MACROECONOMIC PROBLEMS
INTRODUCTION
In macroeconomic theory, there are several problems which critically appear on every angles and aspects. Problems such as unemployment, inflation, interest rates et cetera.
As in fact in economic study, it regulates a vast search of prevention and alternatives to solve these issues.
On this research, I will divide these major problems into three parts which explains the business cycles, second would consider the unemployment and the final part would deal with inflation.
BUSINESS CYCLE
A business cycle is also known as a trade cycle. It is an important element of economics. Business cycle refers to the regular fluctuation in economic activity in an economy as a whole. A business cycle refers to a wave-like fluctuation in aggregate economic activity particularly with regard to national income, employment and output.
DEFINITION
According to Keynes, a business cycle is composed of periods of good trade with rising prices and low unemployment percentages; follow by period of bad trade with falling prices and high unemployment percentages.
CHARACTERISTICS OF A BUSINESS CYCLE
I- A business cycle is an economic-wide phenomenon which prevails in all industries. If a depression or boom takes place in the industries sector, then it will spread to other sector such as construction, services, agriculture and so on.
II- A business cycle is a wave-like movement in economic activity where an expansion is followed by depression. So the economy moves from one position to another position like a pendulum.
III- Business fluctuations occur periodically and tend to be recurrent in nature. They usually appear again and again after a period of time. The periodicity and causes are not always the same.
IV- Expansion and contraction in a business cycle are self-reinforcing and cumulative in effect.
V- A business cycle is characterized by upward and downward movements.
PHASES OF A BUSINESS CYCLE
A typical or standard business cycle goes through four different stage or phases. There are two periods in the business cycle phases which are expansion and contraction.
EXPANSIONS
Defined as a period in a business cycle where it moves from a trough to a peak i.e. where output and employment increase.
CONTRACTIONS
Contraction is a period in a business cycle when it moves from a peak to a trough during which output and employment decline.
PEAK OR BOOM?
During peak period, the economy is at full employment where all available resources are employed. The economy will experience a high level of output and trade, increasing effectives demand and higher employment levels and income.
Business optimism creates more investment and increased pressure on available resources that leads to an increase in wages and prices of inputs.
There could be a situation where the number of jobs is more than the number of workers and this situation is known as overfull of employment. As a result, there will be an increase of price, wages, interests and profit.
RECESSION
Recession will took place after the period of prosperity ends. This phase is characterized by
I- A decrease in the volume of output, trade and transactions;
II- An increase in the level of unemployment(level of employed is lower);
III- A reduction in aggregate income in term of wage and profit; and
IV- A decline in consumption expenditure and investment level.
The downward phase is also called a contraction. A deep and prolonged recession is known as a depression. Recession is only last for a six month period, with a continue decline in real GDP.
TROUGH
A recession ends when the real GDP is stops falling. The minimum point is called a trough. The trough will last until there is an increase in the real GDP.
In this phase, the overall level of economic activity will fall to the lowest level. Unemployment rates during this phase will be higher and will create many problems. Thus it is a period of great suffering and hardship to society and the worst phase to the business cycle.
RECOVERY
The trough is followed by the recovery. Recovery is a period of revival leading to an upturn of an economy. The economy’s level of output and expand towards full employment during this phase.
The recovery period is initiated by the government expenditure, changes in production techniques, new innovation and exploitation of new sources of energy.
The increase in government expenditure will stimulate the demand for consumption if goods. As a result, the employment level, output, income, wages, prices and profit will start to increase. Through the multiplier effect, the economy will move upward rapidly.
Phase of a Business Cycle Economic Activity
Peak Output—Maximum level
Unemployment—Lowest level
Recession Output—Declines
Unemployment—Increases
Trough Output—Minimum Level
Unemployment—Highest level
Recovery Output—Increases
Unemployment—Declines
UNEMPLOYMENT
During a recession, the unemployment rate increases and it is imperative to study unemployment.
In order to understand unemployment, it is vital to understand the labour force. A labour force is defined as all persons above 16 years of age and older who are workings or actively seeking work. Labour force consists of employed and unemployed persons. Unemployment is defined as labour force participants being available and willing to work but is unable to find jobs. Therefore the unemployment rate is the percentage of labour forces that are unemployed and are actively seeking employment. Discouraged workers are not included in the definition of a labour force. A discourage worker is an individual who wants to work but has been unsuccessful for a long period of time in finding a job and who has consequently giving up on seeking for jobs. Discourage workers would like to work if the job prospects are good.
