measured on quarterly basis,

but reported on an annualized basis.

 Most reported GDP figures are seasonally

adjusted.
GDP = Income = Expenditure
GDP Income Expenditure

C
Market Labor
value Income
of final
= =
goods
and I
services
G
Capital
Income NX
In all… GDP is…
 The market value of all final goods and services
produced within a country in a given period of
time.

 We can measure GDP using two ways :

1. Adding up all the expenditures in the economy.
Or,
2. Adding up all the incomes in the economy.

Dollars received by a seller = Dollars spent by a buyer

The Components of GDP

Y = C + I + G + NX
where,
Y = GDP
C = Consumption
I = Investment
G = Government Purchases
NX = Net Exports
Consumption (1)
 Almost all spending by households on goods
and services. Such as : restaurant meals, new
clothes, doctor’s visits, movies, electricity, law
services, etc.

 Both durable and non-durable.

 Services (intangible items).

 Largest components of GDP (around 60-70%

of GDP).
Consumption (2)

Not part of Consumption in GDP :

 Consumption of Used Goods
 Newly constructed housing (investment
rather than consumption)
Investment (1)
 Spending on capital equipment, inventories,
and structures, including household
purchases of new housing.

 Investment means purchases of goods used

to produce other goods.

 When economists talk about investment,

they are talking about capital investments,
rather than financial investments.
Investment (2)
 Business fixed investment
Such as, machinery, factories, and office
buildings.
 Residential investment

Such as, new homes, apartment buildings.

 Inventory investment

Addition of unsold goods to company’s

inventories. The value of inventories could
change.
Government Purchases (1)
 Spending on goods and services by local, state,
and federal governments.

 When government pays salaries to civil servants

or to government-paid labors, the salaries are
treated as government purchases.

 Social security benefit paid to elderly or

unemployment insurance benefit to a laid-off
worker is treated as transfer payments, because
there is no exchange for a currently produced
good or service.
Government Purchases (2)

Example :
Salaries paid to teachers = included in GDP.
Benefits paid to the poor = not included in
GDP.
Interest Payment on Government Debt =
not included in GDP.
Net Exports
 Spending on domestically produced goods
by foreigners (exports) minus spending on
foreign goods by domestic residents
(imports).
 NX = X – IM, where X is exports and IM is
imports.

 Imports do not affect GDP.

 Increase in import will reduce NX, but raises
C/I/G at the same time.
Expenditure Breakdown of GDP for
Selected Countries

GDP =C +I +G +X - I
Country (billions $) (%) (%) (%) (%) (%)
U.S. $14,265 71 14 20 13 - 20
German
2,928 55 18 18 47 - 41
y
Japan 4,294 55 25 18 18 - 16
Mexico 1,480 66 26 10 28 - 30
Poland 609 60 26 18 41 - 45
Source :
World Development Report, 2009, The World Bank.
Survey of Current Business, Bureau of Economic Analysis.
Real vs. Nominal GDP (1)

 GDP of a country is changing continuously.

 When GDP increases, there might be two

possible reasons :
1. The economy is producing more goods
and services.
2. Goods and services are sold at higher
prices.
Real vs. Nominal GDP (2)

Real GDP
 The production of goods and services
valued at constant prices.

Nominal GDP
 The production of goods and services
valued at current prices.
Real vs. Nominal GDP (3)
Illustration (a country which produces only good X and good Y),

Year PX QX PY QY

2016 $1 100 $4 80

2017 $2 120 $5 90

2018 $3 140 $6 100

Year Nominal GDP Real GDP

(base=2011)
2016 $ 420 $ 420
2017 $ 690 $ 480
2018 $ 1,020 $ 540
Real vs. Nominal GDP (4)

 Real GDP is measuring the productivity of

the relevant economy. Real GDP is not
influenced by the changes in the prices.

