Levels of unemployment. “Full-employment”

Level (rate) of unemployment- is a measure of the prevalence of unemployment and it is calculated as a percentage by dividing the number of unemployed individuals by all individuals currently in the labour force.

FULL EMPLOYEMENT

- does not mean zero unemployment, but is equal to the total of frictional and structural unemployment

- when the economy is at full-employment, the natural rate of unemployment or NRU prevails in the economy (полная занятость - естественный уровень безработицы)

- with some unemployment the economy still has room to grow in the short-run as there are some workers available for firms to hire if they wish to expand output

(those that are unemployed - the small percentage - are considered to be a healthy part of economy, for they are a reserve for the growing economy)

 

Economic costs of unemployment.

GDP gap and Okun’s LAW: GDP gap is the difference between potential and actual GDP

 

>> Economist Okun quantified relationship between unemployment and GDP as followers:

For ever 1 percent of unemployment above the natural rate, a 2 percent GDP gap occurs

this has become knows as Okun’s Law

 

Inflation: meaning and measurement. “rule of 70”.

Inflation is defined as a persistent increase in the average price level in the economy usually measured through the calculation of a consumer price index (CPI).

 

Measurement. Inflation measurement is the process through which changes in the prices of individual goods and services are combined to yield a measure of general price change.

«The Rule of 70»

70/inflation rate = years for the price level to double

Interpretation: In a country experiencing 5% inflation, the price level will double in only 14 years. if the inflation reaches 10%, prices will double in only 7 years.

 

Types of inflation.

There are four types of inflation;

 1.Wage Inflation

 2.Cost-push Inflation

 3.Pricing Power Inflation

 4.Sectoral Inflation

 Some other type of Inflation are explained below:

 5..Fiscal Inflation: Fiscal Inflation occurs when there is excess government spending. This occurs when there is a deficit budget.

 6.Hyperinflation: Hyperinflation is also known as runaway inflation or galloping inflation. This type of inflation occurs during or soon after a war.

 

Effects of inflation.

The output effects of inflation:

1)The Cost-push inflation - where resource prices rise unexpectedly, could cause both output and employment to  decline

- real income falls

Real income is nominal income /price index

2)The mild inflation (<3%)- has uncertain effect. It may be a healthy by-product of a prosperous economy or it may have an undesirable impact on real income

3)The creeping inflation- turning into hyperinflation which can cause speculation reckless spending and more inflation

The Redistribute effects of inflation:

 

Phases of the business cycle.

1 peak - бум

2 recession - рецесcия

3 trough - депрессия

4 recovery – оживление

 

Reasons and results of business cycles.

Reasons:

Changes in interest rate affect consumer spending and economic growth. See: Interest rate cycle

Changes in house prices. A rise in house prices creates a wealth effect and higher consumer spending. A fall in house prices causes lower consumer spending and bank losses. (house prices and consumer spending)

Consumer and Business confidence. People are easily influenced by external events. If there is a succession of bad economic news, this tends to discourage people from spending and investing making a small downturn into a bigger recession. But, when the economy recovers this can cause a positive bandwagon effect.

 

Results:

 

Economic growth: definition and ingredients.

Economic growth - is achieved when there is an increase in a nations real income and output in a given year - an increase in real GDP occurring over some time period.

Ingredients of growth

Supply factors (факторы предложения) - related to the physical ability of the economy to expand. They are:

-Improvement in technology:

-Increase in the quantity and quality of:

                   >Natural resources;

                   >human resources

                   >capital goods

 

Demand factors - to fully employ production potential expanding supplies of resources it is necessary to increase level of aggregate demand

 

Efficiency factor: the country must use its resources:

- in the least costly way - productive efficiency

- in producing the specific mix of goods and services that maximizes society’s well-being – all locative efficiency

 

Definition - a positive change in the level of production of goods and services by a country over a certain period of time. Nominal growth is defined as economic growth including inflation, while real growth is nominal growth minus inflation. Economic growth is usually brought about by technological innovation and positive external forces.