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1 Measuring Output, Prices and Unemployment of Nations. 1 1. Na ti ona l Output or Income or Expenditure (Y) 2. Pri ce Levels or Inf latio n (P) 3. Unempl oyme nt (U) 2 1.National Income (Output=Y) Accounting Q(Y)=f(Ln, L, K,O) CSO:NAS in India Measuring the Production, Income and Spending of Nations www.mospi.gov.in/cso_test1.htm

S3 National Income Accounting

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Measuring Output, Prices andUnemployment of Nations.

1

1. National Output or Income or Expenditure (Y)

2. Price Levels or Inflation (P)

3. Unemployment (U)

2

1.National Income (Output=Y)

Accounting

Q(Y)=f(Ln, L, K,O)

CSO:NAS in India

Measuring the Production,Income and Spending of Nations

www.mospi.gov.in/cso_test1.htm

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1. Concepts and Measurements: National

Output

1 GDP: GDPM,and GDPF

2 NDP: NDPM,and NGPF

3 GNP: GNPM,and GNPF

4 NNP : NNPM,and NNPF(= National

Income)

5 Private Income

6 Personal Income

7 Personal Disposable Income 3

4

1.1.The Gross Domestic Product (GDP)

• Gross Domestic Product  (GDP): GDP is the total  market value of all final goods and services produced within the economy during a given period of time(generally a year) irrespective of ownership of  resources.

Ex. If foreign company (Phillips) produces tube light with inIndia, it is considered as part of GDP of India.If Indian company (TVS motors) produces Two wheeler outside India is not calculated under GDP of India, butconsider as part of GNP of India

• GDP is to measure the growth rate of the economy.• GDP also used to measure the total output of the economy 

for accounting and identity purpose • GDP is use to compare the growth rate of various economy 

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1.1.The Measurement of GDP (GDP)

• “GDP is the Market Value . . .” – Output is valued at market prices.• “. . . Of All. . .”

 – Includes all items produced in the economy and legally sold in markets• “. . . Final . . .”

 – It records only the value of final goods, not intermediate goods (thevalue is counted only once).

• “. . . Goods and Services . . .”

 – It includes both tangible goods (food, clothing, cars) and intangibleservices (haircuts, housecleaning, doctor visits).

• “. . . Produced . . .”

 – It includes goods and services currently produced, not transactionsinvolving goods produced in the past.

• “ . . . Within a Country . . .”

 – It measures the value of production within the geographic confines of a

country.• “. . . In a Given Period of Time.”

 – It measures the value of production that takes place within a specificinterval of time, usually a year or a quarter (three months).

6

1.1.The Measurement of GDP (GDP)

• What Is Not Counted in GDP?

 – GDP excludes most items that are produced andconsumed at home and that never enter themarketplace.

 – It excludes items produced and sold illicitly, such asillegal drugs.

 – It excludes all the items produced by Indian companyout side India.

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1.1. GDP: ( GDPF and GDPM)

a. GDPM (GDP at Market Prices): When the output of all final goods

and services are valued at market prices and the values thusobtained are added is known as GDPM.

It included Indirect Taxes (Ti) and net of Subsidies (S)

GDPM =GDPF + (Ti-S)

b. GDPF (GDP at Factor Prices):

GDPF =GDPM - (Ti-S) => GDPF =GDPM – Ti+S

 – All GDP are express with current and constant prices.

 – GDP at Current Price( Nominal GDP)

 – GDP at Constant Price (Real GDP)

GDPF with Constant Price is called as Real GDP which isused to measure the growth rate of the economy.

GDPF with Current Price is called as Nominal GDP.