 Productivity matters.
The GDP Deflator
 A measure of the price level calculated as the
ratio of nominal GDP to real GDP times 100.

nominal GDP
GDP
GDP deflator 100 xx
deflator == 100
real GDP
 Used to monitor the average level of prices in
the economy and thus the rate of inflation.
Is GDP a good measure of economic
well-being? (1)
 GDP does not measure some intangible things,
such as intelligence, integrity, courage, wisdom,
happiness.
 GDP does not take “quality change” into
account.
 GDP only measures activities inside the
legal/open markets.
 GDP says nothing about the distribution of
income.
 GDP assigns no value to leisure time.
 GDP does not take environmental damage into
account.
Is GDP a good measure of economic
well-being? (2)
 GDP measures our ability to obtain inputs
which can make our life worthwhile.
 Nevertheless, GDP is still a good measure of
economic well-being, although it not a perfect
measure.

Countries with higher GDP will have the resources

to build better schools, better healthcare
systems, better police forces (thus make the
countries safer), better public infrastructures,
better movies, better sport facilities, etc.
Human Development Index / HDI
(1)
 Origin :
Human Development Reports
United Nations Development Programme
(UNDP).
Human Development Index / HDI
(2)
Human Development Index / HDI
(3)
HDI & Living Quality
Indicator Very High High HDI Medium Low HDI Least
HDI HDI Developed
Countries

HDI Value 0.878 0.717 0.592 0.393 0.386

Life 80.3 72.6 69.3 56.0 57.7

Expectancy
at Birth
(Years)
Mean years 11.3 8.3 6.3 4.1 3.7
of schooling

Expected 15.9 13.8 11.0 8.2 8.0

years of
schooling
GNI Per 37,225 12,286 5,134 1,490 1,393
Capita (2005
$)

Source : United Nations, Human Development Report 2010, available at http://hdr.undp.org/

Gross National Happiness (GNH)
 The Chinese Economic Reform - 改革
開放 (1)

The Chinese Economic Reform - 改革開放 was started in 1978 by Deng Xiaoping - 邓小平 .
The Chinese Economic Reform - 改革
開放 (2)
The Chinese Economic Reform - 改革
開放 (3)
Real GDP Growth Per Capita (1969-2009)

20

15
Growth Rate (%)

Real GDP Per Capita's

10 Growth (China)

5 Real GDP Per Capita's

Growth (World)
0
1969 1974 1979 1984 1989 1994 1999 2004 2009

-5
Year

Data Source : ERS International Macroeconomic Data Set, 22/09/10, in 2005 dollars
Ever-increasing China’s Influence in
the World (1)
Ever-increasing China’s Influence in
the World (2)
Ever-increasing China’s Influence in
the World (3)
MEASURING COST OF
LIVING
What’s in this chapter?

 What is Consumer Price Index (CPI)? How

is it calculated? What is the use?
 What are the problems with CPI?
 How does CPI differ from GDP Deflator?
 How to compare the value of dollar
amounts from different times?
 How can we correct interest rate for
inflation?
Consumer Price Index (CPI)
 A measure of the overall cost of a standard basket
of goods and services relative to the cost of the
same basket of goods and services in a fixed year
(base year)

Steps to calculate CPI :

1. Fix the basket.
2. Find the prices.
3. Compute the basket’s cost.
4. Choose a base year and compute the index.
5. Compute the inflation rate.
 Computing Index and Inflation
Rate

cost of basket in current year

CPI = 100 x
cost of basket in base year

Inflation CPI this year – CPI last year

= x 100%
rate CPI last year
Inflation rate : the percentage change in the price index from the preceding period.
Example : CPI Calculation (1)
 Step 1, fix the basket.
Let the basket be 2 good X, and 3 good Y.
 Step 2, find the prices.
In 2016, PX = $ 10, and PY = $ 3.
In 2017, PX = $ 12, and PY = $ 4.
In 2018, PX = $ 15, and PY = $ 5.
 Step 3, compute the basket’s cost.
In 2016, the basket cost is $ (20+9) = $ 29.
In 2017, the basket cost is $ (24+12) = $ 36.
In 2018, the basket cost is $ (30+15) = $ 45.
Example : CPI Calculation (2)
 Step 4, choose a base year and compute the index.
Let choose the year 2011 as the base year.
Then,
CPI of 2016 = $ (29/29) x 100 = 100
CPI of 2017 = $ (36/29) x 100 = 124.1
CPI of 2018 = $ (45/29) x 100 = 155.2

 Step 5, compute the inflation rate.

