Eco104: Introductionto Macroeconomics

Lecture2 ParisaShakur

Nowletsgetstarted
Broadambi5onofeconomicsistounderstandpeoplebe:er. Economistsarelikeengineers NoblePrizesince1990sformakinghumanlivesbe:er Ul5matemo:otobringeconomicandsocialjus5ce. Butrstweneedtofamiliarizewiththetoolsandproblems etc. Toolsdonotnecessarilyalwaysmeanmodelsandnumbers;ie: developmentprobleminNairobi,India.

Macroeconomicsisabranchofeconomicsthatdealswith
theen5reeconomy.Itisinterestedintheoverallbehaviorof theeconomy Thewholeisgreaterthanthesumofallparts.Example: Reducedspendingbyonefamilyleadstoeconomicslump

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Pricelevelandindexes
Pricelevelisaweightedaverageofthepricesofallgoodsandservicemeasuredusingan index,oQentheCPI PricelevelPrice Theindicescoveredeightcommoditygroupswhichare: 1.Food,beverageandtobacco 2.Clothingandfootwear 3.Grossrent,fuelandligh5ng 4.Furniture,furnishings,householdequipment&opera5on 5.Medicalcareandhealthexpenses 6.Transportandcommunica5ons 7.Recrea5on,entertainment,educa5onandculturalservices 8.Miscellaneousgoodsandservices WorkedExample: Q.Duetodrought,citrusharvestwasdestroyedandpricesoforanges,grapefruit&lemons increasedfromTk.0.2toTk.0.4, Tk.0.6toTk.1.00&Tk.0.25toTk.0.45respec5vely.Howmuchhasthepriceofcitrusfruit increased? Solu%on: InsteadofndingoutforeachwecandoAverage. Forallgoodsandservices,economiststrackchangesforatypicalbasketofgoodsthe marketbasket.Weneedweightedaverageforbe:ermeasures.Theyearchosenasapointof referenceofbenchmarkiscalledthebaseyear.

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CPIcontd.
Supposethemarketbaskethas200oranges,50grapefruitand100 lemonsforOneyear,then
PreDrought PriceofOrange PriceofGrapefruit PriceofLemon Costofmarket basket 0.2 0.6 0.25 (200x0.2)+(50x0.6)+( 100x0.25)=Tk.95 PostDrought 1.00 0.45 (200x0.4)+(50x1.00) +(100x0.45)= Tk.175
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Priceindexinagivenyear=Costofmarketbasketinagivenyear Costofmarketbasketinbaseyearx100 =175X100=184.2 95

CPIcontd.
CPIisthemostcommonpriceindex. Now,tryndingoutpriceindexvalueforthebaseyear. TheCPIforthebaseyearis100whichmakesiteasierto compare. Thusfromthepriceindexvalueabove,itisclearthatprices haveincreasedby84.2%fordroughtfrombaseyear.

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In?lation
Itistheincreaseinpricelevel Priceindexesareveryusefultocalculateina5on. Ina5onrate=Priceindexinyear2Priceindexinyear1x100 Priceindiceshelpustrackpricechangesovertheyearsfora par5cularmarketbasket. Areourincomesactuallyincreasing? Nominalincome:thecurrencyvalueofapersonsincome Realincome:nominalincomeadjustedforpricechanges
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Priceindexinyear1

RealIncome=Nominalincomex100
CPI

CPI
CPItrendforBangladeshshows,headlineina5onis rising,drivenmainlybyfoodpriceina5on.

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CalculatingRealIncome
Ifyournominalincomeis$50,000andyourrealincome inbaseyearpricesis$62,500,whatistheCPI?
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DisadvantagesofusingCPI:Itovervaluesthetruecostof livingbecause: 1Subs5tu5onbias 2Innova5onmayleadtofallinconsumerprices

Unemployment
Easiertodeneemploymentbutnotsoeasytodene unemployment Peopleover16,notinins5tu5ons,havingtheability(both physicalandmental)andwillingness(ac5velylookingfor work)toworkbutcurrentlyoutofwork,arecountedas unemployed Labourforce=Employed+unemployed 1.Unemploymentrate(U)=(No.ofunemployed/labour force)*100 2.Employmentrate(E)=(No.ofemployed/peoplenotin ins5tu5ons)*100 3.Labourforcepar8cipa8onrate(LFPR)=(Labourforce/people notinins5tu5ons)*100

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Problemswithunemployment rates
Ucanbeoverstatedbecausealotpeoplemaybeunemployed dueto5melagbetweenlosingandgeqngajobbutare condentthattheywillgetone.However,theyarealso countedasunemployed Umaybeunderstatedbecause 1. Alotofpeoplemaygiveuplookingforworkgiventhe prevailingjobmarketbuttheywillnotbecountedas unemployed.Theyarecalleddiscouragedworkers 2. Therearetheunderemployedwhoareworkingpart5me duetolackofdecentfull5mejobs.Eg.women
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Typesofunemployment
1. Fric8onalunemployment(UF)involuntarilyunemployedand taking5meforjobsearching.Inadynamicsocietythistypeof unemploymentisinevitable,harmlessandevenhealthy. 2. StructuralUnemployment(US)Unemployedbecausethereare lessjobsavailablethanthethenumberofunemployedorthereis alackofmatchingskills.Retrainingmightbeasolu5on. 3. NaturalrateofUnemployment(UN)UF+US 4. FullemploymentiswhenU=UN 5. CyclicalUnemploymentisthedierencebetweenUandUN
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Bangladeshataglance,sourceCIAfact
book

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MoreonBangladesh
IncaseofBangladesh: NaturalrateofUnemployment=4.3% Actualunemploymentrate(MES,2009)=5.1% Cyclicalunemployment=(5.14.3)%=0.8%point UnemploymentratesinBangladesh,es5matedat5.1percent, arecompara5velylowduetopervasiveunderemployment andthelargenumberofpeopleconsideredtobeoutofthe labourforce.Unemploymentratesarehighamongtheyouth, especiallyamongyoungmenundertheageof30.

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