8

1.2. NDP: Net Domestic Product

NDP is obtained by subtracting depreciation fromGDP

NDPF=GDPF- depreciation

NDPM=GDPM- depreciation

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1.2 GNP :Gross National Product (GNP):

1. GNP is the monetary value of all final goods and services ( Σ  piqi) that are

Currently produced in a year and Valued at Market price (Jan 1-Dec31 )

2. Produced by National owned Resources only

Ex. visiting Prof, banks profits, Indian company produces out side included

3. Sold through the official market

 – Self consumption- included

 – Rent on owner-living houses is computed –included

 – Do it yourself activities –excluded

 – Black economy: legal/illegal – difficult to estimate: excluded

4. Not resold or used in further productionsFinal goods: Included:

Intermediate goods, Non-productive transactions: such as (i) Public and privatetransfer payment, (ii) buying and selling of securities, and Second hand sales:Excluded

10

1.2 GNP : GNPM and GNPF

(A) GNP at Market Price (GNPM): When the output of all final goodsand services are valued at market prices (current price) and thevalues thus obtained are added is known as GNPM.

It included Indirect Taxes (Ti) and net of Subsidies (S)

GNPM = GNP +Ti-S

B) GNP at Factor Cost (GNPF):

GNPF = GNPM –Ti+S

For National Income identity purpose we use the following identity

GNPF≡ C + I +G+X-M

Hence GNP ≡ GNI ≡ GNE

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1.3. NNP :Net National Product (GNP)s

 – NNP is total value of final goods and 

services produced in the economy during a

year after deducting depreciation plus net 

income from abroad 

 – NNPF=GNPF-depreciation

 – NNPM=GNPM-depreciation

NNPF is known as National Income

12

1.4. How is GDP and GNP Related????

GNP= GDP + Net Income from abroad.

=> GDP=GNP- GDP + Net Income from abroad

Similarly,

1. GNPF=GDPF + Net income from abroad

GNPM=GDPM + Net income from abroad

2. GDPF=GNPF-Net income from abroadGDPM=GNPM-Net income from abroad

We know that

GDPF=GDPM-Ti + S

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1.5 Private Sector’s Income

a.Private Income: Income earned by households

Pvt.I=NNPF –IAD-END+NDI+TAD+OTAb. Personal Income: Income received by households:

PI=Pvt.I-RE-CT

c. Personal Disposal Income: Income available for dispose

PDI=PI-HDT-MAD

IAD- Income from entrepreneurship and property accruing to govtadministrative deps ex. Railways

END- earnings of Govt non-departmental enterprises (PSUs)

NDI- National Debt Interest

TAD- Current Transfer from Govt administration Dept

OTA- Other net current transfer from abroad

RE- retained earnings of nations’s private corporate sector CT- corporate tax

HDT- Household direct tax

MAD- Miscellaneous receipts of govt administrative dept ex. Fines, fees

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India GDP Estimates

• Annual Series(1950-51)• Quarterly Series (since 1997 Q1)

• No Series Less than Quarterly is available

 – IIP used as proxy for GDP

15

year No of Items

1937 15

1946 35

1951 88

1956 201

1960 312 (for monthly)124 ( for annual)

1970 352

1980-81 352( new included old deleted)

1993-94 543

2004-05 682

Use Laspeyer’s Methods to calculate IIP

Weights are based on value added methods

16

Nominal Term i.e. Current Prices

RBI Handbook of Statistics on Indian Economy

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Real Term (i.e. Constant Prices)

RBI Handbook of Statistics on Indian Economy

Measuring the Production, Income, and

Spending of Nations

For an economy as a whole, output 

must equal income which must equal  

expenditure because:

• All output produced is for transactionpurpose

• Every transaction has a buyer and a seller.

• Every rupee of spending by some buyer is arupee of income for some seller.

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Measuring the Production, Income, and

Spending of Nations

19

20

Methods for National Income MeasurementProduction=Income=Expenditure

(GNP=GNI=GNE)

a. Product Methods (GNP): GNP is the ‘value added’ bythe various industries and activities of the economy in aparticular year .

Q=f(Ln, L, K,O)= Σ  pi Q i 

a. Income Methods (GNI): We added up the incomeearned by the owners of factors of productions in aparticular year 

Y = ( R  ×Ln)+(w × L) + (i  × K) + (p × O)

b. Expenditure Methods (GNE): We added up the ‘final’expenditure of all residents (eco agents) in a country.