Inflation rate of 2017 = (124.1 – 100) / 100 x 100 =
24.1 %
Inflation rate of 2018 = (155.2 – 124.1) / 124.1 x 100 =
25.06 %
Producer Price Index (PPI)
 A measure of the cost of a basket of goods
and services bought by firms.
 Higher production costs tend to cause
higher output prices.
 PPI might be useful in predicting changes
in the CPI.
Problems in Measuring the Cost of
Living

 Substitution Bias.

 Introduction of New Goods.

 Unmeasured Quality Change.

Substitution Bias
 Prices do not change proportionally.
 Consumers will adjust their consumption
based on the new prices.

 Buy more goods whose prices have risen

relatively less or perhaps even have fallen.
 Buy less goods whose prices have risen
relatively more.
 If the price index is computed based on a
fixed basket of goods, the index will tend to
overstate the increase in the cost of living.
Introduction of New Goods
 When a new good is introduced,
consumers have more choices.
 More consumption choices make each
dollar more valuable.

 As CPI is based on a fixed basket of goods

and services, it does not reflect the
increase in the value of the dollar which is
caused by the introduction of new goods.
Unmeasured Quality Change

 Change in quality ≈ Change in the value of

the dollar.

 If the quality of the good deteriorates and

the price stays the same, the value of the
dollar falls.
 If the quality of the good improves and the
price stays the same, the value of the dollar
increases.
The GDP deflator vs. CPI (1)
 GDP deflator is the ratio of nominal GDP to
real GDP. It reflects the current level of
prices relative to the level of prices in the
base year.

 Economists use both GDP deflator and CPI

to monitor the changes in prices.

 Most of the time, these two measures tell a

similar story.
 The GDP deflator vs. CPI (2)
Australia, CPI & GDP deflator

20
Inflation Rate (% p.a.)

15
CPI
10
GDP deflator
5

Year

India, CPI & GDP deflator

40
Inflation Rate (% p.a.)

30

20
CPI
10
GDP deflator
0

-10

-20
Year
Data Source : World Bank.
 The GDP deflator vs. CPI (3)
Indonesia, CPI & GDP deflator

80
Inflation Rate (% p.a.)

60

40
CPI

20 GDP deflator

0
1971

1989

1993
1995

1999
2001
1969

1973
1975
1977
1979
1981
1983
1985
1987

1991

1997

2003
2005
2007
2009
-20
Year

South Africa, CPI & GDP deflator

30
Inflation Rate (% p.a.)

25
20
CPI
15
GDP deflator
10
5
0

Year
Data Source : World Bank.
The GDP deflator vs. CPI (4)
But, there are two differences :
1. GDP deflator reflects the prices of all goods
and services produced domestically,
whereas CPI reflects the prices of all goods
and services bought by consumers.

2. GDP deflator compares the price of

currently produced goods and services,
whereas CPI compares the price of a fixed
basket.
Dollar Figures from Different
Times (1)
 The value of $ 10,000 in 1960 does not
have the same value as $ 10,000 in 2013.

 The value of certain amount of money

changes over time.
 The current value might be higher or lower
than the previous value.

 Why???
Different price level in different time period.
Dollar Figures from Different
Times (2)
 Is $ 100,000 in 1960 better than $ 2,000,000 in
2018? Or worse?

 It depends on the CPI of the relevant year.

 If CPI of 1960 is 12, and CPI of 2018 is 180, then…
$ 100,000 in 1960 is equal to $ 1,500,500 in 2018.
 If CPI of 1960 is 9, and CPI of 2018 is 260, then…
$ 100,000 in 1960 is equal to $ 2,166,667 in 2018.
Indexation
 The automatic correction by law or contract
of a dollar amount for the effects of inflation.

 It is done to somehow protect parties

involved in the contract from the pressures
of inflation.

 Example : COLA (Cost Of Living Allowance),

Social Security Benefit.
Real and Nominal Interest Rate (1)
Interest Rate
 A rate which is charged or paid for the use
of money.

 When you borrow money from the bank,

you have to pay loan interest.
 When you put your money in the bank,
the bank has to pay you interest.
Real and Nominal Interest Rate (2)
Real Interest Rate
 The interest rate corrected for the effects of
inflation.

