Economics essay

This essay will attempt to explain the relationships between unemployment, inflation and growth in national income and then using relevant data for France and Japan describe their economies performances stating if there is any need for government intervention.

Firstly, unemployment is a potential problem to any economy and for the people unemployed themselves.  Not everyone who doesn’t have a job is classed as being unemployed.  Children, pensioners and people who just choose to stay at home for personal reasons such looking after children are not included in the unemployment statistic.  There are many different definitions for the number unemployed although the most common one which economists tend to use is ‘those of working age who are without work, but who are available for work at current wage rates’. (Sloman.  Pg 401 5^th edition) 

Some of the other definitions of unemployment are as follows:

• “Unemployed persons are all persons who had no employment during the reference week, were available for work, except for temporary illness, and had made specific efforts to find employment some time during the 4-week period ending with the reference week. Persons who were waiting to be recalled to a job from which they had been laid off need not have been looking for work to be classified as unemployed”.  (http://www.fedstats.gov/qf/meta/long_58609.htm)

• “The unemployment rate is the percentage of the labour force that actively seeks work but is unable to find work at a given time. Discouraged workers—persons who are not seeking work because they believe the prospects of finding it are extremely poor—are not counted as unemployed or as part of the labour force.” (http://canadianeconomy.gc.ca/english/economy/unemployment2.html)

• “Percentage of employable people actively seeking work, out of the total number of employable people; determined in a monthly survey by the Bureau of Labour Statistics (website: www.bls.gov)”. (http://www.moneychimp.com/glossary/unemployment_rate.htm)

Numbers or percentages are used to show unemployment rates.  When a percentage is used it is a percentage for the total labour force.  The labour force being the people employed plus the ones unemployed. 

When doing official unemployment statistics there are two methods used to measure Unemployment.  These are measures are known as Claimant unemployment and Standardised unemployment rates.  Claimant statistics are very easy to get hold of because it is just a measure of all the people who are receiving unemployment related benefits.  This method is not the most accurate and doesn’t give the true level of unemployment.  The reason for this is that not all the people unemployed are able to receive the benefits even though they are of a working age and available for work at current wage rates.  Amongst these people are people who are seeking part time work instead of full time work.

The UK government have been using Standardised unemployment rates instead of Claimant Unemployment since 1998 as it is much more accurate.  It describes the measure of unemployment as “people of working age who are without work, available to start work within two weeks and actively seeking employment or waiting to take up an appointment”. (Sloman. Pg 405 5^th edition)

This measure is good because the ILO and the OECD use the same definition for all the countries which makes it easier to compare the unemployment rates. 

The costs that people unemployed will be faced with will first be a financial one as the money that they were earning will be much more than the unemployment benefit if they even receive one.  The next problem will be that the longer it takes them to get a job the more they will become dispirited and frustrated, which could lead to stress related illnesses.  This same stress may spoil family relationships and increase domestic violence. 

The main cost to the economy following unemployment is the loss of output as actual output is below potential output.  Unemployment will make many other peoples incomes decrease due to the following:

• Unemployed people will spend less money which means government don’t get enough tax revenue from national insurance, VAT and excise duties.
• The lack of full employment means that firms don’t make their full potential in profits.
• Additional wages are lost as workers would have earned more should there have been a higher national output.

The income of an economy has a lot to do with the aggregate demand, which is the total spending on goods and services made within the domestic country.  ‘National income is the sum of the incomes that all individuals in the economy earned in the forms of wages, interest, rents, and profits. It excludes government transfer payments and is calculated before any deductions are taken for income taxes.’  (lms.thomsonelearning.com/hbcp/glossary/glossary.taf)

The circular flow of income is a model which shows how national income can be increase or decrease but it doesn’t show how we measure national income or out put.  National output is mostly expressed as in terms of gross domestic product. (GDP)  There are three different ways that can be calculated to obtain GDP.  The first method is called the produced method, where the production of a firm is added up.  The second method is known as the income method.  This involves adding up all of the incomes from households generated from the production of goods and services.  The third method is all about the expenditures necessary to purchase the nation’s production.  The value being sold must equal the value being produced.

Inflation is all about an increase in the prices of goods and services in an economy.  The rate of inflation is about ‘the rate of change of prices (as indicated by a price index) calculated on a monthly or annual basis’.  www.cogsci.princeton.edu/cgi-bin/webwn

Inflation can also be a big problem for an economy although it can be argued that the problem may be a minor one as long as wages keep up with prices which would then make no difference in living standards.   Inflation can only be a minor problem if people are able to anticipate the rate of inflation and then adjust prices fully as well as incomes.  Unfortunately people very rarely can predict the rate of inflation which leads to problems such as:

• Redistribution- Inflation will redistribute wealth to people who own property as the value will rise rapidly during periods of inflation.  People with certain savings accounts that pay rates of interest below the rate of inflation will lose value.

• Uncertainty and lack of investment- A firm will not invest if they cannot predict their costs and revenues, which will reduce the rate of economic growth.

• Balance of payments- When a country faces high inflation its exports will become less competitive in world markets.  This then allows imports to get cheaper than home produced goods, meaning exports will fall and imports will rise.  As a result of this the balance of payments may deteriorate and the exchange rates will fall.