Macroeconomics and Inflation: Impact on Real GDP Growth and Unemployment in Italy, Appunti di Macroeconomia

Scarica Macroeconomics and Inflation: Impact on Real GDP Growth and Unemployment in Italy e più Appunti in PDF di Macroeconomia solo su Docsity! Macroeconomics for business RECESSION AND DEPRESSION By understanding the causes of the recession and depression we can understand the functioning of the economic context. We understand that we are in a recession by looking at the GDP (=Gross development product) growth indicator (economic indicator). 
 The GDP’s basic equation is the following: private consumption + private investment + public expenditure. But if we are willing to have an international export, is important to: + export - import. The GDP growth is an indicator of the change of the GDP, we can calculate it by: GDP t - GDP t-1 ———————— x 100 and we obtain a percentage. GDP t-1 We are in a recession if there are at least two consecutive quarters of negative GDP growth, GDP growth is a percentage and as consequence all the markets will react. Macroeconomics and Covid-19 Macroeconomics is a study of the economy at the aggregate level (as a whole), while microeconomics looks at the individual. The market is the place where demand and supply interact. There are different markets: good and services, labor, monetary, government. Assume that we are in the market of good and services. In this case the indicators are prices (y), quantities (x). The demand has negative slope. It means that if the price is increasing, there is a reduction in the demand. There is a negative relation between price and quantity. The supply, on the contrary, has a positive slope. If the producer can increase the price, it will be induced to produce more goods. There is a positive relation between price and quantities. The demand is about consumer, the supply is about producers. Covid-19 was a health, economic, social shock pandemic. Shock stands for a change, in this case a negative. The main characteristics/changes of this shock from a macroeconomics point of view were: consumption behaviour since in this case we have a reduction in consumption and an increase in saving, related to the uncertainty and obviously if there is a shock there is a high uncertainty; at the beginning of the crisis we had a change in labour related to the firing freeze and a change in organization with the introduction of smart working; we also experienced a dramatic increase in technology. GOVERNMENT INTERVENTION The Government had the power to intervene for the pandemic. Its interventions are exogenous.
 The Italian government was the first in Europe to declare, on March 9, an unprecedented national lockdown that paralysed the country. From March 25, productive activities were shut down, except for those deemed ‘essential’ for the functioning of the country’s economic system. The essential activities were supermarket, hospital, drugs, transportation activities. Non-essential activities were hotel, restaurant, and café (crisis of HORECA —> Hotel, restaurant, Cafes). 
 On May 4, lockdown rules started to be lifted, and, from June 15, almost all economic activities were finally allowed to re-open, albeit under strict safety protocols.
 1 The impressive resurgence of the contagion in the fall of 2020 forced the government and regional authorities to reintroduce restrictive measures targeted to economic activities to contain the second wave (partial lockdown for non-essential sectors and activities). The repercussions of this remarkable series of disruptive events on the Italian economy are enormous, and the government tried to attenuate these impacts by adopting several emergency measures and fiscal packages. To increase workers’ protection, the government issued an ad hoc Decree-Law on March 17, 2021, (“Save Italy”) which introduced two labor market policies: 
 - A special COVID-19 short-time work retroactive compensation scheme (Cassa Integrazione Guadagni - CIG). - A firing freeze that stopped firings extended several times up to July 2021. Since firing is a cost there is always labour holding: firing is not immediate but only after a certain amount of time. Also important to mention is the firing freezing , that stopped firings extended several times. With the Covid-19 we have a decrease in the GDP and an increase in the unemployment rate, with a new organization of work (smart working) and the firing freeze and there a negative correlation between GDP an unemployment. The smart working between the Covid-19 wasn’t a common way of work, around 4%. Talking about occupation we can say that there is a distinction between white collar (high technological skills, more conceptual type of work) and blue collar (manual and manufacturing occupation). ISCO is the International Standard Classification of Occupations, introduced by the OECD Organisation for the Economic Cooperation and Development, in Italy called OCSE which is an institution that includes many countries that are the more advanced countries. THE EFFECTS OF THE CRISIS We consider the crisis effects challenging because Covid-19 was an “exogenous shock” that left no part of the world unaffected. In Italy, was even more complicated because of its bureaucracy related to presence of many regional and local authorities. The economic and social impact of the pandemic has also been severe. Very important is the shape of the recovery of the crisis, every crisis is different from the others and at the beginning of Covid-19 researches said that the shape was a V shaped but with the second wave of Covid-19 it became a W shaped. Talking about the “great depression” of 2007-2009 (with a double deep in 2011) in the US, we can recall the fact that we are in recession when after we have two quarters of negative GDP growth. As a difference from Covid-19, the great depression was only a supply shock while Covid-19 was both a supply and demand shock. The shape of the great depression is a U shaped recession/recovery, as shown: We can see that we don’t have a complete recovery especially for growth GDP. By studying each recession we can learn cases and consequences, following there are the key challenges facing the global economy, since was a global crisis: - How, where and how long the economic effect of the crisis will last? - How negative will be its effects? Obviously in terms of the GDP growth and also the unemployment. 2 to this topic we have the firing freeze for permanent employee only and also compensation (adapting the umber of hours worked) scheme. In the fourth graph we observe that the OECD uses the international standard classification of occupation: ISCO, that made an aggregation of four types of combination of white / blue collar and high / low skills. We can see that the most affected country was Chile than Mexico. Here the most disadvantaged category is the medium skilled workers. THE LATEST MACROECONOMIC FORECAST FOR ITALY The Italian economy grew by 6.5% in 2021 and had recovered most of the pandemic-incurred output losses by year-end. The unemployment rate is 9%, we almost have recovered the pre-pandemic period percentage. Why the forests for this year in terms of GDP is relatively low? Because the inflation rate is increasing and reduces the expectations of growth. Another reason his there war that increases uncertainty associated with consumer confidence. Also the rising prices ion energy aren’t helping the crisis. We also must look at all the variables, such as the international commerce. The short-term outlook is clouded by protracted supply disruptions and sharply rising energy prices. Eroding purchasing power, due to higher inflation, and softening consumer confidence are expected to dent real GDP growth in the near term, especially consumer services. The inflation reduced the purchasing power of consumers because of the growth of prices. At the same time, the wage did not increase. The consequence is the wage pressure. (Indexation: a technique to adjust income payments by means of a price index, in order to maintain the purchasing power of the public after inflation). 
