Macroeconomics Problem and the Current Situation in US
ECON 2030 - Intermediate Macroeconomics
University of Cincinnati
June 4, 2024
Introduction
The current financial crisis in America is partly being blamed on poor
economic policies enacted and implemented by the Bush
administration. Though the policies have in part been in use for the
last eight years, they are pointed to have been the cause of the present
crisis. Such is the relationship between short-term and long-term
economic problems. This is to say that a macroeconomic policy might
have a good impact on some aspects of the economy in the immediate
future, but after a number of years, the results might be completely
different (Case and Fair, 2006). In this paper, we look at the main
macroeconomic issues and assess how they impact the economy both
in the long run and in the short run.
Current situation
The US economy is in a crisis. Financial services companies are
coming down in large numbers, with most being bailed by the
government. Employees are worried t the current levels of
unemployment standing at over 6%. Inflation is also on the rise. In
short, in the few months that the financial market has been in trouble,
consumers and investors have panicked a lot and made rash decisions
with far-reaching implications in the short run and in the long run.
Many are withdrawing their deposits from banks in fear that they may
collapse. In short, there have been panic withdrawals, thereby
worsening the conditions further. This can be seen as the short-term
implications of the high inflation and financial crisis in the economy.
Unemployment
In any given economy, a certain age group of the population and main
persons between the ages of 21-65 constitutes the economy’s labor
force. According to Reinhardt (2006), this number of people is the
main contributor to the national Gross Domestic Product (GDP).
Classical economists describe the labor force as the number of people
in an economy ready to exchange their services for salaries and wages
for the prevailing wage rates. They are again the highest taxpayers
providing revenue to the government to run its activities. Factories
and industries require labor input from the labor market to facilitate
the production of goods and services. The labor market is guided by
the general law of demand and supply through complications arise due
to various factors such as level of skill and mobility of labor. Such
factors, according to Reinhardt (2006), have their own way of
producing unemployment. So what is unemployment in the first
place? Going by Lawrence’s (2003) description of the term, he says
that it is a percentage of the number of people that are considered to
belong in the labor force but cannot find employment. This brings to
our attention the fact that students and the aged are not considered as
part of the labor force; hence they are not included among the
unemployed. Another definition favored by the Keynesian school of
thought is that “unemployment is an excess supply of labor resulting
from a failure of coordination in the market economy” Classical
economists, on the other hand, define unemployment as “people
engaged in the productive work of looking for a better match between
worker and employer.” They, therefore, view the search for work as
work in itself. Thus we can deduce that the unemployed are workers
working the “job search sector.”
Unemployment is considered only a problem in the economy when it
exceeds the recommended level of 4%. This level is encouraged as
full employment; in this case, 0% unemployment, production will be
impossible. Pharis (2007) the recommended 4% is only to cushion the
labor market from unprecedented wage hikes resulting from high
demand and low supply. The recommended rate is permanent as in the
short run people will keep on switching employments. During this
transition from one employer to the other, then there will always be a
number of people unemployed in the short run, but in the long run,
they will be employed.
Long term unemployment
Long-term unemployment periods can be related to lower transition
probabilities from job search to employment. Secondly, the long term
unemployed workers “are less relevant to wage and price formation
than the newly unemployed” (Llaudes, 2005).
The author base’s his argument on the assumption that “the long term
unemployed play a marginal role in the wage formation process.”
From this, we deduce that unemployment durations do not count in the
setting of wage rates in the labor market. This is contrary to what is
predicted in the Phillips Curve, which suggests that the long-term
unemployed should receive more weight in terms of better
employment conditions and wages. However, individual economic
policies determine the role played by long-term unemployment.
Llaudes (2005) notes that long-term unemployed persons in some
Western European countries have a negligible effect on labor prices.
Long-term unemployment can, in one or another, be attributed to
short-term unemployment. This occurs due to the act that, after some
time unemployed, individuals become disheartened and reduce their
job search morale and activities, thereby decreasing their chances of
finding employment. Again, according to the Phillips Curve,
employers are biased against long-term unemployed workers as they
are assumed to be more expensive by demanding higher wage rates.
Therefore if firms consistently stick to this by hiring the newly “un-
employed because they are assumed to be more productive and less
costly, the equilibrium or “efficiency wage” is determined by the
wage demands of this preferred group” (Llaudes, 2005).
According to the Bureau of Labor Statistics, unemployment in the US
stood at 6.5% as of October this year. This is posed to continue with
the economic situation in the country not that promising. Then we
may ask ourselves what the role of government in reducing the
unemployment levels in the country is. There are two major ways
through which a government can influence the performance of the
economy, not only in growth but also in solving some of these
macroeconomic problems. In this year alone, the Bush administration
has been lowering interest rates to encourage more investment and
borrowing. This was a result reported a drastic drop in consumer
spending since late 2007.
