Economics: the macroeconomic problems (cont.)

When the actual change in price level differs from expected, there will be a redistributive effect between providers and recipients of fixed future payments.

-          Anticipated change in price level is expected (correctly).

_-           Unanticipated change in price level is unexpected or expected incorrectly.

_-           Under inflation, providers of fixed future payments (borrower) gain while the recipients (lender) lose. It’s because the interest rate of fixed future payment is bonded by expected inflation rate. When unanticipated inflation exist, the value of returning sum is less than expected in real terms (i^a > i^e, r^a = n - i^a < n - i^e = r^e).

_-           Oppositely, under deflation, providers of fixed future payments (borrower) lose while the recipients (lender) gain.

Other effects of inflation

1)       Increase in cost of livings, so for given income the standard of living may fall.

2)       Resource allocation due to redistribution effect or investment in goods which have a higher rise in nominal price.

3)       Effect on GDP: since the cost of consuming in the future is raised, C↑ and savings↓, also NX fall.

Employment problem

Labour force refers to people that are able and willing to work, aged 15 or above.

Employed person is the labour force that works for profit/ with a formal job attachment, including part-time/underemployed workers, employers, unpaid family members (like housewife) and those who are temporarily absent for work (sick leave / strike)

Underemployed workers are those employed persons who involuntarily work less than a specified number of working hour (35 hrs in HK).

Unemployed persons are able but failed to find a work.

Underemployment or unemployment rate = underemployed persons or unemployed persons / Labour force * 100%.

Costs of unemployment include lower living standard, family problems to individuals; financial burden to government; loss of output to society and other social problems as well.

Note: unemployment is not purely bad to the society. Due to frictional unemployment, some lose their work and find a new one, this may give a rise in productivity.

Business cycles

This refers to the short run cyclical fluctuations in growth rate of real GDP around the long run trend.

1)       Recession / contraction: real GDP drops continuously, unemployment rate is increasing.

2)       Trough: lowest point in the business cycle where the unemployment rate is at highest.

3)       Recovery / expansion: real GDP rises continuously, unemployment rate is decreasing.

4)       Peak / prosperity / boom: highest point in business cycle where unemployment rate is at lowest.

Note:

1)       There are different definitions to the business cycles: (1) Trough may refer to negative real GDP growth only; (2) Recovery and recession may refer to two consecutive growth / fall in growth rate in real GDP.

2)       The period and magnitude of each cycle may not be the same, it’s only a trend.

*Starting from "other effects of inflation" it's new since the mid-term.