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Areej Aslam Khan 201002380 (business Administration) NooraAl-musailem 200700066 (Finance) ASSE2111 SEC: 201 Rationale Lucius Annaeus Seneca, a Roman philosopher and playwright, once said, “Economy is too late when you are at the bottom of your purse” (Proverbia, 2012). It clearly shows that one should have complete knowledge of economy before it is too late. One needs to understand the importance of learning about the economy as any activity that takes place depends on economy. One’s decision is greatly influenced by economy and that study of economics. Researches state that, “economics is about the world around us; it’s current; it’s always changing; it’s always interesting. It’s the subject that allows you study Tesco’s and ASDA’s methods of competition one day, and learn about the environment and pollution permits the next. It’s about the modern world; it’s about how we behave, how businesses behave and how the government behaves” (McCullagh, 2012). This shows that students need prospects to be able to understand how the world works. It tells us how important it is to learn economics to be able to understand the current world’s dealings and how to compete in the business world. This book is aimed at the high school students who intend to have a major in economics in their undergraduate life who are trying to learn the basics of economy. The Goals that this book aims to achieve based on this are: 1. To help create awareness to students about the economy they live in. 2. To help them understand how the economy works. 3. To help them relate their live with economics. 4. Help them understand the difference between macro economics and micro economics. 5. To influence focused learners about the importance of world economy. To make these goals attainable, the objectives mentioned latter are to be met: 1. Students will be able to identify and explain economic concepts and theories related to the behavior of economic agents, markets, industry and firm structures, legal institutions, social norms, and government policies. 2. Students will be able to identify the determinants of various macroeconomic aggregates such as output, unemployment, inflation, productivity and the major challenges associated with the measurement of these aggregates. 3. Students will be able to formally represent economic relationships using graphical and mathematical tools and provide meaningful verbal interpretations of these representations. 4. Students will attain deeper understanding by focusing on economic growth full employment price stability and economic freedom The content in this book is carefully designed to make students understand the economy from the basics till the complicated concepts of economics that would give strong foundation to the students and enable them to have strong basics for their professional life. References Bamford, C. (2003). Economics. London: University of cambridge. McCullagh, J. (2012). Why study economics. Retrieved from http://whystudyeconomics.ac.uk/why-study-economics-2/ Proverbia. (2012, may 8). Economy. Retrieved from http://webcache.googleusercontent.com/search?q=cache:lCMmFlUf1okJ:en.prove rbia.net/citastema.asp?tematica=374 importance of economics quotes&cd=4&hl=en&ct=clnk WIZIQ. (n.d.). Economics. Retrieved fromhttp://www.wiziq.com/tutorial/38600Meaning-and-Definitions-of-Economics 2012 ECONOMICS AREEJASLAM & NOOR AL-MUSAILEM Table of Contents Introduction UNIT 1: Central Concepts Chapter 1: The Basic Concepts of Economics Chapter 2: The Mixed Economy; Modern Times Chapter 3: The Key Elements; Demand and Supply UNIT 2: Microeconomics Chapter 4: Demand and Supply Chapter 5: Elasticity and Application Chapter 6: Production and Business Organization Chapter 7: Cost Analysis Chapter 8: Analysis of Markets UNIT 3: Factor Markets Chapter 9: How Markets Determine Factor’s Incomes Chapter 10: The Market of Labor Chapter 11: Land and Natural Resources; Environment Chapter 12: Entrepreneurship UNIT 4: Macroeconomics Chapter 13: Basics of Macroeconomic Chapter 14: Measuring Economic Activity Chapter 15: Consumption and Investment Chapter 16: Aggregate Demand and Supply Chapter 17: Monetary Policy UNIT 5: Macroeconomic Problems Chapter 18: Economic Growth Chapter 19: Challenges of Economic Development Chapter 20: Unemployment Unemployment Difficulties in measuring Unemployment The causes and types of unemployment Relationship between inflation and Unemployment Chapter 21: Inflation INTRODUCTION According to J.E Cairns, “Economics deals with the phenomenon of wealth” (WIZIQ). This shows that Economics teaches us how to deal with wealth. It is also a medium to understand the way of making decisions as it basically is the study of social science that deals with solving the problem of scarcity, that is, how to deal with deciding what resources and their amount to use to produce goods and services as there are limited resources available in the world. This book acts like a ladder to the students that would enable them to understand the world and economics from the very basics so that it would help them in their future career and undergraduate studies. This book provides information that meets with the intellectual level of the high school students and provides them basis to the economic world and gives them clear ideas that would also train them in making decisions in their life, not necessarily relating to business but those decisions that would effect their lives. In this book, each unit has about 4 to 5 chapters that are divided according to particular topics. In each chapter, there are sufficient activities, objectives, summaries and definitions that would make the learning process for the students easier and makes them realize how much they themselves have understood the topic and can assess their standing in the course. This book provides enough information that would gives a start to eht students that would enable to build a strong base to their professional studies. 