Unemployment

Unemployment

unemployment occurs when a person who is

actively searching for employment is unable to
find work.

Unemployment rate the number of

unemployed people as percent of the labor
force. The labor force includes the people who
are either employed or unemployed
Unemployment

• Unemployment occurs when workers who want to work are

unable to find jobs, which lowers economic output; however,
they still require subsistence.

• High rates of unemployment are a signal of economic

distress, but extremely low rates of unemployment may signal
an overheated economy.

• Unemployment can be classified as frictional, cyclical,

structural, or institutional.

• Unemployment data are collected and published by

government agencies in a variety of ways.
Unemployment
Type of Unemployment

frictional unemployment occurs as a result of people

voluntarily changing jobs within an economy.

cyclical unemployment is the variation in the number

of unemployed workers over the course of economic
upturns and downturns.

structural unemployment comes about through

technological change in the structure of the economy in
which labor markets operate.

institutional unemployment results from long-term or

permanent institutional factors and incentives in the
economy.
Long-Run Growth
Long-Run Growth

economic growth An increase in the total

output of an economy.

modern economic growth The period of

rapid and sustained increase in output that
began in the Western world with the Industrial
Revolution.
The Growth Process: From Agriculture to Industry

From Agriculture to Industry: The Industrial Revolution

Beginning in England around 1750, technical

change and capital accumulation increased
productivity significantly in two important
industries: agriculture and textiles.

More could be produced with fewer resources,

leading to new products, more output, and wider
choice.

A rural agrarian society was very quickly

transformed into an urban industrial society.
The Growth Process: From Agriculture to Industry

Growth in Modern Society

Economic growth continues today, and while the

underlying process is still the same, the face is
different.

Growth comes from a bigger workforce and more

productive workers. Higher productivity comes
from tools (capital), a better-educated and more
highly skilled workforce (human capital), and
increasingly from innovation and technical change
(new techniques of production) and newly
developed products and services.
The Growth Process: From Agriculture to Industry

Growth Patterns and the Possibility of Catch-Up

catch-up The theory stating that the growth rates

of less developed countries will exceed the growth
rates of developed countries, allowing the less
developed countries to catch up.
The Sources of Economic Growth

aggregate production function The

mathematical representation of the relationship
between inputs and national output, or gross
domestic product.

An increase in GDP can come about through

1. An increase in the labor supply.

2. An increase in physical or human capital.

3. An increase in productivity (the amount of

product produced by each unit of capital or
labor).
The Sources of Economic Growth
An Increase in Labor Supply

labor productivity Output per worker hour; the

amount of output produced by an average worker
in 1 hour.

Economic Growth from an Increase in Labor—More Output but Diminishing

Returns and Lower Labor Productivity
Quantity Quantity Total Measured
Of Labor Of Capital Output Labor
L K Y Productivity
Period (Hours) (Units) (Units) Y/L

1 100 100 300 3.0

2 110 100 320 2.9
3 120 100 339 2.8
4 130 100 357 2.7
The Sources of Economic Growth
Increases in Physical Capital

Economic Growth from an Increase in Capital—More Output, Diminishing

Returns to Added Capital, Higher Measured Labor Productivity

Quantity Quantity Total Measured

Of Labor Of Capital Output Labor
L K Y Productivity
Period (Hours) (Units) (Units) Y/L

1 100 100 300 3.0

2 100 110 310 3.1
3 100 120 319 3.2
4 100 130 327 3.3
The Sources of Economic Growth
Increases in Physical Capital
Role of Institutions in Attracting Capital

foreign direct investment (FDI) Investment in

enterprises made in a country by residents outside
that country.
The Sources of Economic Growth
Increases in Human Capital

Years of School Completed by People Over 25 Years Old, 1940–2006

Percentage With Less Percentage With 4 Percentage With 4
Than 5 Years Of Years Of High School Years Of College
School Or More Or More

1940 13.7 24.5 4.6

1950 11.1 34.3 6.2
1960 8.3 41.1 7.7
1970 5.5 52.3 10.7
1980 3.6 66.5 16.2
1990 NA 77.6 21.3
2000 NA 84.1 25.6
2006 NA 85.5 28.0

NA = not available.
The Sources of Economic Growth
Increases in Productivity

productivity of an input The amount of output

produced per unit of an input.

Technological Change

invention An advancement in knowledge.

innovation The use of new knowledge to produce

a new product or to produce an existing product
more efficiently.
The Sources of Economic Growth
Increases in Productivity
Economies of Scale

External economies of scale are cost savings that

result from increases in the size of industries.
 Economic Growth in
Developing and
Transitional Economies
Life in the Developing Nations: Population and Poverty

While the developed nations account for only

about one quarter of the world’s population, they
are estimated to consume three-quarters of the
world’s output.

This leaves the developing countries with about

three-fourths of the world’s people but only one-
fourth of the world’s income.