 While COVID infections surged in the first weeks of 2022, high vaccination rates helped to prevent a significant tightening of containment measures and real output. It is quite sure that will be another contraction very soon due to the uncertainty, the war, the inflation and the economic environment. Next year’s GDP growth is forecast to grow by 1.2% in 2024. Consumer spending, helped by improving labor market conditions and decreasing uncertainty related to the pandemic (its duration and shape of the recession), is projected to support growth, with household savings rate gradually returning to pre-crisis levels. Consumption is an income component as well as an increase in savings. Following the sharp rebound in 2021, growth of investment was moderate over 2022 and also is expected to be moderate in 2023, because we also have uncertainty about the interest rate (=opportunity cost of time). The external environment was supportive and extended the strong performance of goods exports of 2022 (plus tourism sector). External environment means that Italy as a country is selling abroad, and is a positive component of GDP since Italy produces more than consumes (positive trend). Exports are forecast to grow more moderately in 2023, in line with the external demand. The current account balance is set to deteriorate sharply, reflecting the energy related to negative terms of trade effects. Services are set to increasingly contribute to export growth, driven by the gradual recovery of receipts from international tourism. 
 Driven by energy prices, inflation (=increase in the level of prices) increased significantly in 2022 due especially to the increase in energy prices. Elevated levels throughout the year, with higher energy costs likely to further push up food prices. 5 The world bank on Wednesday said it expects energy prices to decline by 11% in 2023 after 2022. 60% surge following the war, although slower global growth and COVID restriction in China could lead to a deeper fall. Both natural gas and coal prices are projected to decline in 2023 from record highs in 2022. Inflation is set to rise to 3.8% this year, before falling back to 1.6% in 2022. The Bank of Italy was optimistic about Italian inflation over the next few years. In December 2022 the bank forecast Italy’s inflation rate as 8.8% in 2022, 7.3% in 2023, and 2.6% in 2024, slightly revising its prediction from October. 
 Wage pressure, which is the increase in nominal wages to increase the purchasing power of workers, and is set to increase only gradually, as most labour contracts in the manufacturing sector have recently been renewed and labour market slack continues to persist. REAL GDP: CURRENT (ACTUAL) AND FORECASTED Italy – real GDP growth and contributions, takes into account current prices. (Different colors are GDP components.) Y axis: GDP growth
 X axis: time, years (t, t – 1) It was 6,5% and is expected to be about 4% in 2022 and 2% in 2023.
 GDP decreased dramatically in 2020 up to -10% due to Covid-19. Then, it increased up to 6,5% in 2021 with an important recovery in one year It is a V-shaped (HORECA crisis). In 2021 the consumption was the most relevant component of GDP (yellow) because of the reduction of consumer confidence, uncertainty, ecc… The source is the European Commission. Employment and unemployment in Italy (labor market)
 Unemployment (% rate, sx) and employment (stock of employment) (thousands, dx) Unemployment rate=unemployed people labor force. Unemployed people are those in search for a job and available to work with respect to the labor force. A person is defined as employed if he/she worked at least 1 hour in the previous weeks. 6 The green line indicates the unemployment rate, while the blue line indicates the employed.
 A percentage point is the difference between two percentages. If the unemployment rate last year was 10%, and today is 9%, the difference is 1% point, which is different from 1%. Before the pandemic the unemployment rate was relatively high (11% in 2018), then with the pandemic mildly decreased (cause of job retention scheme), and then there was a reduction in 2020 and then an increase. Nowadays the employment is almost as the pre COVID level.
 THE SUPPLY - SHOCK Different sources of the shock from Covid19 pandemic: - Sick workers do not produce, and the GDP does not grow. - Restrictive measures, such as firms’, industries’, universities and schools’ closures, 
 quarantine, lock of tourism flows and, more in general, lockdown measures, importantly 
 reduce of the aggregate production because of government intervention. (Shut down of non- essential activities.) - However, the technology helped to mitigate the negative effects (smart working, online 
 teaching, cooperation on digital platforms, e-commerce, etc.). Nowadays the smart working in Italy is near 20% and only for specific occupations.
 THE SPREAD OF THE SUPPLY SHOCK Notably, the geographical distance from the origin was not necessarily a determinant of the spread of the supply shock (the epicentre was Wuhan in China, but immediately after the shock reached the north of Italy - Lombardy). The spread was uncorrelated with the geographical distance. Air and sea routes might have played a role for the initial dissemination of the virus. 