20 Unemployment On completion of this section you should know: 1. 2. 3. 4. 5. What are the macroeconomic problems How to define unemployment and its measurement problems Types of unemployment Main causes of unemployment Relationship of unemployment with other macroeconomic problems UNEMPLOYMENT out on training and work experience. There is People are unemployed when they are able and willing to work but they cannot find also increasing evidence of a link between levels of unemployment and crime. jobs. Unemployment can bring with it serious problems both for those who are unemployed and for the country. With some people being out of work the country’s output will be below its potential level, tax revenue will be lower and more state benefits will have to be paid out. The unemployed, in addition to having lower incomes, may experience higher rate of mental and physical illness and divorce and will miss Economists measure not only the level of unemployment but also the rate of unemployment. The level refers to the number of people who are unemployed; whereas the rate of unemployment the rate of unemployment is the number of people unemployed as the percentage of the number of people in the labor force (i.e. the employed and the unemployed). Full employment is often considered to be achieved when employment falls to 2 to 3%. This may appear to be somewhat surprising as you might have expected it to be 0% While monetarist argue that the natural rate of unemployment cannot be reduced, in the long run, by expansionary monitory or fiscal policies, it can change over time. The factors which do determine the natural rate of unemployment may fall as the results of: unemployed. However, in practice, at any An increase in the mobility of labor, particular time some people may be An improvement in the education and experiencing a period of unemployment as they move from one job to another job. training levels of workers, practices, The natural rate of unemployment, which can also be referred to as the non- level of unemployment which exists when the aggregate demand for labor equals the A reduction in state unemployment benefits, accelerating inflation rate of unemployment (Nairu), is largely a monetarist concept. It is the A reduction in paid union restrictive A cut in income tax. DIFFICULTIES IN MEASUREING UNEMPLOYMENT aggregate supply of labor at the current wage There are two main methods most rate and so there is no upper pressure of the governments use to measure unemployment. wage rate and the price level. The inflation rate One is to measure the number of people in is constant, with the actual inflation rate receipt of unemployment – related benefits ; equaling the expected one. this is called the claimant count. It has the advantage that it is relatively cheap and quick calculate as it is based on information which the government collects as it pays out benefits. work, but who are available for work in the next However the figure obtained may not be two weeks and who are seeking paid entirely accurate. This is because it may include employment. This measure picks up some of some people who are genuinely unemployed. the group not included in the first measure. It Some of those receiving unemployment also has the advantage that as it is based on benefits may not be actively seeking internationally agreed concepts and definitions. employment (the voluntary unemployed) and It makes international comparisons easier. some maybe working and so claiming benefit However, the data are more expensive and time illegally. On the other hand there maybe a consuming to collect than the unemployment number of groups who are actively seeking benefit measure. Also as they are based on a employment but who do not appear in the sample survey they are subject to sampling official figures. These groups may include the error. elderly, those below a certain age, those on THE CAUSES AND TYPES OF UNEMPLOYEMENT government training schemes, married women looking to return to work and those who chose not to claim benefits. As this measure is based on those receiving benefits, it changes every time there is a change in the criteria for qualifying a benefit. Monetarists believe that even at the natural rate of unemployment, when the labor market is in equilibrium, some people will still be unemployed. These are the people who are not able or willing to work at the current wage rate. This equilibrium unemployment can be divided The other main measure involves a labor force survey using the international labor organization a definition of unemployment. This includes as unemployed all people of working age who, in a specified period, are without into two main categories, Frictional and Structural. Frictional unemployment is unemployment which arises when workers are between jobs. One form of frictional unemployment is search unemployment. This unemployment can be divided into a number of arises when workers do not accept the first job forms. One is the technological unemployment. or