Types of unemployment.
Frictional unemployment.
Cyclical unemployment.
Structural unemployment.
Cyclical unemployment, in particular, is defined as an excess supply
of labor and usually occurs in the long run. It results from delayed
short-term unemployment periods, and according to the Phillips curve,
it is supported by the labor market. On the other hand, frictional
employment is caused by some people being between jobs, thus a
short term, while structural unemployment is caused by problems that
arise because of a mismatch between the needs of employers and the
skills and training of the labor force. This might translate to either
long-term unemployment or short-term unemployment depending on
how far the employer is willing to compromise and high unskilled
labor and then later train the employees (Case and Fair, 2006).
Economic stagnation
Economic growth is a long-term trend largely dependent on supply-
side factors. Growth in the labor market and human capital, in general,
is viewed as a key driver to economic growth though not always.
Rueben (2007) takes note of China and India, which are heavily
relying n their human capital for very rapid growth. Another factor
that greatly contributes to economic growth, as noted by the same
author, is investments in real capital stock. He says human capital
facilitates individuals in the center to generate knowledge and new
products and production methods when viewed on the supply side.
From the demand side perspective, large human capital creates
demand for goods and services produced in that economy.
Unfortunately, differences in natural factors over different economies
create variation in the effectiveness of human capital as a contributing
factor to economic growth. In Africa, for example, high population
growth rates are blamed for the unending poverty levels in the
country. This is contrary to the above suggestions that increased
human capital is viewed as an injection to the economy.
Economists and academicians have offered different ideas as to why
the US economy is experiencing slowed growth. In any modern
economy, some basic necessities must be ensured in order to
guarantee growth. Most important, they must have a strong currency
and a positive net exports balance. These three things are
complementary to each other. A weak dollar, will in due course, lead
to high oil and commodity prices through the multiplier effect. In the
long run, this will lead to high inflation as we are experiencing now.
In response, the Federal Reserve Bank is forced to raise interest rates
in an attempt to protect consumers. This points to a very important
revelation that a weak dollar does not cause economic stagnation but
rather a weak dollar of any currency is a direct result of slowed
growth or economic stagnation.
Case and Fair (2006) say that both long term and short term economic
stagnation can be attributed to:
Weak Dollar.
Expensive Commodities.
Expensive Oil.
High Inflation.
Unmanageable Debt.
The current economic system in America possesses all of the above
characteristics. The frustrating thing is that each is one of them is
spinning out of control. In the last few years, the US economy has
been on a growth recovery path after a slowdown caused by the
terrorist attack of the World Trade Center.DDuring such economic
recovery periods, tax revenues are high, normally accounting for a
large portion of the GDP. Unfortunately, normalization of growth
after stabilizing recovery is interpreted as slowed growth. In the
current “recession” period, we have seen the opposite as slowed
growth.
Data from the Federal Bureau of Statistics shows that per capita
income in the US and growth in GDP have been on a steady increase
in the last 20 years, with GDP growth averaging 1.8%. Unfortunately,
this growth is not well represented among the low-income earning
population. A report by the IMF released by BBC early last year
shows that the difference in income between the rich and the poor is
highest in developed countries contrary to popular belief that it is
highest in developing and less developed countries. The US, as the
most developed country, does not show its reported economic growth
among the low-income earners despite the continued growth in the
economy. Weiner (2008) says this points to the inefficiency of the
GDP as a measure of economic performance/growth. He makes an
example of the buying and reselling of houses at an ever-increasing
price as being counted towards economic growth. Economists have for
a long time relied on GDP as the most all-inclusive measure of growth
in an economy. With the economic situation.
Inflation
Inflation is defined by Rueben (2007) as the general increase in price
levels. According to the Federal Bureau of Statistics, the US economy
had registered an inflation level of 6.5% in the month of October. This
translates to say that while prices have remained constant, product
prices have increased by 6.5%. Therefore the common American
citizen has the same number of dollars to spend on expensive
products. This now points to the difference in nominal and real wages.
While there may be nominal increases of wages by employers to
offset the inflation impact, the increase might not be enough to cover
for inflation. Therefore, when the nominal wage is adjusted to
inflation levels, we get a real increase in wages. When households
receive a real increase in wage, consumption is bound to go up.
Types of inflation
Economists agree on three types of inflation, namely as:
Demand-pull inflation
Cost-push inflation
Hyperinflation
When demand increases and this results in inflation, we describe it as
demand-pull inflation. On the other hand, when cost increases and this
causes supply to decrease in turn, and this results in inflation, we
describe it as cost-push inflation. But these two different causes of
inflation are not independent, of course. Demand-pull pull inflation
will more often than not lead to cost-push inflation. Continued
inflation in the two categories creates hyperinflation. This is usually
inflation in excess that may occur during a crisis such as war (Case
and Fair, 2006).