Nominal Interest Rate

 The interest rate as usually reported without
a correction for the effects of inflation.

r  i 
Real interest rate = Nominal interest rate – Inflation rate
The Fisher Effect

Irving Fisher
February 27, 1867 – April 29, 1947

American Neo-Classical Economist

Fisher Effect : The tendency for nominal

interest rate to be high when inflation is high
and low when inflation is low.
Costs of Inflation
 Decrease in purchasing power.
 Falling in capital investment.
 Reduce economic growth.
 Wealth redistributions.
 The fear of continuous inflation may
prolong the inflationary period, or even
may raise the inflation rate.
 “Noise” in the price system.
 Increase uncertainty.
 “Shoe-Leather” / “Menu” costs.
Deflation and Its Costs

 Deflation : declines in general price level.

Possible costs :
1) Fall in consumer’s confidence
2) Higher real cost of borrowing
3) Lower profit margin (and possibly might
increase unemployment)
Hyperinflation
 A situation in which the inflation rate is
extremely high.

 Some hyperinflation in modern history :

1. Germany, 1923 – 102,000,000%.
2. Hungary, 1945 – 3.8 x 1027%.
3. Israel, 1985 – 400%.
4. Nicaragua, 1988 – 33,000%.
5. Zimbabwe, 2008 – 2,200,000%.
UNEMPLOYMENT &
MONETARY SYSTEM
Countries with highest unemployment rate
Country Unemployment Rate (%)
Former Yugoslav Republic of Macedonia 30.01
Bosnia and Herzegovina 27
Greece 26.98
Spain 26.87
South Africa 25.12
Serbia 25
Sudan 19
Armenia 18.5
Portugal 17.40
Cyprus 17
Georgia 16.71
Tunisia 16.7
Source : International Monetary Fund, World Economic Outlook Database, October 2013.
Countries with lowest unemployment rate
Country Unemployment Rate (%)
Belarus 0.6
Thailand 0.65
Kuwait 2.07
Singapore 2.1
Brunei Darussalam 2.7
Malaysia 3.1
Buthan 3.2
Hong Kong SAR 3.2
South Korea 3.22
Switzerland 3.23
Norway 3.3
Seychelles 3.32
Source : International Monetary Fund, World Economic Outlook Database, October 2013.
Employment Survey
Categories of Households in Employment Survey :
 Employed

Paid employees, Private Businesses, Unpaid

Workers in a family member’s business.
Full Time & Part Time.
 Unemployed

Not employed, available for work, and looking for

job.
 Not in the Labor Force

Other than two above categories. Such as, student,

retiree.
Employment Measures

Labor Force  Number of Employed  Number of Unemployed

Number of Unemployed
Unemployment Rate  100%
Labor Force

Labor Force
Labor Participation Rate  100%
Adult Population
Short-term vs. Long-term
Unemployment
 Short-term unemployment might not pose
a big threat.
 But, Long-term unemployment might pose
a big threats, such as economic and
psychological hardships.

 Most spells of unemployment are short,

and most unemployment observed at any
given time is long-term.
Three Types of Unemployment
 Frictional Unemployment
Unemployment caused by the time gap between
quitting a job and finding a new job.
 Structural Unemployment
Unemployment caused by insufficiency of number
of jobs, or by inability to find jobs due to lack of
relevant skills.
 Cyclical Unemployment
Unemployment associated with Business Cycle.
Deviation from Natural Rate of Unemployment
(NRU).
Natural Rate of Unemployment
(NRU)
 The normal rate of unemployment around
which the unemployment rate fluctuates.
 Consists of structural and frictional
unemployment.

In Employment Act (1946) – U.S.,

Government is responsible for creating full
employment.
Full employment : Everyone who wants to
have a job could have one.
Discouraged Workers

 Hysteresis Effect.

 Individuals who would like to work, but

have given up looking for a job.

 The number of discouraged workers tend

to increase during long recession.
Public Policy and Job Search
 Internet shortens the job matching
processes.

Government Policies :
1. Government-run employment agencies.
2. Public training programs.

Critics of Government Policies : Laissez-

Faire, let the market solves the problem.
Barriers to Full Employment

 Unemployment Insurance

 Minimum Wage Laws

 Labor Unions
Unemployment Insurance
A government program which partially protects
workers’ incomes when they become
unemployed.

In the U.S. : 50% of former wages for 26 weeks.