jobs on offer but spend some time looking In this case people out of work due to the for a better paid job and when employers hold introduction of labor - saving techniques. In out in the hope of recruiting more – productive many European countries a high number of workers. Casual and seasonal unemployment banking staff have lost their jobs in recent years are two other forms of frictional with the introduction of phone and internet unemployment. Casual unemployment refers to banking. When the declining industries are workers who are out of work between periods concentrated in particular areas of the country, of employment including, for example, actors, the unemployment is sometime referred to as TV script writers and roof repairers. In the case regional unemployment. Another form of of seasonal unemployment, demand for structural unemployment is international workers fluctuates according to the time of the unemployment. This is when workers lose their year. During periods of the year, people jobs because demand switches from their working in, for example, the tourist, building industries to more competitive foreign and farming industries maybe out of work. industries. Unemployment can also arise due to changes in Keynesians, however, think that, in addition to the structure of the economy. Overtime the these causes of unemployment, people can be pattern of demand and supply will change. without work because of lack of aggregate Some industries will be expanding and some demand. This will affect the whole economy will be contracting. Because of the immobility and is referred to as cyclical, demand – labor, workers may not move smoothly deficient or disequilibrium unemployment.Fig. between industries, so structural 20.1 shows the labor market initially in unemployment may arise. Structural equilibrium at a wage rate of W. then, as a result of a fall in aggregate demand, firms 1. reduce their output and aggregate demand for UK workers experience according to the report? labor shifts to AD1. If workers resist wage cuts, 2. disequilibrium unemployment of XQ will exist. governments pending would reduce such Even if wage rates fall, disequilibrium unemployment may persist. This is because a cut in wages would reduce demand for goods What type of unemployment may some Discuss whether an increase in the unemployment. RELATIONSHIP BETWEEN INFLATION AND UNEMPLOYMENT and services, which would cause firms to cut Economists have devoted considerable back their output further and make more attention to the relationship between inflation workers redundant. and unemployment. The most famous study on Self – assessment tasks read the short article below and then tackle the exercises that follow. A report by the UK department of trade and industry and development agencies for wales and London published in feb 2001 predicted that the British call center industry, an important provider of jobs in many depressed areas, may lose a significant number of jobs to India. The author of the report, Mike Havard, said, “India is building some of the highest quality call centers in the world, supported by state of the art technology and staffed by skilled, English speaking workforce. Many of the facilities are better than the best the UK can offer.” He argued British operators to improve the quality of their service for e.g. By reducing the time callers have to wait for an operator, if they do not want to lose business. the relationship was carried out by Bill Philips, a Newzeland economist based at the London school of economics. He analyzed the relationship between changes in money wages and unemployment in the UK over the period 1861 to 1957. He found an inverse relationship as show in figure 20.2. A fall in unemployment may cause higher inflation due to the extra aggregate demand generated and the possible upward pressure on wages. This traditional Philips curve suggests that a government can select its optimum combination of inflation and unemployment their outputs and more people are attracted and can trade off the two. For e.g. if the current into the labor force as a result of higher wages. unemployment rate is 8% and its inflation rate However when firms realize that their costs is 4%, the government may seek lower have risen and their real profits are unchanged. unemployment to 5% by increasing its They will cut back and their output and some expenditure while accepting this improvement workers, recognizing that real wages have not may have to be bought at the cost of higher risen, will leave the labor force. Unemployment inflation. returns to 8% in the long run but inflation of 5% However this interpretation is questioned by the monetarist. They argue that while there may be a short run trade of, in the long run expansionary fiscal or monetary policies will have no impact on unemployment but will succeed in raising the inflation rate. To illustrate this view Milton Friedman developed the expectations - augmented Philips curve (also known as the long run Philips Curve) as shown by the vertical line Fig. 20.3. the position of this line is determined by the natural rate of unemployment. The diagram shows that an increase in the aggregate demand does succeed in reducing unemployment from 8% to 4% but creates inflation of 5% and moves the economy to a higher short run Philips curve. Firms expand has now been built into the system. Firms and workers will presume that inflation will continue at 5% when deciding on their prices and putting in their wage claims.