Z= (C+I+G+X-M)

National Income Identity: Q≡ Y≡Z

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2.1. Product Methods (value added method):

GDPF =ΣPiQi

Pi= Price of final good i

Qi= Output of final good i

A. Primary

(i) Agriculture + (ii) forestry and Fishing + (iii) Mining and Quarrying

B. Secondary

(i)Manufacturing + (ii) Elecricity, gas and water supply + (iii )Constriction

C. Tertiary (Services)

Trade, hotels and restaurant

Transport, storage and communication

Banking and insurance

Real estate , dwelling and business services

Public administration and defense

Other services

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Sectoral Contributions Towards GDP at FC at Const P

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

Agriculture & Allied Activities Agriculture Industry

Mining & Quarrying Manufacturing Electricity, Gas & Water Supply

Services Construction Trade, Hotels, Transport & Communication

Financing, Insurance, Real Estate & Business Se rvic es C omm un ity , Social & Personal Services

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2.2. Income Approach:

GDPF= R+W+I+PA. Compensation of employee

B. Operating surplus

rent

interest

profits and dividends

C. Mixed Income

(self employed ex.(i) Farming enterprises, (ii) sole proprietorship , (iii)

legal and medical services, consultancy services, trading, transport(iv) owned earned income eg. Interest on own capital

Transfer payments, employees benefit, pensions etcnot included here as income.

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2.3. Expenditure Approach: GDPM= C+I+G+X-M

A. Private Consumption (C)

B. Investments (gross) (I)

C. Government Expenditure (G)

D. Exports (X)

E. Imports (M) (minus)

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Implications for Managers

-Movement in national Income helps the manager to figure out the state of theeconomy

-Component of the national income helps to determine the production ,distribution, demand structure etc. of the economy.

-Expenditure pattern indicates the role of govt in economic activity

-Role of govt enhances private competitions

-Pattern of govt finances thorough direct and indirect axes affects the

disposable income of the households thereby their consumption pattern

-Level of imports and exports provides information to the managers about thedemand pattern and the potential customers in the international markets

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Real Vs Nominal GDP

1. Nominal GDP values the production of goods and services atcurrent prices .GDPF at current Prices

2. Real GDP values the production of goods and services at constant prices .GDPF at constant Prices

3. GDP Deflator = Nominal GDP/Real GDP.An accurate view of the economy requires adjusting nominal to realGDP by using the GDP deflator.

32

Real and Nominal GDP

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The GDP Implicit Deflator 

• The GDP Implicit deflator is a measure of the price levelcalculated as the ratio of nominal GDP to real GDP times 100.It tells us what portion of the rise in nominal GDP that isattributable to a rise in prices rather than a rise in thequantities produced.

Calculations:

GDP deflator =Nominal GDP

Real GDP× 100

Real GDPNominal GDP

GDP deflator20XX

20XX

20XX

= ×100

34

The GDP Deflator 

• The GDP deflator  is essentially an adjustment factor to convert nominal GDP to realGDP. It is the ratio of Price Indices number(PIN) of a chosen year to the Price Indexnumber (PIN) of the base year. The PIN of the base year=100.

 Year Nominal

GDP

Price Index (base year 

is (2000)=100

GDP Deflator Real GDP

2000 500 100 1.00 500

2005 600 110 1.10 545.45

Calculation

GDP Deflator=PIN of the chosen year/PIN of the base year

So, GDP Deflator2005=PIN of the chosen year2005 /PIN of the base year2000

=110/100=1.10

Real GDP=Nominal GDP/GDP deflator=600/1.10

=545.45

As GDP increases from 500 to 600 at 20 % and Price Index increases from 100 to 110 at

