PSCI 150 : INTRODUCTION TO ECONOMICS Bachelor of Political Science, KIRKHS, IIUM

1. PSCI 1500:
Introduction to Economics
Macroeconomic Problems:
Unemployment

2. MACROECONOMICS OVERVIEW
Macroeconomics Study of the operation of the
economy as a whole. 6 major Macroeconomics goals:
1. Low unemployment
2. Low and stable inflation
3. High economic growth, broad - based
development
4. Minimal domestic economic fluctuations
5. Minimal international economic fluctuations
6. Wise economic policy, governmental and non-
governmental efforts to influence the economy
toward the macroeconomic goals.

3. 2 major macroeconomic problems are:
• Unemployment
• Inflation
MACRORECONOMIC PROBLEMS

4. UNEMPLOYMENT
LABOUR FORCE
Defined as people from the total population above the
16 years of age, not in any institutions and who are
either employed or unemployed but actively seeking
for jobs.
A DISCOURAGED WORKER
An individual who wants to work but has been
unsuccessful for a long period in finding a job and has
given up seeking jobs. those who drop out of the labor
force because after unsuccessful in finding job for a
long period of time.

5. UNEMPLOYMENT
Defined as labour force participants being
available and willing to work but unable to find
jobs. In other words, the available human
resources for production are not being used/
underutilized.
UNEMPLOYMENT RATE
The percentage of the labor force that is
unemployed and actively seeking jobs.
UNEMPLOYMENT

6. UNDEREMPLOYMENT
An individual who works part-time or who are in
jobs below their capability, but who are seeking
full-time employment. In other words, human
resources are not used to their fullest productive
capability.
FULL EMPLOYMENT
The situation in the economy where all available
resources are employed to produce goods and
services.
UNEMPLOYMENT

7. FORMULA
UNEMPLOYMENT = NUMBER OF UNEMPLOYED X 100%
RATE LABOUR FORCE
UNEMPLOYMENT RATE

8. TRY THIS
1. If the population of a country is 220 million people,
its labor force consists of 115 million and 99 million
people are employed, what is the unemployment
rate?
ANSWER – 13.9%
2. If the population of a country is 800,000 people,
the number employed is 700,000 and the number of
unemployed is 70,000, what is the unemployment
rate ?
ANSWER – 9.09%
UNEMPLOYMENT RATE

10. TYPES UNEMPLOYMENT
Frictional Unemployment
• Occurs when people are out of work for a short
period of time while searching for a job.
• Voluntarily, normal and temporary
Cyclical Unemployment
• Involuntary unemployment that results from a
downswing in a business cycle, or recession
• Continues until the economy breaks out of the
recession.

11. Structural Unemployment
• Involuntary unemployment that results when a
worker’s job is no longer part of the production
structure of the economy.
• Because of a mismatch between skills and jobs, it
continues indefinitely; no prospect for rehire.
Seasonal Unemployment
• Occurs when a person is able and willing to work
but currently is without work
• i.e. amusement parks may experience seasonal
unemployment during the winter due to less people
will visit the parks during this time.
TYPES UNEMPLOYMENT

12. EFFECTS OF UNEMPLOYMENT
Effects on Individuals and Society
Effects on the Economy

13. UNEMPLOYMENT
 Effects on Individuals and Society
Unemployment intensifies an individual’s struggle
with scarcity because spending habits and lifestyles
are altered due to the lack of employment.
 Effects on the Economy
Unemployment intensifies the scarcity problem, and
the loss to society is the goods and services that
might have been enjoyed.

14. • Full Employment - All human resources available for
production are fully utilized
• Goal of Full Employment does not mean 100% of the
labor force is working.
• Rate associated with full employment has changed due to:
• Changes in the composition of the work force
- Affect gender, skills, demographic changes
• Duration and quantity of government assistance programs
- May influence people’s decisions to remain out of work.
• Growth in temporary and part-time work
- Jobs are plentiful and people are counted as employed.
UNEMPLOYMENT & FULL EMPLOYMENT

15. NATURAL RATE OF EMPLOYMENT
Proper definition of full employment is critical, economist
focused on the Natural Rate of Unemployment (NRU) rather
than Full Employment to reflect the definition of current
employment condition.
Natural Rate of Unemployment (NRU)
 Concept of economic activity developed in particular by
Milton Friedman and Edmund Phelps in the 1960s
 Considered to be consistent with level of unemployment that
includes only frictional, seasonal and structural
unemployment
 Is the equilibrium rate of unemployment - all those wanting to
work have found employment and it is assumed that there is
no cyclical unemployment .

