The real economy in the long run (The natural rate of unemployment (公式…
The real economy in the long run
Production and growth
Economic growth around the world
Living standards, as measured by real GDP per person, vary significantly among nations.
Within a country there are large changes in Living standards over time.
Annual growth rates that seem small become large when compounded for many years.
The rule of 70: if a variable grows at x% a year, its value will double in 70/x years.
What explains the differences in living standards?
Productivity plays a key role in determining living standards for all nations in the world.
Productivity refers to
the amount of goods and services produced for each hour of a worker’s time.
What determines productivity?
produced in the past and used in current production process
the stock of equipment and structures
E.g., Tools, buildings, schools, etc.
the knowledge and skills that workers acquire through education, training and experience.
inputs used in production that are provided by nature
e.g., land, rivers and mineral deposits.
society’s understanding of the best ways to produce goods and services.
The production function
Describes the relationship between the quantity of inputs used in production and the quantity of output from production.
Y = A F(L, K, H, N)
Y = quantity of output
A = available production technology
L = quantity of labour
K = quantity of physical capital
H = quantity of human capital
N = quantity of natural resources
F( ) is a function that shows how the inputs are combined.
Economic growth and public policy
To raise productivity, government should have policies that
saving and investment
One way to raise future productivity is to invest in capital.
Investment in physical capital is subject to diminishing returns:
As the stock of capital rises, the extra output produced from an additional unit of capital falls
Implications of diminishing returns:
Catch-up effect: poor countries tend to grow faster than rich ones.
In the long run, the higher saving rate leads to a higher level of productivity and income, but not to higher growth rates.
investment from abroad
Investment from abroad takes several forms:
foreign direct investment: capital investment owned and operated by a foreign entity.
foreign portfolio investment: investments financed with foreign money but operated by domestic residents.
Benefits for capital importing countries
Learn advanced technologies and processes
education, health and nutrition
Investment in human capital raises productivity
Education has a positive externality
One problem facing some poor countries is the brain drain
health and nutrition
Investing in the health of the population increases productivity and raise living standards.
Other things equal, healthier workers are more productive
secure property rights and political stability
Property rights refer to the ability of people to exercise authority over the resources they own.
An economy-wide respect for property rights is an important prerequisite for the price system to work.
It is necessary for investors to feel that their investments are secure.
Political stability is important to the protection of property rights.
Countries may adopt
inward-oriented trade policies, avoiding interaction with other countries; or
outward-oriented trade policies, encouraging interaction with other countries.
Most economists believe outward-oriented trade policies are preferable.
Trade improve the economic being of citizens
research and development
The advance of technological knowledge has led to higher standards of living.
Government can encourage the development of new technologies through research grants, tax breaks, etc
Most technological advance comes from private research by firms and individual inventors.
Excessive population growth
Excessive population growth reduce per capital natural resources and capital stock.
Reducing population growth is thought to be one way low income countries can increase their living standards
Direct population control policies
Equal education and employment opportunities for women
Excessively low fertility rates in some advanced economies also cause problems.
Aging population and related public finance problems.
The natural rate of unemployment
Unemployment is measured by the Australian Bureau of Statistics (ABS).
The ABS surveys 0.33 per cent of Australian households chosen randomly. The survey is known as the Labour Force Survey.
Estimates of unemployment are derived from this survey. Only adults (aged 15 years and older) are included.
Based on the survey, the ABS places each adult into one of three categories:
if a person has spent at least one hour of the previous week working at a paid job or family business.
if a person is on temporary layoff, is looking for a job or is waiting for the start date of a new job.
not in the labour force.
A person who is neither employed or unemployed, such as a full-time student, homemaker or retiree.
The labour force is the total number of workers, including both the employed and the unemployed.
the labour force=employed+unemployed
adult population=not in the labour force+labour force
Unemployment rate = (number of unemployed/labor force) x 100
Labor force participation rate = (labor force/adult population) x 100
Problems with the unemployment measure
Discouraged workers, people who would like to work but have given up looking for jobs after an unsuccessful search, do not show up in unemployment statistics (but are separately identified in the ABS and not in the labour force statistics).
False claims: Other people may claim to be unemployed in order to receive financial assistance, even though they are not truly looking for work.
What do the unemployment data show?
Most spells of unemployment are short.
Most of the economy’s unemployment problem is attributable to relatively few workers who are jobless for long periods of time.