10%,then Real GDP increases from 500 to 545.45 at 9.1 %

Rate of Inflation(using GDP Deflator)= ((PIN2005-PIN200)/PIN200)*100

=((110-100/100)*100=10%

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0

1000000

2000000

3000000

4000000

5000000

6000000

   1   9   5   0

  -   5   1

   1   9   5   3

  -   5

   1   9   5   6

  -   5    7

   1   9   5   9

  -   6   0

   1   9   6   2

  -   6   3

   1   9   6   5

  -   6   6

   1   9   6   8

  -   6   9

   1   9    7   1

  -    7

   1   9    7   4

  -    7   5

   1   9    7    7

  -    7

   1   9   8   0

  -   8   1

   1   9   8   3

  -   8

   1   9   8   6

  -   8    7

   1   9   8   9

  -   9   0

   1   9   9   2

  -   9   3

   1   9   9   5

  -   9   6

   1   9   9   8

  -   9   9

   2   0   0   1

  -   0

   2   0   0   4

  -   0   5

   2   0   0    7

  -   0   8

GDPFC Current Price(Nominal) GDPFC Constant Price(Real)

Nominal Vs Real GDP(GDPF)

36

Nominal Vs Real GDP(GDPF

)

GDP Deflator 

0.0020.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

   1   9   5   0

  -   5   1

   1   9   5   4

  -   5   5

   1   9   5   8

  -   5   9

   1   9   6   2

  -   6   3

   1   9   6   6

  -   6    7

   1   9    7   0

  -    7   1

   1   9    7   4

  -    7   5

   1   9    7   8

  -    7   9

   1   9   8   2

  -   8   3

   1   9   8   6

  -   8    7

   1   9   9   0

  -   9   1

   1   9   9   4

  -   9   5

   1   9   9   8

  -   9   9

   2   0   0   2

  -   0   3

   2   0   0   6

  -   0    7

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Growth Rates

• Growth rate: (Yt-Yt-1)/Yt-1*100

• Economic Growth rate is measured in

terms of real GDP growth rate

38

Real GDP Growth Rate i.e. GDP at FC

(constant price) base year (1999 2000)

GDPF Const P( Real GDP) growth rate

-6.0

-4.0

-2.00.0

2.0

4.0

6.0

8.0

10.0

12.0

   1   9   5   1

  -   5   2

   1   9   5  4

  -   5   5

   1   9   5    7

  -   5   8

   1   9   6   0

  -   6   1

   1   9   6   3

  -   6  4

   1   9   6   6

  -   6    7

   1   9   6   9

  -    7   0

   1   9    7   2

  -    7   3

   1   9    7   5

  -    7   6

   1   9    7   8

  -    7   9

   1   9   8   1

  -   8   2

   1   9   8  4

  -   8   5

   1   9   8    7

  -   8   8

   1   9   9   0

  -   9   1

   1   9   9   3

  -   9  4

   1   9   9   6

  -   9    7

   1   9   9   9

  -   0   0

   2   0   0   2

  -   0   3

   2   0   0   5

  -   0   6

   2   0   0   8

  -   0   9

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39

Real GDP Growth Rate i.e. GDP at FC (constant

price) base year (1999 2000): from Trend Line

-6-4

-2

0

2

4

6

8

10

12

   1   9   5

   0  -   5

   1   9   5

   3  -   5

   1   9   5

   6  -   5

   1   9   5

   9  -   6

   1   9   6

   2  -   6

   1   9   6

   5  -   6

   1   9   6

   8  -   6

   1   9    7

   1  -    7

   1   9    7

   4  -    7

   1   9    7

    7  -    7

   1   9   8

   0  -   8

   1   9   8

   3  -   8

   1   9   8

   6  -   8

   1   9   8

   9  -   9

   1   9   9

   2  -   9

   1   9   9

   5  -   9

   1   9   9

   8  -   9

   2   0   0

   1  -   0

   2   0   0

   4  -   0

   2   0   0

    7  -   0

Real GDP Growth Rate Trend Line

40

Real Growth Rate of different measurement of National

Income accounting (constant price) base year (19992000)