16. Discuss 4 major types of unemployment by giving
appropriate examples to support your answer.
REVIEW

17. OVERVIEW OF INFLATION
• Inflation
• A continuous increase in the general price level of
goods and services in the economy.
• Hyperinflation
• Extremely rapid increases in the general price level
(high rate of increase in price level).
• Deflation
• A decrease in the general price level of goods and
services in the economy.
• Disinflation
• Slowing of the inflation rate/reduction in inflation rate.

18. CAUSES OF INFLATION
DEMAND-PULL INFLATION
COST-PUSH INFLATION

19. CAUSES OF INFLATION
Demand-Pull Inflation
• Pressure on prices from the buyers’ side of the market
• Tends to occur when spending is greater than the
productive capability of the economy (Dd>Ss)
• This is when the economy is at full/nearly full
employment, capacity of producing is maximum, people
have income and spend, increasing demand.
• From business side, they will increase investment and
spend on new business plants.
• Spending pressure (demand pressure) will lead to the
rise in the price level .

20. Cost-Push Inflation
• Upward pressure on prices from the sellers’ side of the
market
• Also known as supply-shocks inflation (shortage to the
availability of supply of goods and services)
• Occurs due to increased costs of inputs, borrowing, and
even attempts to increase profit.
• As price of factors of production increase, the seller’s
cost increase and this will be passed to the consumers.
CAUSES OF INFLATION

21. ROLE OF EXPECTATION
Effect from the Role of Expectation towards inflation
i. Demand-pull side : fear of high price, current
spending increase, gives upward pressure to the
current price
ii. Cost-push side : firm expects cost will increase, will
raise price in anticipation of the future higher cost

22. Inflation & Income
 Inflation causes the real income to fall
 Real Income - income measured in terms of the goods
and services that can be purchased with a particular
amount of money income.
 Nominal Income - income measures in terms of current
currencies.
 People with fixed income (i.e. fixed salary, hold
government bonds etc..) are easily affected by
inflation, and the standard of living as a whole will
decline.
EFFECTS OF INFLATION

23.  COLA - Cost of Living Adjustments (COLAs) is a way
to reduce the effects of inflation to those with fixed
income.
 Arrangement whereby an individual’s wages
automatically increase with inflation.
 Adjusts salaries based on changes in a cost-of-living
index (normally used the Consumer Price Index).
COST OF LIVING ADJUSTMENTS

24. MEASURES OF INFLATION
Measures of Inflation - Price Index
 Measures changes in the price of an item or a group of
items using a percentage scale.
1. Consumer Price Index (CPI) measures changes in the
price level of consumer goods and services typically
purchased by households
2. Producer Price Index (PPI) measures changes in the
prices of goods that businesses buy, for further
processing or for sale to a consumer.
3. GDP Price Index measure the price changes for the
entire economy.

25. INFLATION RATE
CALCULATION
INFLATION = CPI current year – CPI previous year X 100%
RATE CPI previous year
Where CPI = Consume Price Index

26. The Consumer Price Index (CPI) reflects the prices of all
goods and services bought by consumers.
Constructing a Price Index uses base year which is the
year against which prices in other years are compared in
a price index.
Example - Calculating the CPI and inflation rate
• Base Year is 2013.
• Basket of goods in 2013 costs RM1,200.
• The same basket in 2014 costs RM1,236.
• CPI = (RM1,236/RM1,200) x 100 = 103.
• Prices increased 3% between 2013 and 2014.
MEASURES OF INFLATION

27. Inflation & Interest Rate
 Interest Rate - The price of money; determines the
return to savers and lenders of money, and the cost to
borrowers
 Real Rate of Interest - Nominal rate of interest minus
the inflation rate (adjusted for inflation)
 With inflation : -
 Savers and lenders will lose if the interest rate does
not rise as much as the rise of inflation rate.
 Borrowers will lose if the interest rate is higher than
the inflation rate.
EFFECTS OF INFLATION

28. Inflation & Wealth
 Wealth measures the value of what people own, i.e.
stocks, real estate, cash, precious metals etc., as
opposed to income (what people earn)
 Inflation will appreciate the assets, thus it will benefit
those who have assets and hurt those who just started
to own wealth or those who wants to purchase assets.
Inflation & Political Environment
 It will reflect the election campaign, changes in
leadership, consequently changes in the socio-political
environment
EFFECTS OF INFLATION

29. 1. Discuss two types of inflationary pressures.
2. Discuss the effect of inflation.
REVIEW