Current situation vs. the great depression of the 1930s
Understanding the great depression of the 1930s is like the Holy Grail
of macroeconomics, so says Bernanke, as quoted by Shane (2005).
This has been the worst financial crisis to hit the world and the US.
The current situation, as earlier said, is being compared to the Great
Depression. But the thing is, we are not yet there, but we might be
headed there if the government does not institute policies that will
deliver the economy from the imminent danger. The Great Depression
is said to have been caused by the Stock Market crash of 1929 in the
US, but the other way that some authors see it as the crash had
resulted from the depression had begun earlier than the agreed time of
1930 (Case and Fair, 2006). In the current situation, the financial and
stocks market is in grave danger, with multi-billion companies
reporting billions of losses and others filing for bankruptcy. Though
the Stocks market crash of 1929 happened in one day, the effects are
expected to be the same with a gradual crash as it is happening now.
During this 1930’s depression, unemployment levels in the US had
escalated to over 30%, with hundred of firms closing down.
Conclusion
The fact that the US economy has reportedly been on a growth path
and the life of the ordinary American citizen has been worsening calls
for urgent measures to evaluate the current system of measuring
national economic output in terms of GDP as an indicator of the
general economic position of a region. As earlier said, the disparity in
wealth distribution is highest in countries reported as having the
highest levels of GDP. In conclusion, therefore, the current method of
using GDP as a measure of growth could be wrong in saying that the
US economy. If other more competent measures were used, then it
could be revealed that the US economy is worse-off than probably
imagined and already in a bad recession.
Current situation
The US economy is in a crisis. Financial services companies are
coming down in large numbers, with most being bailed by the
government. Employees are worried t the current levels of
unemployment standing at over 6%. Inflation is also on the rise. In
short, in the few months that the financial market has been in trouble,
consumers and investors have panicked a lot and made rash decisions
with far-reaching implications in the short run and in the long run.
Many are withdrawing their deposits from banks in fear that they may
collapse. In short, there have been panic withdrawals, thereby
worsening the conditions further. This can be seen as the short-term
implications of the high inflation and financial crisis in the economy.
Unemployment
In any given economy, a certain age group of the population and main
persons between the ages of 21-65 constitutes the economy’s labor
force. According to Reinhardt (2006), this number of people is the
main contributor to the national Gross Domestic Product (GDP).
Classical economists describe the labor force as the number of people
in an economy ready to exchange their services for salaries and wages
for the prevailing wage rates. They are again the highest taxpayers
providing revenue to the government to run its activities. Factories
and industries require labor input from the labor market to facilitate
the production of goods and services. The labor market is guided by
the general law of demand and supply through complications arise due
to various factors such as level of skill and mobility of labor. Such
factors, according to Reinhardt (2006), have their own way of
producing unemployment. So what is unemployment in the first
place? Going by Lawrence’s (2003) description of the term, he says
that it is a percentage of the number of people that are considered to
belong in the labor force but cannot find employment. This brings to
our attention the fact that students and the aged are not considered as
part of the labor force; hence they are not included among the
unemployed. Another definition favored by the Keynesian school of
thought is that “unemployment is an excess supply of labor resulting
from a failure of coordination in the market economy” Classical
economists, on the other hand, define unemployment as “people
engaged in the productive work of looking for a better match between
worker and employer.” They, therefore, view the search for work as
work in itself. Thus we can deduce that the unemployed are workers
working the “job search sector.”
Unemployment is considered only a problem in the economy when it
exceeds the recommended level of 4%. This level is encouraged as
full employment; in this case, 0% unemployment, production will be
impossible. Pharis (2007) the recommended 4% is only to cushion the
labor market from unprecedented wage hikes resulting from high
demand and low supply. The recommended rate is permanent as in the
short run people will keep on switching employments. During this
transition from one employer to the other, then there will always be a
number of people unemployed in the short run, but in the long run,
they will be employed.
Long term unemployment
Long-term unemployment periods can be related to lower transition
probabilities from job search to employment. Secondly, the long term
unemployed workers “are less relevant to wage and price formation
than the newly unemployed” (Llaudes, 2005).
The author base’s his argument on the assumption that “the long term
unemployed play a marginal role in the wage formation process.”
From this, we deduce that unemployment durations do not count in the
setting of wage rates in the labor market. This is contrary to what is
predicted in the Phillips Curve, which suggests that the long-term
unemployed should receive more weight in terms of better
employment conditions and wages. However, individual economic
policies determine the role played by long-term unemployment.
Llaudes (2005) notes that long-term unemployed persons in some
Western European countries have a negligible effect on labor prices.