 THE DEMAND SHOCK 
 The closure of the commercial activities and the restrictions to the individuals’ mobility significantly reduced the demand for goods and services. 
 Unemployment and reduced working hours reduced the available household income (synonyms of wealth. Since working hours and income reduced there was an increase in savings and poverty. Poverty increased because of reduction of working hours and reduction in wage received, there was an increase of the in-work poverty. Statistically the “at risk of poverty” is a relative measure because we compare the income of each household to the average national equalised household income. The equalised household income is the household income divide to the modified OECD scale (=scale that gives a weight to each household component). 
 Psychological effects (wait-and-see attitude due to the uncertainty), disinformation, absence of trust and confidence (increase in savings: propensity to save, decrease in confidence) in the institutions likely contribute to reduce the aggregate production (GDP).
 However, the possibility of home delivery, the e-commerce, and remote services to individuals and firms helped to mitigate these effects. 
 THE SPREAD OF THE DEMAND SHOCK
 Internet and the interpersonal communication are the most important drivers of the spread of the economic contagion of the demand shock: from a local shock to a global (mass) shock. 
 The media also played a role: information, awareness, prevention, fake news. Closure and restrictions as well reduced potentially the demand.
 Keynesian effects (multiplier effects) likely enlarge and extend the reduction of the aggregate demand. 7 Helicopter money? Is a financial intervention raised after the crisis to deal with the problems related to it. Without an important amount of savings was hard to face a hard pandemic, this is the reason why was introduced this resource to all the households, with distributing the same amount of money. Lower interest rates? Is another solution proposed to face the pandemic with reducing the cost of money given by the interest rate. Moral hazard —> trying to connive people about the goodness of an investment. But after this proposal the reduction of rate wasn’t enough when firms needed money/loan to pay mortgages, rents, wages, electricity, suppliers, and banks refuse to lend money . FISCAL POLICY IN ITALY: SHORT-TERM MEASURES Budget deficit forecasts for 2020 and 2021 surveyed before and during the COVID-19 pandemic. Considering export and import we can have: -Trade balance X > IM -Surplus X < IM -Deficit X = IM Considering government and taxation: - Deficit G > T - Surplus G < T - Balanced government budget G = T All countries before the pandemic, except for Germany, had a budget deficit (blue). When the Covid-19 came (yellow) the deficit increased, the situation became even worse. In April 2020 it was negative, especially for Germany, they only started with positive budget. In other countries it was not as bad as Germany. 
 In 2021 in Germany the forecast was dramatic because it started positive and became negative. In France the measure of containment of the budget were not effective. 
 ROLE OF THE EU: LONG-TERM MEASURES Next Generation EU Recovery Plan which includes the Recovery Fund, introduced in May 2020, last step of adoption in Dec 2020: the EC borrows money (€750 billions) on the financial market (long-term) thanks to its credibility. The fund will be shared among EU countries. Some are grants (subsidies, non-repayable contributions), some loans that will increase the debts of member states Investment aims: fighting climate change, environment, digital transformation (infrastructures in some regions), employment support and gaps reduction, reinforce the role of the EU as a global player. Italy: around €222 billions, approx €80 billions subsidies and €140 billion loans to be repaid after 2027. FINANCIAL ASSISTANCE IN THE EURO AREA European Stability Mechanism (ESM) is part of the EU strategy designed to safeguard financial stability in the euro area set up in 2012. European Intergovernative organization based in Luxembourg with stakeholders the 19 countries of the euro zone. 10 The ESM raises funds by issuing money market instruments as well as medium and long-term debt with maturities of up to 30 years. It can also conclude agreements with its members, financial institutions or other parties. Grant loans to its members in temporary financial difficulties to ensure financial stability in the euro area. It is a conditional instrument: to obtain loans the member states must undertake fiscal policy reforms, labour market reforms, financial reforms. The basic concepts of macroeconomics To have a better knowledge of the markets and and the overall economy, we study both microeconomics and macroeconomics to have an overall economy policy, with the final object: aggregate supply and aggregate demand. Macroeconomics is the study of the behavior of the overall economy as a whole with booms and recessions in the business cycle, the economy’s total output of goods and services (analysing the GDP), the growth of output, the rates of inflation and unemployment, the balance of payments, and exchange rates. To calculate the wealth of a country we can use two methods: - real GDP - nominal GDP For inflation we mean the increase in the level of prices. Now the inflation is Italy is more or less 10% with respect to the reference year. Obviously the reference year cannot be a year (quarter) with booms and recession. Inflation’s formula: Pt - pt - 1 ———— X 100 = with a positive result: we have inflation; with a negative: we have deflation. Pt-1 The level of prices reference’s it’s a basket of goods and services and is representatives of all the purchases of the consumers. To measure inflation we use is the consumer price index, also called CPI. According to this indicator we have the level of prices representative of all purchases of the consumers. The pro of using the basket of goods: is easily obtaining a measure of the level or prices. The cons of using the basket of goods: it is relatively constant over time and it cannot include some goods and services, as the value of some goods and services are not correctly measurable. CPI (consumer price index) has its reference base equal to 100. If CPI > 100 —> we have a inflation in the level of prices If CPI < 100 —> we have a deflation, reduction in the level of prices. CPI is connected to all economic indicators. Important to remember is that inflation is a measure of the purchasing power of the consumer. The unemployment rate —> individuals in search of a job and available to work ——————————————————————— X 100 Labor force (sum of employed and unemployed): active population 11 The unemployment rate is important because together with the GDP is and indicator of the wealth of a country, and is calculated considering the working age population that in Italy is 15 to 74. We experienced an increase in the upper age limit since the renewal of 2004, because of the increase in the retirement age. The criteria for being classified as unemployed are set by the ILO (international labour office), and are: - active search for a job during the pasty four weeks. For “active” we mean that there is an active action for searching a job but also a timing for this job search action, during the previous forum weeks. - available to work (almost immediately available) in the next two weeks. For balance of payment, we mean the payment of internal exchange (within country borders) and external trade (difference between X - IM). Exchange rate is the cost of foreign currency. Macroeconomics examines the economy in the short-run and long-run:
 - Short run: in terms of timing is one year and we consider the movements in the business cycle —> booms and recession according to the GDP growth.
