HKCE Macroeconomics

 Chapter 5: Unemployment, Price

Fluctuations and Business Cycle

By Mr. LAU san-fat CH5-Unemployment, Price F.. 1

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.

By Mr. LAU san-fat CH5-Unemployment, Price F.. 2

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.

By Mr. LAU san-fat CH5-Unemployment, Price F.. 3

Labor Force and Unemployme
nt

Aged 15
Aged 15 or
or Above
Above

Employed
Labor Force Whole
Whole

Unemployed
Population
Population
Under-employed

By Mr. LAU san-fat CH5-Unemployment, Price F.. 4

Labor Force & Unemployment
 Exercises:
1. Is a housewife regarded as unemployed?
2. Ah Wing is a F.3 student who is a private t
utor at Friday nights. Is she employed?
3. A mild mentally retarded person who has
graduated from a special workplace and is
looking for a job. Is that person unemploy
ed?
4. A young lady who cared some poor childr
en carrying HIV in Cambodia last summer
. Is she employed?
By Mr. LAU san-fat CH5-Unemployment, Price F.. 5
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%

By Mr. LAU san-fat CH5-Unemployment, Price F.. 6

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 + 1 225=6 430
 unemployment rate =(1 225/6 430)x100%=19.1%
 under-employment rate = (643/6 430)x100%=10%
By Mr. LAU san-fat CH5-Unemployment, Price F.. 7
Measuring Unemployment
Exercise 2:
 Given that the unemployment rate is 5% and labor for
ce is 10 000. Now, 1 000 new school leavers are see
king jobs.
 Would there be an increase in labor force?
 Yes, increase by 1 000
 Would the unemployment rate change if ALL of th
em 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)x100%=]13.6%-5%
=+8.6%
By Mr. LAU san-fat CH5-Unemployment, Price F.. 8
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

By Mr. LAU san-fat CH5-Unemployment, Price F.. 9
Price Fluctuations
 Inflationis a persistent increase in the g
eneral price level.
 Deflation is a persistent decrease in the
general price level.
 The following situations are NOT consid
ered as inflation/deflation:
 An once-and-for-all change in general price
 A persistent rise/fall in the price of one goo
d
By Mr. LAU san-fat CH5-Unemployment, Price F.. 10
Price Fluctuations
 Remarks:
 Under inflation/deflation, it does NOT impli
es that the prices of ALL goods and service
s change.
 In times of inflation, the prices of some goo
ds may fall while some may remain consta
nt.
 In times of deflation, the prices of some go
ods may increase while some may remain
constant.
By Mr. LAU san-fat CH5-Unemployment, Price F.. 11
Measuring Changes in Prices
 Two methods for measuring a change in
the general price level:
 Consumer price index (CPI)
 Implicit price deflator of GDP

By Mr. LAU san-fat CH5-Unemployment, Price F.. 12

Measurement by CPI
 Types of CPI:
 Consumer price index(A), CPI(A)
 Reflecting the effect of price changes on the lower expen
diture group
 Consumer price index(B), CPI(B)
 Reflecting the effect of price changes on the middle expe
nditure group
 Consumer price index(C), CPI(C) [formerly called
Hang Seng CPI]
 Reflecting the effect of price changes on the higher expe
nditure group
 Composite consumer price index, Composite CPI
By Mr. LAU san-fat CH5-Unemployment, Price F.. 13
Measurement by CPI
 Types of CPI:
Index Monthly Expenditure % of Households
Range (at Covered
1999/2000 prices)
CPI(A) $4 400 - $18 100 50
CPI(B) $18 100 - $31 800 30
CPI(C) $31 800 - $64 600 10
Composite CPI $4 400 - $64 600 90

By Mr. LAU san-fat CH5-Unemployment, Price F.. 14

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.
By Mr. LAU san-fat CH5-Unemployment, Price F.. 15
Measurement by CPI
 IfCPI 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 period]x100%

By Mr. LAU san-fat CH5-Unemployment, Price F.. 16

Measurement by Price Deflato
r 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 def
lator in the last period]x100%
By Mr. LAU san-fat CH5-Unemployment, Price F.. 17
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.

By Mr. LAU san-fat CH5-Unemployment, Price F.. 18

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 understandin
g the effects of price changes on differe
nt income groups.