Pros : reduces the hardship of unemployment by

providing some income, provides additional time
to look for a better job.
Cons : reduces the incentives of looking for a new
job (thus, increases unemployment).
Minimum Wage Laws (1)

W
Surplus of Labor
SLabor

WMin

WEq

DLabor

Q
QEq
Minimum Wage Laws (2)

 If left unprotected, lower-skills workers are the

ones who are prone to be exploited by
employers.
 Higher skills workers are almost totally unaffected
by this policy as their salary are way above the
minimum level.

 Minimum Wage Laws mostly affect

unemployment rate among workers with the
lower skills.
The Economics of Labor Unions
(1)
A worker association that bargains with
employers over wages, benefits, and working
conditions.

Collective Bargaining
 The process by which unions and firms agree
on the terms of employment.

Strike
 The organized withdrawal of labor from a firm
by a union.
The Economics of Labor Unions
(2)
 If a union raises the wage above the equilibrium
level, there will be surplus of labor.
 Those who are employed at higher wages are
better off. But, the unemployed ones are worse off.

 Insiders vs. Outsiders in different groups of

workers.
 When unions raise wages in one part of the
economy, the supply of labor increases in other
parts of the economy (thus, reduces the wages of
the non-unionized industries).
Labor Strikes
Pros and Cons of Unions
Pros :
1. Limiting firms’ market power.
2. Protecting the workers from abuse.
3. Helping firms to keep the workforce
happy and productive.

Cons :
1. Cartel-like social structure.
2. Some workers benefits at the expense of
the other workers.
Theory of Efficiency Wages (1)
Above-equilibrium wages paid by firms to
increase workers’ productivity.

 This might cause some unemployment to

exist at all time.

 Similar to unemployment caused by

minimum wage laws and unions.
 But, minimum laws and unions are binding.
Theory of Efficiency Wages (2)

Why do firms want to pay higher wages?

1. Workers’ health.
2. Workers’ turnover.
3. Workers’ quality.
4. Workers’ effort.
Workers’ Health
 Higher income leads to better diet. Better diet
leads to healthier life. Healthier life leads to
higher productivity.
 This theory might explain unemployment in less-
developed countries. Firms are more concerned
about the health of the workers, thus pay above-
equilibrium wages.
Workers’ Turnover
 Higher wages lead to lower turnovers.

Why do firms care about turnover?

 Hiring and training new workers are costly.
 New workers might be less productive than
the trained workers.

Firms with higher turnovers tend to have

higher production costs.
Workers’ Quality

 Higher wages attract better job applicants.

 Workers with higher qualities is associated
with higher productivity.
Workers’ Effort
 Higher wages provide incentives for the
workers to put more efforts on their
works.
 Equilibrium wages provide less incentives
for the workers to put more efforts on
their works.
Costs of Unemployment
 Economic costs
Loss in productivity.
 Psychological costs
Ex : loss of self-esteem, depression, suicidal
behaviors.
 Social Problems.
Ex : crimes, illegal businesses, alcoholism, drug
abuse.
 Government’s Problems.
Less tax receipts, but spend more in unemployment
benefits.
Unemployment and Education
Level
Unemployment and Gender
Who is responsible for
unemployment?

 Individual’s responsibility???

 Keynesian economists argued that society

owes people jobs commensurate with their
training or past job experience.
Okun’s Law

1 percentage point change in the unemployment

rate is equal to 2 percent change in output in
opposite direction.

+1 % change in unemployment = -2 % change in output

 Increasing Wage Inequality : The Effects of
Globalization
 Comparative Advantage.
 Ex : the country has comparative advantage in B. Export more B,
and import more A.
Real Wage S0 Real Wage S0

W1

W0 W0

W1

D1
D0 D0

D1

LA LB

Industry A Industry B
 Increasing Wage Inequality : The Effects of
Skill Differences
 Unskilled Workers vs. Skilled Workers

Real Wage S0 Real Wage S0

W1

W0 W0

W1

D1
D0 D0

D1

LUnskilled LSkilled

Unskilled Workers Skilled Workers

Is the job really that easy???
 No.

Problems :
 Moving Target.
 Inability to find precise multipliers.
 No clear idea of full-employment GDP.
 Economic Policies with long lags.
 Politicians’ agenda.
To be continued