 - Long-run: economic growth (trend line), how and if the GDP growth helped our country to move towards our trends GDP. When studying a market is important to go beyond individual economic units, such as households and firms, or the determination of prices in a particular market, which are the subjects matter of microeconomics. Aggregates individual markets of goods, labor, and assets we look at markets as a whole, because we have different markets and we work considering all of this markets together to obtain aggregate supplies and aggregate demand. We want to reach the equilibrium which is demand=supply. Macroeconomics is in equilibrium when we obtain equilibrium in all markets. - AS = Aggregate Supply: amount of output the economy that can produce given the available resources (inputs), and the available technology. It is the GDP: aggregate total output. Can be measured with Y. The resources or inputs used to obtain the level of outputs according to the neoclassical model are labour and capital. Talking about technology we have a debate in the literature and the reason is that the question is unsolved. The role of technology in terms of production or related to specific production function\inputs: • Technology is a perfect substitutes of labor —> there will be unemployment • Technology associated with capital for investing in technology should create new jobs (white collar or blue collar with high skilled workers). - AD = Aggregate Demand: total demand for goods to consume (C), for new investment (I), for goods purchased by government (G), and for net goods to be exported abroad (X - IM). C, I and G are the domestic components and indicate the closed economy. A model is way of describing a system of at least two equations. The advantage is that ai can obtain an easy formalisation while the disadvantage is that we need to introduce different hypothesis and usually this hypothesis are simplifying the reality. 12 National income accounting Income is a synonymous of GDP, in terms of total/overall output, overall production and all GDP components. The nationals savings are associated with both government expenditure and trade balance (exports and imports). which is a formalisation of economic theories/hypothesis Output - GDP: Value in terms of accountability of all goods and services; within a country boarder; period of time for example a year or a quarter. like wages for labour and interest rate for the shares that are associated with capital In this case we have two sides: production and demand side. The payment of this production function goes to labour, most of the rest goes to pay capital and other factors go to true profit. By summing up C + I + G = 68.1 + 16.9 + 17.8 we exceed 102.9 that goes to the net export and in roder to Boston 100 we need more imports and exports. Looking at the pie on the right, we can say that consumption is the most relevant GDP component in each accountability of each country. For consumption we mean the national account of each country. 1 d C= Co + C X y were Co is the autonomous/exogenous component of consumption while C1 is the propensity to consume and is an endogenous component of consumption. The issue related to the consumption is the private consumption. 15 Long-term evolution of the consumption as a share of GDP. 1. C is most relevant in the US 2. Evolution US linear and increased overtime, because Jan is less clear. Transfer payment TR are transfer of money from the government to household/ people. 16 In this graph we can see the overall evolution and the importance of the government purchase is over then 20% of the GDP. Long-term investments —> Which is a synonymous of education and skills. Export is important since it’s produced something that ids sold abroad NX —— X 100 GDP Decreased up to the beginning of 2000. Here we can see that the net exports, decreased up to the beginning of 2000 and then it started to increase. 17 price of the base/reference year and current quantities. The difference between the Nominal GDP and the Real GDP is the level price consider and the current picks of the base year. What is the GDP (definition) mainly considered by the economists? Why? Because changes in real GDP are only due to changes in the economic activity, not to inflation change in prices; while in the nominal GDP the changes are due both got the economic activity and prices. Value of output in terms of good/services produced. Real GDP is GDP at constant prices, given by the price in the base while the nominal GDP is at current prices. We consider for nominal GDP = current prices: 2009 and 2016. —> line of the sum of the 20 First way of measuring inflation: —> Pt > Pt -1 —> Pt < Pt -1 Price index —> reference/base year NGDP t current prices = ———— ——————— RGDP t constant prices Ex. NGDP 2012 = 6,25 current prices GDP RGDP 2012 = 3.59 constant prices NGDP 2012 6.25 GDP deflator= ——————-- = ———— = 1.79 as units RGDP 2012 3.50 As index: 1.79 x 100 = 179 —> prices increase by 79% since the base/reference year. Second way of measuring inflation: —> consumer price index —> deflator: all goods and services are fixed Third way of measuring inflation: Inflation is one of the way of action of policy making. The official unemployment definition understates real or true unemployment because it's due to the rigidity of ILO (International 21 labour office). The two main criteria for unemployment are: - active search for a job - immediate availability to work. If the first criteria comes less, individuals are classified as not in the labour force: inactivate. Individuals that stop searching are classified with the discouragement effect, after some unsuccessful searching actions. In order to avoid such an understatement of unemployment was introduced a complimentary labour market indicator to capture the understatement of employment, that is called extended unemployment rate is the ratio between: people in search and available to work + potential labour force ———————————————————————————— x 100 labour force + potential labour force Is important to know the three-states representation of the labour market: - Employment - Unemployment - Inactivity (not in labour force) It is important to look at the six flows/movement/transition between the three labour market’s states, to obtain a dynamic analysis of labour. With the dynamic analysis and the addition of flows we can understand that the evolution of the labour market and its nature can be a static of dynamic labour market. The change in unemployment should be relative low and should compensate in flows of employment and of successful outflows of unemployment with finding a job. When there is a crisis the unemployment reacts because