Economics Course Material: Labor Markets, Inflation, and Unemployment - Prof. Arranz, Apuntes de Economía

¡Descarga Economics Course Material: Labor Markets, Inflation, and Unemployment - Prof. Arranz y más Apuntes en PDF de Economía solo en Docsity! © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. W o jc ie ch G er so n ( 18 3 1 -1 9 01 ) Universidad Carlos III de Madrid Economics Principles of Saving, Investment, Unemployment and Inflation Measurement Week 9 2 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Syllabus of the macro part  Week 8  GDP, growth and determinants of productivity.  Week 9  Savings and investment, labour markets and measurement of inflation  Week 10  Money, monetary system, central banks and causes of inflation  Week 11  Open economies and exchange rates  Week 12  Economic fluctuations in the short run: aggregate demand and aggregate supply  Week 13  Fiscal and monetary policies  Week 14: Review and discussions 5 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Savings, investment and national accounts  Remember the Basic Macroeconomic Model (closed economy)  Savings can be Private or Public  Private saving  The portion of households’ income that is not used for consumption or paying taxes Y – T – C  Public saving  Tax revenue less government spending T – G 6 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Saving, investment and NA  National saving = private saving + public saving = (Y – T – C) + (T – G) = Y – C – G National saving = the portion of national income that is not used for consumption or government purchases 7 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Savings, investment and NA  Recall the national income accounting identity: Y = C + I + G + NX  For the rest of this class, focus on the closed economy case: Y = C + I + G Solve for I:I = Y – C – G = (Y – T – C) + (T – G) national saving  In a closed economy SAVING = INVESTMENT 10 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The Market for Loanable Funds  Assume: only one financial market  All savers deposit their saving in this market.  All borrowers take out loans from this market.  There is one interest rate, which is both the return to saving and the cost of borrowing. 11 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Supply of Loanable Funds  The supply of loanable funds comes from saving:  Households with extra income can loan it out and earn interest.  Public saving, if positive, adds to national saving and the supply of loanable funds. If negative, it reduces national saving and the supply of loanable funds. 12 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The Slope of the Supply Curve Interest Rate Loanable Funds ($billions) Supply An increase in the interest rate makes saving more attractive, which increases the quantity of loanable funds supplied. i i t i t t t i tt ti , i i t tit f l l f li . 60 3% 80 6% 15 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Equilibrium Demand The interest rate adjusts to equate supply and demand. i t t t j t t t l . Supply The eq’m quantity of L.F. equals eq’m investment and eq’m saving. ’ tit f . . l ’ i t t ’ i . 5% 60 Interest Rate Loanable Funds ($billions) 16 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. A Government Budget deficit (G-T>0) Interest Rate Loanable Funds ($billions) D1 A government budget deficit reduces national saving and the supply of L.F. i i i l i lS1 5% 60 S2 …which increases the eq’m interest rate i i ’ i and decreases the eq’m quantity of L.F. and investment. 6% 50 17 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Savings, investment and MLF  Using national accounts identity we have that S=I  Long run growth is driven by S  The returns to savings are determined by the market of loanable funds  Public deficits retard growth  Incentives to savings increase growth 20 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Breakdown of the population 21 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Labor Force Statistics labor force participation rate labor force Population older than 16 = 100 x Labor force participation rate: % of the adult population that is in the labor force Unemployment rate (“u-rate”): % of the labor force that is unemployed u-rate # of unemployed labor force = 100 x 22 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Labor market and the crisis Spain, 1T-2005 to 2T 2012.  Participation rate and unemployment rate in Spain 25 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Different types of Unemployment There’s always some unemployment, though the u-rate fluctuates from year to year. Natural rate of unemployment the normal rate of unemployment around which the actual unemployment rate fluctuates Cyclical unemployment  the deviation of unemployment from its natural rate  associated with business cycles, which we’ll study in later chapters 26 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Different types of Unemployment Structural unemployment The number of jobs available in certain markets are insufficient to provide a job for everybody that wants one  This kind of unemployment results when wages are for some reason set above the level that brings demand and supply into equilibrium Legal minimum wage, Unions, … 27 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Economic crisis and unemployment  Unemployment rates in developed countries and the economic crisis 2008-2012 30 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Price indices  There are many prices in an economy  Sometimes some prices increase more than other prices so there is a change in relative prices  In order to summarize the information given by prices it is usual to calculate an index  For the “typical household” the relevant prices are those related with their consumption  The CPI (Consumer Price Index) measures the overall cost of the goods and services bought by a typical consumer 31 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Price indices  Inflation is the growth rate of a price index (typically the CPI)  There are other indices from which we can measure other types of inflation  For instance the Core Inflation is a kind of “long term” inflation when the more volatile components of the HICP (Harmonized Index of Consumer Prices) are excluded 32 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. How the CPI is Calculated 1. Fix the “basket.” The Bureau of Labor Statistics (BLS) –the INE in Spain- surveys consumers to determine what’s in the typical consumer’s “shopping basket.” 2. Find the prices. The BLS –INE- collects data on the prices of all the goods in the basket. 3. Compute the basket’s cost. Use the prices to compute the total cost of the basket. 35 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The CPI and the GDP deflator  The evolution of both indexes is usually coincident P er ce n t ch an g e p er y ea r 36 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The CPI and the GDP deflator Imported consumer goods: included in CPI  excluded from GDP deflator i l i I l The basket:  CPI uses fixed basket  GDP deflator uses basket of currently produced goods & services This matters if different prices are changing by different amounts. I l i i i i i i i . Capital goods:  excluded from CPI  included in GDP deflator (if produced domestically) i l l I i l i i ll 37 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Comparing economic variables across time  Inflation makes it harder to compare dollar amounts from different times.  Example: the minimum wage  $1.25 in Dec 1963  $7.25 in Dec 2013  Did minimum wage have more purchasing power in Dec 1963 or Dec 2013?  To compare, use CPI to convert 1963 figure into “2013 dollars”…