By Mr. LAU san-fat CH5-Unemployment, Price F.. 19

Effects of Changes in Price Le
vel
 Effects on purchasing power of money:
 Inflation reduces the purchasing power of
money.
 Deflation raises the purchasing power of
money

By Mr. LAU san-fat CH5-Unemployment, Price F.. 20

 Effects of Changes in Price Le
vel
 Effects on real income:
Conditions Effects on Real Income
If % rise in money income > inflation rate Real income increases

If % rise in money income < inflation rate Real income falls

If % rise in money income = inflation rate No change in real income

If % fall in money income > deflation rate Real income falls

If % fall in money income < deflation rate Real income rises

If % fall in money income = deflation rate No change in real income

By Mr. LAU san-fat CH5-Unemployment, Price F.. 21

Effects of Changes in Price Le
vel
 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.

By Mr. LAU san-fat CH5-Unemployment, Price F.. 22

Effects of Changes in Price Le
vel
 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.

By Mr. LAU san-fat CH5-Unemployment, Price F.. 23

Effects of Changes in Price Le
vel
 Effects on Income Redistribution (The R
edistributive Effect):
 The redistributive effect would occur if the i
nflation/deflation is unexpected or unanticip
ated.
 As income will be re-distributed, some peo
ple would gain and some lose.

By Mr. LAU san-fat CH5-Unemployment, Price F.. 24

Effects of Changes in Price Le
vel
 Redistributive Effects under Inflation
People who gain People who lose
Borrowers/Debtors gain because Lenders/Creditors lose as they
they pay less in real terms. receive less in real terms.
Bankers gain as their liabilities of Depositors lose as their interest
deposit falls in real terms. returns falls in real terms.
Employers gain as employment Employees lose as their money
contracts fix the amount of money income is fixed and thus their
wage and thus they pay less in real income is reduced.
real terms.
Insurance companies gain as the Policy-holders lose as the
insurance payments fall in real compensation and returns fall in
terms. real terms.
By Mr. LAU san-fat CH5-Unemployment, Price F.. 25
Effects of Changes in Price Le
vel
 Redistributive Effects under Deflation
People who lose People who gain
Borrowers/Debtors lose because Lenders/Creditors gain as they
they pay more in real terms. receive more in real terms.
Bankers lose as their liabilities of Depositors gain as their interest
deposit rises in real terms. returns increases in real terms.
Employers lost as employment Employees gain as their money
contracts fix the amount of money income is fixed and thus their
wage and thus they pay more in real income is not reduced.
real terms.
Insurance companies lose as the Policy-holders gain as the
insurance payments rise in real compensation and returns rise in
terms. real terms.
By Mr. LAU san-fat CH5-Unemployment, Price F.. 26
Effects of Changes in Price Le
vel
 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.

By Mr. LAU san-fat CH5-Unemployment, Price F.. 27

Effects of Changes in Price Le
vel
 Effects on government tax revenue :
 In times of inflation, government tax revenue woul
d increase because higher money wage makes a
person's income exceeded the tax allowances or f
ell into a higher tax bracket.
 In times of deflation, government tax revenue woul
d fall because lower money income means some p
eople may be out of tax net or fall into a lower tax
bracket.

By Mr. LAU san-fat CH5-Unemployment, Price F.. 28

Effects of Changes in Price Le
vel
 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.

By Mr. LAU san-fat CH5-Unemployment, Price F.. 29

Business Cycle
 Business cycle (BC) refers to the recurrent f
luctuations of economic performance (esp. i
n terms of the real GDP) of an economy.
 A business cycle is characterized by 4 phas
es:
1. Prosperity/Boom/Peak
2. Recession/Contraction
3. Depression/Trough
4. Recovery/Expansion

By Mr. LAU san-fat CH5-Unemployment, Price F.. 30

Business Cycle

By Mr. LAU san-fat CH5-Unemployment, Price F.. 31

Business Cycle
 Characteristics of prosperity:
 Unemployment rate is the very low/Full employme
nt 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

By Mr. LAU san-fat CH5-Unemployment, Price F.. 32

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 risi
ng
 The real GDP growth rate starts to rise
 Deflation rate starts to fall/The general price level stops
declining

By Mr. LAU san-fat CH5-Unemployment, Price F.. 33

 Business Cycle-A Summary
Phase Growth Unemployment Changes in
Rate of Rate the General
Real GDP Price Level
Prosperity Increasing Very low Rising rapidly
or very high
inflation rate
Recession decreasing Increasing Decreasing or
deflation
Depression Low or Very high Falling rapidly
negative or very high
deflation rate
Recovery Positive or Decreasing Increasing
increasing
By Mr. LAU san-fat CH5-Unemployment, Price F.. 34
Business Cycle-HK

By Mr. LAU san-fat CH5-Unemployment, Price F.. 35