is a lagging economic indicator related to the phenomena of the labour hoarding. Is defined as the cost of money or opportunity cost of money, because the opportunity cost is the cost of giving up a specific alternative. There is an important debate about reducing the increasing trends of inflation trough the interest rate. The difference between nominal interest rate and real interest rate stands on the money considered so it’s like taking inflation to account for nominal interest rate, while for the real one we don’t take inflation into account. Is the price of a foreign currency, obviously to have an exchange rate we are in an open economy. It’s also important to have exports and imports in order to have exchange rate. —> To buy 1$ I need to pay 0.65£. Depending on the conditions of the financial or money market we could have either floating or 22 Unemployment The unemployment rate is the ratio between: people in search and available to work + potential labour force ———————————————————————————— x 100 labour force + potential labour force There are two criteria to define the unemployment and are set by ILO. We recall: active search for a job (4 weeks before the survey) and immediate availability that is a timing of two weeks after the survey. TYPES OF UNEMPLOYMENT We ave four types of unemployment: 1. Frictional unemployment —> frictional because if we are in equilibrium, in the labour market, we have wage and unemployment and we obtain an equilibrium wager and an equilibrium unemployment. In equilibrium we can have unemployment and it's called frictional unemployment, because is essential for the correct functioning of the labour market since time is needed to reallocate the people and find a new job. We can’t avoid this functional unemployment. It’s not a working phenomena but it’s essential. 2. Seasonal unemployment —> is associated with seasonality and typical for some economic sectors: agriculture, commerce. It’s not a working phenomena because we know it in advance and we cannot avoid seasonal unemployment. The economic indicators are seasonally adjusted, which means that are corrected for seasonality. 3. Cyclical unemployment —> associated with the business cycle and it’s the increase in unemployment due to recession/negative shocks. In general we can say that unemployment is a lagging indicator. To reduce cyclical unemployment we recall policy intervention which for this kind of unemployment is composed by firing freeze and unemployment benefits. The duration of the cyclical unemployment usually takes a short time because its properly associated with the recession once the recession is over the employment should recover, but also is associated with the shape of the crisis or better the shape of the recovery. With the great recession for example we experienced a U shaped recovery that was relatively slow; when the Covid started we didn’t recovery completely in term s of unemployment. It could be a worrying phenomena on both the nature and the duration of the crisis, because if the duration of the crisis is long and the recovery is like a U shape it will last for a long time. 4. Structural unemployment —> is due to a structural mismatch between the skills required by the forms and the skills of the potential workers that are included in the labour supply (since we are win the labour market). It is a warning phenomena. We have policies such as training both in the public and private sector and the increasing in the quality and quantity of education. In terms of education at a glance, in Italy we are below the OECD average. This type of unemployment is an important component of the official unemployment rate (structural vs cyclical). More in general understanding the prevalent type of unemployment is fundamental for policy makers. Unemployment is an important indicator of the wealth of a country, because is associated with the GDP and follows it but with a time lag. For this reason we have mistaken kind of policy since the reaction is not immediate —> this not equality distributed recalls the existence of inequality because of the dining between rich and poor. In some EU countries there are some population categories/groups at a relatively high risk of unemployment and we define this as one of the most common a characteristics of 25 unemployment. In Italy we can mention youth (those aged 15-24), due to the ageing of the population and the increase ratio of the duration cycle of life while females we recall inactivity. For this categories unemployed it’s high. Another important economic connection is between is vacancy (a place that is free and should be filled with an individual in search of a job) or vacant places and unemployment rate has been studied. Since finding a job takes time we mention frictional unemployment. The mismatches between jobs and workers recalls the structural unemployment; enough jobs is related to cyclical unemployment. The unemployment/vacancy ratio gives us important information about the speed/rapidity which a vacant place is covered by unemployed and its strictly connected with the flexibility of there labour market. If we have an increase in vacancy we will have a reduction in unemployment because there are new jobs positions and are filled by unemployed. During the Great Recession, we experienced a shifted to the right in the graph (black line). Unemployment is heterogenous. The labour market turnover is another characteristic of unemployment and is the sum of flows/movements between the state or conditions of employment and unemployment. The turnover is cyclical because follow the business cycle. Unemployment composition is both cyclical and has structural (long time) component in order to have a really detailed analysis and policy implications. The long term unemployment are those unemployed from 12 months or more and is called: phenomena of LTU. Three states representation of the labour market. To find 66.42 = 25,409/38,252 To find 58 = 22,189/38,252 To find 10 = 2,546/38,252 —> inactive/not working The dynamic analysis of the labour market includes three states or conditions: unemployed, employed and inactive or not in the labour force. 