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

  1   9   5  1  -   5

   2 

  1   9   5  4  -   5

   5 

  1   9   5   7  -   5

   8 

  1   9  6   0  -  6

  1 

  1   9  6   3  -  6

  4 

  1   9  6  6  -  6

   7 

  1   9  6   9  -   7

   0 

  1   9   7   2  -   7

   3 

  1   9   7   5  -   7

  6 

  1   9   7   8  -   7

   9 

  1   9   8  1  -   8

   2 

  1   9   8  4  -   8

   5 

  1   9   8   7  -   8

   8 

  1   9   9   0  -   9

  1 

  1   9   9   3  -   9

  4 

  1   9   9  6  -   9

   7 

  1   9   9   9  -   0

   0 

   2   0   0   2  -   0

   3 

   2   0   0   5  -   0

  6 

   2   0   0   8  -   0

   9 

GDPFC NDPFC GNPFC NNPFC

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Is GDP A Good Measure Of Economic Well-

being?

• GDP is the best single measure of the economic well-being of a society.

• GDP per person tells us the income and expenditure of the average person in the economy.

• Higher GDP per person indicates a higher standard of living.

• GDP is not a perfect measure of the happiness or qualityof life, however.

42

Is GDP A Good Measure Of Economic Well-

being?

• Some things that contribute to well-beingare not included in GDP.

 – The value of leisure.

 – The value of a clean environment.

 – The value of almost all activity that takesplace outside of markets, such as the value of the time parents spend with their children andthe value of volunteer work.

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43

GDP and the Quality of Life

44

Measuring Price (P) Changes:

GDP Deflator, WPI, CPI Differences

P

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Measuring Price Changes

Basic Concepts:Index No: It is a statistical device (measure) to express

average changes in related variables.

Price Index: Measures relative changes in average pricesover time.

India Uses Laspeyer’s Method

46

Measuring Price Changes:

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47

Price Index in India

48

Measuring Price Changes: Different Kind of 

Price Index• GDP Deflator 

 – Implicit Price Index. Calculated from Nominal and Real GDP• WPI (435+) started in (1902)

  – AC All commodities.  – PA Primary articles. – FA Food articles.  – NF Non-food articles. – FPL& L Fuel, power, light & lubricants.  – MP Manufactured products.

• CPI (200+) (1970s)

  – IW Industrial workers.

 – UNME Urban non-manual employees.  – AL Agricultural labors.

• Producer Price Index (PPI) ( Dr Abhijit Sen Suggestions)

 – Includes only manufacturing goods

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Measuring Price Changes:

Inflation Rate from the GDP Deflator 

Inflation (π) is the rate of change in prices

Inflation (π) rate:

Inflation from 2005 to 2006:

= (2006 Deflator – 2005 Deflator) • 1002005 Deflator 

= (171.9 - 100.0) • 100 = 71.9%

100.0

1

1

t t 

P P

Pπ  

=

1001

=

t t 

P

PPπ  

50

Measuring Price Changes:

Consumer Price Index

  Average Prices Quantity Sol

  1992 1994 % Change 1992 199

Food $ 12 $ 14 17 % 4 5

Housing 9 10 11 % 3 3

Fun 4 5 25 % 3 4

Machines 20 20 0 % 2 2 

CPI:

- Machines not included.

- Base year quantities (market basket) rather than base

year prices used.

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51

Measuring Price Changes:

Consumer Price Index

Laspeyer’sr Methods

= 1992 Quantities x 1992 Prices= 4 • $12 + 3 • $9 + 3 • $4= $48 + $27 + $12= $87

= 1992 Quantities x 1994 Prices= 4 • $14 + 3 • $10 + 3 • $5= $56 + $30 + $15= $101

CPI = Σptq0/ Σp0q0 x 100 Laspeyer’sr Methods

=(1994/1992) x 100

= (101 / 87) = 1.16%

Inflation Rate will be 0.16 % with base year price is 100.

1001

=

t t 

P

PPπ  

52

WPI Weights Existing (1981-82) series

Total: 447 commoditiesi) Primary article: 93

ii) Fuel, power etc: 20

iii) Manufactured Items: 334

Weights are assigned in proportion to their share in the total value of transaction (output)

in the economy.