Types of unemployment
Resulting from the fact that it takes time for workers to find the jobs that suit their tastes and skills.
results from the fact that it takes time for qualified individuals to be matched with appropriate jobs.
is inevitable because the economy is always changing.
Labor demand by industries and regions change.
It takes time for workers to search for and find jobs in new sectors and regions.
Resulting from the fact that there aren’t enough jobs for everyone who wants one due to mismatch of skills.
Strucctural unemployment arises if the skills demanded by businesses is not matched by the skills of workers.
Structural unemployment is often thought to explain longer spells of unemployment.
The Australian government offers training to ease the transition of workers from declining to growing industries.
Resulting from above equilibrium wage rates.
if classical unemployment=0, the economy is at nature rate of unemployment
Explaining unemployment: unions and collective bargaining
A union is a worker association that bargains with employers over wages and working conditions.
The process by which unions and firms agree on the terms of employment is called collective bargaining.
A strike can be organised if the union and the firm cannot reach an agreement.
By acting as a cartel, unions can achieve above-equilibrium wages for their members
Above equilibrium wages cause unemployment.
Union workers benefit at the expense of non-union workers.
Explaining unemployment: the theory of efficiency wages
A firm may prefer higher than equilibrium wages for the following reasons:
Worker health: relevant in poor countries where higher wages improve worker nutrition.
Worker turnover: higher wages reduce worker turnover.
Worker effort: Higher wages motivate workers to put forward their best effort.
Worker quality: Higher wages attract a better pool of workers to apply for jobs.
Public policy and job search
Government-financed employment agencies
give out information about job vacancies in order to match workers and jobs more quickly.
Public training programs
aim to ease the transition of workers from declining to growing industries and to help disadvantaged groups escape poverty.
offers workers partial protection against income loss when they are unemployed.
reduces the search efforts of the unemployed and increases unemployment
may improve the chances of workers being matched with the right jobs.
Saving, investment and the financial system
The financial system consists of
the group of institutions in the economy that help to match one person’s saving with another person’s investment.
Financial institutions in Australia
Financial markets: savers directly provide funds to borrowers.
A bond is a certificate of indebtedness that specifies obligations of the borrower to the holder of the bond.
Term: The length of time until maturity.
Credit risk: The probability that the borrower will fail to pay some of the interest or principal.
Tax treatment: The way in which the tax laws treat the interest on the bond.
In Australia interest earned on bonds is treated as any other form of income and is taxed.
A share is a claim to partial ownership in a firm.
The sale of stock to raise money is called equity financing.
Compared to bonds, shares offer both higher risk and potentially higher returns.
The most important stock exchange in Australia is the Australian Stock Exchange (ASX).
Important stock exchanges overseas include:
New York Stock Exchange
Tokyo Stock Exchange
London Stock Exchange.
Financial intermediaries: help savers indirectly provide funds to borrowers.
Act as an intermediary between savers and borrowers
Take deposits from people who want to save
Make loans to people who want to borrow.
Earn the difference between borrowing and lending rates of interest
Help create a medium of exchange which facilitate the purchase of goods and services.
A managed fund is an institution that allows investors to own a portfolio, of various types of stocks, bonds, or both without buying them individually
They allow people with small amounts of money to diversify.
Savings in the national income accounts
In a closed economy: Y = C + I + G
which implies: Y – C – G = I
The left side of the equation is national saving, or just saving (S), so we have S = I which means that
savings equals investment
Some important identities
National saving, or saving, is equal to:
S = I
S = Y – C – G
S = (Y – T – C) + (T – G)
National saving (Y-C-G)国民储蓄
is the total income in the economy that remains after paying for consumption and government purchases.
Private saving (Y-T-C)私人储蓄
is the amount of income that households have left after paying their taxes and paying for their consumption.
Public saving (T-G)公共储蓄
is the amount of tax revenue that the government has left after paying for its spending.
The market for loanable funds
The supply of loanable funds comes from people who have extra income they want to save and lend out.
The demand for loanable funds comes from households and firms that wish to borrow to make investments.
The equilibrium of the supply and demand for loanable funds determines
the real interest rate
Effects of government policies
How can government policies affect the market for loanable funds:
Tax incentives for saving
Increases supply for loanable funds
Investment tax credit
Increases demand for loanable funds
Deficit borrowing reduces the supply of loanable funds available to private investors
Surplus increases the supply of loanable loanable funds available to private investors
definition of saving and investment
depositing unspent income in a bank or using it to purchase shares or bonds
spending on new capital, such as new machines, equipment, tool, or buildings