26 Corresponding to this states we have three indicators: - Labour force which is the sum of the employed and unemployed, is the population potentially active because one of the indicators is the labour force or simply activity rate, that gives us the percentage of the population potentially active. To calculate it: labour force/population x 100. - Employment rate define by: employed/population x 100. The employed are those working at least one hour for a pay in the week before the survey. - Unemployment rate which: is people in search and available to work + potential labour force ———————————————————————————— x 100 labour force + potential labour force THE DYNAMIC LABOUR MARKET ANALYSIS It comes from the macroeconomics literature. We have three states/stocks/conditions: employment, unemployment and not in the labour foce and with the dynamic analysis we can analyse the movements/flows/transitions between the stocks. —> since 2021 we have time limit of temporary absent from work is three months. Those marginally attached are those not searching but available to work. Is important to define this individuals because according to the rigidity of the ILO criteria if one of this two criteria isn’t fulfilled the individual is inactive, but those marginal attached are not inactive simply not searching. This is the reason why EUROSTAT introduced the category of marginally attached to the LF —> potential LF or grey zone. With the introduction of this labour market indicator it was possible to better classify individuals especially during economic recession, when the discouragement effect is relatively high by using the extended unemployment rate: people in search for a job and available to work + marginally attached or potential LF —————————————————————————————————————— x 100 LF + marginally attached or potential LF The discouragement effect is an unbiased unemployment rate calculator during recession. Main causes of unemployment. 1. new entrant like students; reentrant like mother 2. quite a job creates a vacant place 3. be laid off mainly during a recession 27 Natural rate is related with the frictional unemployment of the labour market. The unemployment rate is the full employment level of output, which is the prevailing unemployment which exists when we exploit all our inputs at their maximum. Usually the natural rate, which is a trend rate, of unemployment is relatively constant. The hysteresis is the process where the increase in unemployment for a long time increase the natural rate of unemployment. It was also analysed recently with the great recession. If there is an important rate of unemployment, this should become an attitude and a way to increase employment benefits. Also important is the bad signalling effect of unemployment. That are usually associated with short term unemployment but sometimes could have some unexpected effects. and people tend to remain unemployed. Which led to reporting bias, that is an undesired increase in unemployment. 30 Unemployed are not only economic cost but also a social cost. Income loss is associated with poverty; social problems are mainly related to long term unemployment. The cost if cyclical unemployment is connect with the GDP empirical relation. Also because females are less educated. —> Which creates a reduction in the economic activity. Exercise: Indicate if the following people are employed; unemployed or inactive/out of the labour force. If they are unemployed indicate whether their unemployment is structural, cyclical, frictional or seasonal (if possible). A. A full time student who does not work. If the student does not search, is classifies as inactive, while if he is searching for a job and has the legal age is unemployed. B. A blue collar worker who was laid-off when his plant was closed for production changes and has not been looking for work. Even if the worker is not looking fior work, he is considered unemployed because he will be back to work after the production plant change. C. A stay at home mother. Which is inactive because if she is not looking for work or self- employed , otherwise. D. A retired aerospace engineer that bags groceries part-time. He is classified as employed E. Katy looses her life guarding job at the end of the summer, just before returning to school. She is seasonly unemployed if she is looking for another work, otherwise she is inactive. F. After a tariff on steel is repealed American steel manufacturers lay-off some workers. This case is structural unemployment because the steel workers afre not looking for a new job. G. Due to generally decreasing retail sales, many retail workers lose their jobs. Here we have cyclical unemployed since we expect a temporary condition and a recovery, because the lay offs are the result of generally poor economic co pitons, these people are cyclically unemployed. H. John leaves his position at McDonalds to look for a new job. This is a case of frictional unemployment because time is needed to find a new job. I. Mary is working a part-time job while she looks for a permanent position. She is employed. Exercise: One economy has the following data for unemployment rare and labour force share: 3 years: 2005/2010/2015, male/female in the range 15-24 and 25 over. 1. Calculate the unemployment rate in the 3 years 2. Comments on changes 1.UR 2005= (20 x 0.021) + (24 x 0.21) + (9 x 0.512) + (11 x 0.442) = 10.44% UR 2010= (18 x 0.019) + (20 x 0.019) + (8 x 0.0513) + (10 x 0.449) = 9.3% UR 2015= (19 x 0.018) + (23 x 0.018) + (9 x 0.514) + (12 x 0.45) = 10.78% 15-24 years 25 years and over MALE FEMALE MALE FEMALE 2005 20 2.1 24 2.1 9 51.2 11 44.6 2010 18 1.9 20 1.9 8 51.3 10 44.9 2015 19 1.8 23 1.8 9 51.4 19 4.5 31 2. There is a reduction from 10.44 in 2005 to 9.3% in 2010: (9.3 - 10.44) - 1.12 % percentage point and (9.3 - 10.44)/10.44 x 100 = -10.75% This change is primarily due to the reduction of the unemployment rates of youth females. There was an increase from 9.3% in 2010 to 10.75% in 2015: 10.75 - 9.3= 1.48 P.P. and (19.78 - 9.3)/9.3 x 100 = 15.7%, due to the increase in going females. Females youth are an unstable labour force population/category (this issue is associated with flexibility). Exercise: In 2017 the population of a country is 1m, the employed are 640k and the unemployed 20k. 1. Calculate labour foce, unemployment rate and participation rate. 2. Assume that in 2018 there’s a 10% increase in population: what happens to labour market indicators? 1. Labour force = employed + unmet ployed = 640.000 + 20.000 = 660.000 - Employment rate = employed/unemployed x 100 = 640.000/1.000.000 x 100 = 64% - Unemployment rate = unemployment/labour force x 100 = 20.000/660.000 x 100 = 3.03% - Participation rate = labour force/population (active) x 100 = 660.000/1.000.000 x 100 = 66% 2. ∆ + 10% Population —> POP = 1.000.000 POP1= 1.100.00 ∆ in labour market indicators: Increase in the denominator of both employment and unemployment and participation. ER1= 640.000/1.100.000 x 100 = 58.2% —> P.P. = 58.2% - 64% (current - previous) = -5.8% P% = (58.2 - 64)/64 x 100 = -9.1% PR1= 660.00/1.100.000 x 100 = -60% —> P.P. = 60-66 = -6% P% = (60-66)/66 x 100 = -9.1% An incresce of 10% in population reduces both rates by -9.1%.