The unemployment does not measure underemployment. Underemployment is a term used to describe those who take on part-time jobs bellow their capabilities but are seeking for a full time employment.
CALCULATION OF UNEMPLOYMENT RATE
Number of unemployed
Unemployment rate (%) = ------------------------------- x 100%
Labour force
| | Year 2000 | Year 2001 | Year 2002 |
| Total Population | 17400 | 17800 | 18200 |
| Labour Force | 6834.1 | 7046.5 | 7527.9 |
| Total Employment | 6350.8 | 6621.0 | 6848.9 |
The unemployment rate for each year is as follows.
Unemployment rate year 2000 = (Total Unemployed/labour force) x 100
= (6834.1 – 6350.8/ 6834.1) x 100
= 7.07%
Unemployment rate year 2001 = (Total Unemployed/labour force) x 100
= (7046.5 -6621.0/7046.5) x 100
= 6.04%
Unemployment rate year 2002 = (Total Unemployed/labour force) x 100
= (7527.9-6848.9/7527.9) x 100
= 9.02%
Full Employment is a situation in which all available resources in the economy are employed to produce goods and services. However it is difficult to define full employment because full employment does not mean hundred percent of the working labour force. There are always people who are voluntarily unemployed as a result of being dissatisfied with their current job. This situation is called frictional unemployment.
Full employment means that unemployment rate that is equal to frictional unemployment.
Types of Unemployment.
- Frictional Unemployment;
- Cyclical Unemployment;
- Structural Unemployment;
- Seasonal Unemployment.
Frictional Unemployment
Some people have voluntarily quit their jobs to look for other suitable employment. Some school leavers or fresh graduates may be entering into labour force for the first time. This job seeker may be unemployed temporarily for a short time. This is referred to a fictional unemployment.
Fictional Unemployment occurs when people are in between jobs, or are entering or re-entering the labour force.
Cyclical Unemployment
Cyclical unemployment occurs when there is a lack of jobs that results because of a downswing in a business cycle or a recession.
Cyclical employment is a matter of a serious concern compare to a fictional unemployment because the latter was involuntarily and continues until the economy comes out of a recession and takes several years to recover.
Structural Unemployment
This type of unemployment arises due to structural changes in the economy of a country. E.g. a worker loses a job due to that particular job is no longer a part of the structure of the economy.
Structural Unemployment exists because the composition of the labour force does not respond quickly to meet changing demands, technological changes or competition from imported goods and so on.
The workers felt that their skills, talents and experiences were obsolete and unwanted due to the changes in technology and consumer demand.
Technological unemployment is a type of unemployment which is caused by the changes in the technique of production. Technology changes are taking place constantly and there is a need for the labour to keep them updated and be responsive to these changes.
Seasonal Unemployment
Seasonal Unemployment arises due to a second variation in the activities of particular industries. This scenario may be caused by climatic changes or changes in fashion or by the inherent nature if the industries themselves. E.g. A fisherman couldn’t go to the sea during winter or rainy season, therefore as an alternative, the fisherman do work onto the other industries during the low season.
MEASURES TO CONTROL UNEMPLOYMENT
The government can implement any one or a combination of monetary, fiscal and direct control policies.
Monetary Policy
The government may practice expansionary monetary policies which increased money supply in the economy.
a) Open market Operation-purchase of securities or short-term bond
- Central Bank may buy short-term bond or government securities and treasury bills
from individuals as well as institutions. The purchase of securities can increase money supply and increase the purchasing power of individuals and firm.
b) Lowering the reserve requirement
- Reserves Requirement refers to the amount of reserve commercial bank are required
to keep in the central bank. During period of unemployment, the central bank lowers this reserve requirement to increase the cash resources of commercial bank, thereby encouraging the banks to offer loans to public and businessmen.
c) Lowering the discount rate
- Also known as the bank rate. A decline in the discount rate is followed by a decline
in other interest rates which leads to increase borrowing and increase investment by
by private businessmen.
d) Lowering the interest rate
- The central bank may persuade commercial banks to decrease their rates of interest
on deposits from the public. This action from commercial banks will reduce the level
of savings and increase the purchase of goods and service from the public.
Fiscal Policy
The government may practice expansionary fiscal policies through taxation and public expenditure.
a) Decrease in taxes
-The approach to reduce the general burden of taxation on the community is a way to
control unemployment. Reduction in excise duty, sales tax, service tax, and other type
of taxes will increase the consumption expenses of the people.
