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Principles of Macroecomomics - Essay Example

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Principles of Macroeconomics Principles of Macroeconomics Unemployment is considered to be one of the biggest macro economical problems. Unemployment can be expressed either as a number or as a percentage of labor force…
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Principles of Macroecomomics

Download file to see previous pages... Unemployment can be measured by the claimant count or the standardized ILO unemployment measure. (Abel, 2010) Unemployment can be classified into two broad categories: Equilibrium unemployment and Disequilibrium unemployment. When Aggregate Demand for Labor (ADL) equals Aggregate Supply of Labor (ASL) at market wage rate, the labor market is said to be in equilibrium. The difference between the ASL and the labor force is known as equilibrium unemployment or the natural rate of unemployment. This represents the excess of people looking for work over those actually willing to accept jobs. This can be seen in the graph shown below. (Dornbusch, 2006) As shown in the diagram above, distance AB is the equilibrium unemployment. This type of unemployment may occur due to frictional (irreducible minimum level of unemployment in a dynamic and growing economy), structural (resulting from the mismatch of skills and job opportunities), regional (associated with specific regions often due to the concentration of industries in a region) or seasonal (associated with industries or regions where demand for labor is lower at certain times) causes. (Dornbusch, 2006) Disequilibrium unemployment occurs when real wages in the economy are above equilibrium level. This means either the ASL exceeds the ADL or that stickiness in wages prevents wages falling to equilibrium level. The labor market is in a state of disequilibrium, it may be due to real wage (unemployment created when labor wages are deliberately maintained above market clearing level) or demand deficient unemployment (associated with cyclical downturn or recession). (Dornbusch, 2006) Now let us take the consider interest rate. Interest is a rate at which the interest has to be paid by the borrower to the lender apart from the principle amount. Interest rate is a tool of the monetary policy which the government uses in order affect the money supply of the economy in order to achieve macroeconomic objectives. Interest rates are of two types: real and nominal. Real interest rates are interest rates that are formed in accordance with the rate of inflation. On the other hand nominal interest rate refers to the amount, in money term of interest payable. (Dornbusch, 2006) There are many reasons that may lead to a change in the interest rates. Firstly, it may lead to short-term political gains. Politicians do this in order attain public support; however, it may later lead to problems later on. Deferred consumption may also lead to changes in interest rates. Speculation may lead to changes in the interest rates as well, for instance if consumers think that interest rates are going to rise, the consumers would demand more bonds and thus increase demand for bonds, this would lead to an even higher increase in interest rates. (McEachern, 2008) High levels of unemployment means that the economy is not functioning at its production possibility function, that is, it is underachieving and that it can produce more goods but that would require the economy to function more efficiently than it is doing right now. Unemployment imposes private, economic as well as social costs. In that not only does it represent a was of valuable resources but also causes suffering in terms of increased poverty, falling living standards and psychological disorders. Naturally, the costs of unemployment depend on its severity and duration. The costs ...Download file to see next pagesRead More
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