 32 Indexation may be useful, but there are some drawbacks, obstacles. If opportune actions are not taken, the risk is not controlling for it. 
 Exercises: 1. In a country, there are only three goods: A (popcorn) , B (movie shows) and C (diet drinks). The following table shows price and quantities produced in three years 1987, 1990, 1991. 1990=1980 2000=1990 2001=1991 - Calculate NGDP in 1991, RGDP in 1991, with base year 1990. What is the GDP deflator in 1991? NGDP 1991= (1,05 x 590) + (10,50 x 210) + (0,75 x 420) = 3139,5
 RGDP 1991= (1,00 x 590) + (10,00 x 210) + (0,80 x 420) = 3026 
 GDP deflator 1991 = (NGDP 1991/RGDP 1991) x 100 = 3139,5/3026 = 1,037 x 100 = 103.7 The inflation rate in 1991 is 3.7% 2. A market bundle for a typical household includes: three units of good A; three units of good B and three units of good C. Calculate the consumer price index (CPI) for each of the three years by taking 1980 as the base year. CPI 1980= 100 BASE YEAR CPI 1990= (3 x 1 + 3 x 10 + 3 x 0.80) / (3 x 1 + 3 x 5 + 3 x 0.70) x 100 = 176 (there was inflation) CPI 1991= (3 x 1.05 + 3 x 10.50 + 3 x 0.75) / (3 x 1 + 3 x 5 + 3 x 0.70) x 100 = 183 (there was increase in the level of prices). 3. What was the rate of inflation from 1990 to 1991 by using the CPI calculated in point 2?
 (CPI 1991 - CPI 1990) / (CPI 1990) x 100 = (183 - 176) / (176) x 100 = 3.9% 4. Calculate the CPI fro each of the three years using 1990 as the base year, by considering the same market bundle. CPI 1990= 100 BASE YEAR CPI 1980= (3 x 1 + 3 x 5 + 3 x 0.70) / (3 x 1 + 3 x 10 + 3 x 0.80) x 100 = 56 CPI 1991= (3 x 1.05 + 3 x 10.50 + 3 x 0.75) / (3 x 1 + 3 x 10 + 3 x 0.80) x 100 = 104 5. What was the evolution of inflation from 1980 to 1991? We start from a relatively low level of prices. CPI 1980 = 56), then price increase and in 1991 there is inflation, that is: (104 - 100) /(100) x 100 = 4% 6. Now assume what a new market bundle is defines: six units if good A, two units of good B and four units of good C. Calculate the CPI for the three years using the new market bundle and using 1980 as the base year. CPI 1980= 100 CPI 1990= (6 x 1 + 2 x 10 + 4 x 0.80) / (6 x 1 + 2 x 5 + 4 x 0.70) x 100 = 155.3 CPI 1991= (6 x 1.05 + 2 x 10.50 + 4 x 0.70) / (6 x 1 + 2 x 5 + 4 x 0.70) x 100 = 161.2 7. What was the inflation rate from 1990 to 1991, using the CPI calculated in point 6? 35 Explain why is is different from you answer in point 3. (CPI 1991 - CPI 1990) / (CPI 1990) x 100 = (161.2 - 155.3) / (155.3) x 100 = 3.8% rate of inflation There is a change in the rate on inflation due to a change in the bundle, we have different quantities. Aggregate supply and demand We are talking about the aggregate level —> Y = C + I + G + (X - IM). Our aim is to obtain the full employment level of output. The two key indicators for this module are: the output level (what is produced and offered in the economy) and the level of prices. Here to aim is to obtain aggregate demand and aggregate supply and from the interaction of this curve we obtain the equilibrium output and the equilibrium prices. The equilibrium isn’t a long term conditions because there’s re some important shocks both i the aggregate supply and in the aggregate demand, so there are changes in both As/Ad that implies a new equilibrium level of either price or quantity or even e both. The rapidity of the process starts from a shorts term aggregate supply and goes to the long term aggregate supply. Which the term smooth growth we mean that the output following a trend towards the full employment level of output. The aggregate supply has a positive slope, because there is a positive relationship between prices and the quantity produced; aggregate supply has a negative slope because the low of demand. Aggregate demand has negative slope because of the low demand itself, so has a downward sloping. Simultaneously in equilibrium (equilibrium in the market of goods: Y = C + I + G + (X - IM) and the equilibrium in the money market: money demand=money supply), from this equilibrium we obtain a level of price and a level of output but with negative slope because higher prices reduce the level of money supply and the output demand. This is the graph of the equilibrium of the AS-AD model. We have the equilibrium level of output which is observed in the economy. We also have the equilibrium price. 36 We mention that equilibrium is not a stable condition since we can have many shocks. A shock in general means a shift in demand or supply. An example in the increase of the aggregate demand could be an increase in consumption or public expenditure. An example in the increase of the aggregate supply is a shift to the change in the overall output produced by the firms total production. We start from the equilibrium E and we have an aggregate supply shock, which is a negative shock that has as implications a reduction of aggregate supply that is a shift to the left of AS. During Covid 19 we had a reduction of the supply since we experienced firm’s closure. More in general the effects of a shock are associated the reduction of production and the increase in prices and are associated with different issues (the three in the slide). For extent we mean the magnitude of the shock. Associated with the magnitude there is the change in the equilibrium level (price and quantities). Here we have the curve associated with the long-run (important assumption is the full employment level of output and the economy should support this level) and is a vertical curve. (secondo grafico). The different price level are associated with different quantity supply. Here we have a vertical curve and we can the speed growth of y. The graph on the left is showing how and how much the output increases over time. As a result of this increase we have the graph on the right that is showing that overtime there is an increase in the output that moves the AS to the right. The output doesn’t not change if the prices changes. Is an horizontal curve so is the opposite situation of previous curves. 