The simple result is that most of our planet’s

population is poor.
Economic Development: Sources and Strategies
The Sources of Economic Development
Capital Formation

vicious-circle-of-poverty hypothesis Suggests

that poverty is self-perpetuating because poor
nations are unable to save and invest enough to
accumulate the capital stock that would help them
grow.

capital flight The tendency for both human

capital and financial capital to leave developing
countries in search of higher expected rates of
return elsewhere with less risk.
Economic Development: Sources and Strategies
The Sources of Economic Development
Human Resources and Entrepreneurial Ability

brain drain The tendency for talented people

from developing countries to become educated in
a developed country and remain there after
graduation.

Social Overhead Capital

social overhead capital Basic infrastructure

projects such as roads, power generation, and
irrigation systems.
Economic Development: Sources and Strategies
The Sources of Economic Development
Social Overhead Capital

Corruption
The following chart shows the
World Bank’s rating of corruption
levels in a number of countries
around the world. The countries
are ranked from those with the
strongest controls on corruption—
Germany and France—to those
with the lowest controls—Pakistan
and Nigeria. Indonesia, as you
can see, is near the bottom of the
list.
Economic Development: Sources and Strategies
Strategies for Economic Development
Exports or Import Substitution?

import substitution An industrial trade strategy

that favors developing local industries that can
manufacture goods to replace imports.

export promotion A trade policy designed to

encourage exports.
Economic Development: Sources and Strategies
Strategies for Economic Development
Central Planning or the Market?

International Monetary Fund (IMF) An

international agency whose primary goals are to
stabilize international exchange rates and to lend
money to countries that have problems financing
their international transactions.

World Bank An international agency that lends

money to individual countries for projects that
promote economic development.
Economic Development: Sources and Strategies
Strategies for Economic Development
Microfinance: A New Idea

In the mid 1970s, Muhammad Yunus, a young

Bangladeshi economist created the Grameen
Bank in Bangladesh.

Microfinance is the practice of lending very small

amounts of money, with no collateral, and
accepting very small savings deposits. It is aimed
at introducing entrepreneurs in the poorest parts of
the developing world to the capital market.

Relative to traditional bank loans, microfinance

loans are much smaller, repayment begins very
quickly, and the vast majority of the loans are
made to women (who, in many cases, have been
underserved by mainstream banks).
Economic Development: Sources and Strategies
Growth versus Development: The Policy Cycle

structural adjustment A series of programs in

developing nations designed to: (1) reduce the
size of their public sectors through privatization
and/or expenditure reductions, (2) decrease their
budget deficits, (3) control inflation, and (4)
encourage private saving and investment through
tax reform.
Issues in Economic Development
Population Growth

The populations of the developing nations are

estimated to be growing at about 1.7 percent per
year.

Concern over world population growth is not new.

The Reverend Thomas Malthus (who became
England’s first professor of political economy)
expressed his fears about the population
increases he observed 200 years ago. Malthus
believed that populations grow geometrically at a
constant growth rate—thus the absolute size of the
increase each year gets larger and larger—but
that food supplies grow more slowly because of
the diminishing marginal productivity of land.
These two phenomena led Malthus to predict the
increasing impoverishment of the world’s people
unless population growth could be slowed.
Issues in Economic Development
Population Growth
The Consequences of Rapid Population Growth

The Growth of World Population,

Projected to A.D. 2020

For thousands of years,

population grew slowly. From
A.D. 1 until the mid-1600s,
population grew at about .04
percent per year. Since the
Industrial Revolution, population
growth has occurred at an
unprecedented rate.
Issues in Economic Development
Population Growth
Causes of Rapid Population Growth

fertility rate The birth rate. Equal to (the number

of births per year divided by the population) × 100.

mortality rate The death rate. Equal to (the

number of deaths per year divided by the
population) × 100.

natural rate of population increase The

difference between the birth rate and the death
rate.
The Transition to a Market Economy
Six Basic Requirements for Successful Transition

Economists generally agree on six basic

requirements for a successful transition to a
market-based system.
The Transition to a Market Economy
Six Basic Requirements for Successful Transition
Macroeconomic Stabilization

To achieve a properly functioning market system,

prices must be stabilized.

Deregulation of Prices and Liberalization of Trade

An unregulated price mechanism ensures an

efficient allocation of resources across industries.

Privatization

Private ownership provides a strong incentive for

efficient operation, innovation, and hard work that
is lacking when ownership is centralized and
profits are distributed to the people.
The Transition to a Market Economy
Six Basic Requirements for Successful Transition
Market-Supporting Institutions

The capital market, which channels private saving

into productive capital investment in developed
capitalist economies, is made up of hundreds of
different institutions.

Social Safety Net

This social safety net might include unemployment

insurance, aid for the poor, and food and housing
assistance.

External Assistance

Very few believe that the transition to a market

system can be achieved without outside support
and some outside financing.
The Transition to a Market Economy
Six Basic Requirements for Successful Transition
Shock Therapy or Gradualism?

shock therapy The approach to transition from

socialism to market capitalism that advocates
rapid deregulation of prices, liberalization of trade,
and privatization.