 Existing (1993-94) series

Total: 435 commodities

i) Primary article: 98

ii) Fuel, power etc: 19

iii) Manufactured Items: 318

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53

WPI Weights

Weights are assigned in proportion to their share in the total value of transaction (output)

in the economy.

Major Group / Group

Weight No. of items No. of Quotations

2004-05 1993-94 2004-05 1993-94 2004-05 1993-94

All Commodities 100.00 100.00 676 435 5482 1918

I Primary Articles 20.12 22.02 102 98 579 455

II Fuel & Power 14.91 14.23 19 19 72 72

III ManufacturedProducts 64.97 63.75 555 318 4831 1391

54

CPI Weights

Weights are assigned as the ratio of total consumption expenditure of estimated number of 

families allocated to a center in the state to the sum of all such expenditures over all centers in the country

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55

Inflation Rate in India

56

Inflation and Interest Rates

• Interest rates reported in the media are nominal rates

• Real interest rate = nominal interest rate -(expected)inflation rate

• A 10-year Treasury bond paying 6.08% p.a. with 1.6%annual inflation rate has a real return of ?

• Real return = 6.08% - 1.6% = 4.28%

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57

U

Measurement of Employment (E)

and Unemployment (U)

58

Definition of UnemploymentDefinition:

• An Unemployed person is – Not working, willing and able to work – Actively seeking a job and willing to accept a job at the prevailing

market wage

Not counted as unemployed• Unable or unwilling to work, underage, college students,

home makers, retired , in the military.

Measurement:Total labor force (L) = Employed persons (E)+ Unemployedpersons

Civilian noninstitutional population (16 and over)= Total labor force (L) + Not in labor force

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59

Unemployment Rates

Unemployment Rate (percent)

= Unemployed * 100

Total Labor Force

Participation Rate (percent)

= Total Labor Force * 100

Civilian Population

60

Employment - UnemploymentU.S. Unemployment Rate

0%

5%

10%

15%

20%

25%

1930 1940 1950 1960 1970 1980 1990 2000

   U  n  e  m

  p   l  o  y  m  e  n   t  r  a   t  e ,

   %

U.S.

Fairfax Co., VA.

1973 - 1975

recession

1981 - 1982

recession1990 - 1991

recession

Great Depression

(1929 - 1933)

World War II

(1941 - 1945)

Source: Bureau of Labor Statistics

www.bls.gov

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61

Types of Unemployment

• Frictional Unemployment - where people become unemployed

between jobs. Due to imperfect information.• Structural Unemployment - caused by changes to the structure of 

industry in the economy – e.g. the decline of the coal, iron and steelindustries. The mismatch between skills of labor and skills demanded.

• Seasonal Unemployment - unemployment that results from thenormal seasonal change in aggregate economic activity. e.g. holidayresorts

• Cyclical Unemployment - stable labor force in an unstable economy.Unemployment that results from a decline in aggregate economicactivity

• Demand Deficient Unemployment – where AD is less than AS

• Technological Unemployment – caused where people are put out of work by changes in technology

• Real Wage or Classical Unemployment  – caused by wage ratesbeing held above market clearing levels

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“Natural Rate” of Unemployment

• Natural Rate of Unemployment - consistentwith frictional, structural, and seasonalunemployment.

• Full Employment Output - total output of economy when unemployment is at the naturalrate. During the business cycle total outputfluctuates around the full employment levelleading to changes in the cyclicalunemployment.

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63

Government Policy and Unemployment

• Job Training

• Unemployment Benefits

• Fiscal and Monetary Policy

64

Costs of unemployment to the Individual

 – De-skilling

 – Loss of self-esteem

 – Lower income – reduced purchasingpower and lower standard of living

 – Effects on the family unit

 – Increase in likelihood of stress relatedillnesses and mental breakdown

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Costs of unemployment to the economy

 – Lower tax revenues

 – Higher benefit payments

 – Social costs: crime, vandalism, familybreakdowns and social welfare support,regional decay

 – Opportunity cost of lost potential output

66

Thank You All