37 The main hypothesis only to consider the moment market and we know that demand is associated with both market of goods and money market. Here money market is fundamental for the definition of aggregate demand. Following the assumption/hypothesis: AD is determinate by the money market. Here we are in the short-term. The movement from the short to the long run is associated with a specific adjustment process. Here we start from the equilibrium E, which is the initial equilibrium. We can have either monetary or fiscal expansionary policy and in AD implies a shift to the right. Employment is more likely to increase, related to the labour market, because there is a higher need of production thus an increase in employment also associated with taxation. Here we are in the long run, and to explain such a vertical aggregate supply we have the fact that we have reached our full employment level of output. The role of the aggregate demand is manly to determine prices. We cannot extend our employment or use all inputs of labour because we are at the full employment level of output which means that we are already exploiting labour at its maximum level. The overall effect of this change that is only a change in demand is the increase in price Here we are in the long run. And there is an effect movement along the supply curve and we experience and increase in prices. To hire more workers has as effect the rise of both wages and cost of production. This is because if we increase prices everything that is calculated in real terms: increases. So there will be a dynamic adjustment in 40 terms of prices and the long term adjustment. There is an important theory which sees AS as a driver of economy and this theory is the supply side economics. Supply side policies are those that increase the potential output through time, so the possibility of expansion of an economy and is obviously associated with a high level of output, which mean we have a shift of AS to the right. 1.regulation is simplifying for the functioning of the economy which mean that there is a relatively high capacity of adjustment also after a possible shock removing regulations which implies some rigidity, 2.legal system reduces or minimizes the costs 3.the technological process has as aim to obtain a high level of output and to produce more, but technology requires a higher level of production Cutting taxes will have a higher effect than the increase in the available output or better production. So it will increase AS and the increase in output will have a high proportion. With reducing taxes (T), in AD is present in the disposable income (Y-T) so reducing taxes means increase AD with a shift to the right pf AD from AD to AD1. On AS, cutting taxation increases the propensity to work and higher production/output. With an increase of AS there will be a shift to the right from AS to AS1. In this graph we have a higher magnitude fro AD, because associate with the magnitude there is the effect on either prices, output and production. increasing potential output. we have a recount in G because of the compensation effect. Deficit: G>T. This is a graph summarizing the empirics evidence of all counties in terms of temporal change in AD and AS, to analyze if supply side economics works and how AD and AS evolve trough time. In the graph, by comparing the change in AD to the change in AS we see that there was an increase in AS up to the new millennium than a reduction in the rate of increase; AD follows AS and implies an increase in the price level. The increase in output was relatively high than the increase in prices. 41 Exercise 1: An economy is characterized by the following equations: AD —> y = 460-1000 r (here we have negative slope) AS —> y = 270+500 r (here we have a positive slope) r stands for interest rate. 1. Calculate the equilibrium level of output and interest rate and say whether we are in a recessive or expensive gap by considering that the full employment or the long run equilibrium level of output is y*=400. Equilibrium level of y: 400-1000r = 270 + 500r -1500=-190 r 1500=190r so r=190/1500= 0.127 or better 12.7%. This is the equilibrium level of the interest rate. Equilibrium level of r: y= 460-(1000 x 9.127)= 333.3 equilibrium level of output y=333.3 current or actual level of output Since y*=400 we are in a recessive gap: (y-y*)=(333.33-400) = 66.7 Following the formula y<y* Exercise 2: An economy is characterized by the following equations and indicators: 1. Find the equilibrium level of output and interest rate 2. Assume that G increases from 70 to 10. What is the new equilibrium? 1. To solve the first point we need to use IS-LM model to obtain simultaneous equilibrium in the market of goods and in the money market, because IS curve is obtain by the equilibrium in the market of goods, while LM curve is obtain by the equilibrium in the money market. 42