Long-term unemployment can, in one or another, be attributed to
short-term unemployment. This occurs due to the act that, after some
time unemployed, individuals become disheartened and reduce their
job search morale and activities, thereby decreasing their chances of
finding employment. Again, according to the Phillips Curve,
employers are biased against long-term unemployed workers as they
are assumed to be more expensive by demanding higher wage rates.
Therefore if firms consistently stick to this by hiring the newly “un-
employed because they are assumed to be more productive and less
costly, the equilibrium or “efficiency wage” is determined by the
wage demands of this preferred group” (Llaudes, 2005).
According to the Bureau of Labor Statistics, unemployment in the US
stood at 6.5% as of October this year. This is posed to continue with
the economic situation in the country not that promising. Then we
may ask ourselves what the role of government in reducing the
unemployment levels in the country is. There are two major ways
through which a government can influence the performance of the
economy, not only in growth but also in solving some of these
macroeconomic problems. In this year alone, the Bush administration
has been lowering interest rates to encourage more investment and
borrowing. This was a result reported a drastic drop in consumer
spending since late 2007.
Types of unemployment.
Frictional unemployment.
Cyclical unemployment.
Structural unemployment.
Cyclical unemployment, in particular, is defined as an excess supply
of labor and usually occurs in the long run. It results from delayed
short-term unemployment periods, and according to the Phillips curve,
it is supported by the labor market. On the other hand, frictional
employment is caused by some people being between jobs, thus a
short term, while structural unemployment is caused by problems that
arise because of a mismatch between the needs of employers and the
skills and training of the labor force. This might translate to either
long-term unemployment or short-term unemployment depending on
how far the employer is willing to compromise and high unskilled
labor and then later train the employees (Case and Fair, 2006).
Economic stagnation
Economic growth is a long-term trend largely dependent on supply-
side factors. Growth in the labor market and human capital, in general,
is viewed as a key driver to economic growth though not always.
Rueben (2007) takes note of China and India, which are heavily
relying n their human capital for very rapid growth. Another factor
that greatly contributes to economic growth, as noted by the same
author, is investments in real capital stock. He says human capital
facilitates individuals in the center to generate knowledge and new
products and production methods when viewed on the supply side.
From the demand side perspective, large human capital creates
demand for goods and services produced in that economy.
Unfortunately, differences in natural factors over different economies
create variation in the effectiveness of human capital as a contributing
factor to economic growth. In Africa, for example, high population
growth rates are blamed for the unending poverty levels in the
country. This is contrary to the above suggestions that increased
human capital is viewed as an injection to the economy.
Economists and academicians have offered different ideas as to why
the US economy is experiencing slowed growth. In any modern
economy, some basic necessities must be ensured in order to
guarantee growth. Most important, they must have a strong currency
and a positive net exports balance. These three things are
complementary to each other. A weak dollar, will in due course, lead
to high oil and commodity prices through the multiplier effect. In the
long run, this will lead to high inflation as we are experiencing now.
In response, the Federal Reserve Bank is forced to raise interest rates
in an attempt to protect consumers. This points to a very important
revelation that a weak dollar does not cause economic stagnation but
rather a weak dollar of any currency is a direct result of slowed
growth or economic stagnation.
Case and Fair (2006) say that both long term and short term economic
stagnation can be attributed to:
Weak Dollar.
Expensive Commodities.
Expensive Oil.
High Inflation.
Unmanageable Debt.
The current economic system in America possesses all of the above
characteristics. The frustrating thing is that each is one of them is
spinning out of control. In the last few years, the US economy has
been on a growth recovery path after a slowdown caused by the
terrorist attack of the World Trade Center.DDuring such economic
recovery periods, tax revenues are high, normally accounting for a
large portion of the GDP. Unfortunately, normalization of growth
after stabilizing recovery is interpreted as slowed growth. In the
current “recession” period, we have seen the opposite as slowed
growth.
Data from the Federal Bureau of Statistics shows that per capita
income in the US and growth in GDP have been on a steady increase
in the last 20 years, with GDP growth averaging 1.8%. Unfortunately,
this growth is not well represented among the low-income earning
population. A report by the IMF released by BBC early last year
shows that the difference in income between the rich and the poor is
highest in developed countries contrary to popular belief that it is
highest in developing and less developed countries. The US, as the
most developed country, does not show its reported economic growth
among the low-income earners despite the continued growth in the
economy. Weiner (2008) says this points to the inefficiency of the
GDP as a measure of economic performance/growth. He makes an
example of the buying and reselling of houses at an ever-increasing
price as being counted towards economic growth. Economists have for
a long time relied on GDP as the most all-inclusive measure of growth
in an economy. With the economic situation.
Inflation
Inflation is defined by Rueben (2007) as the general increase in price
levels. According to the Federal Bureau of Statistics, the US economy
had registered an inflation level of 6.5% in the month of October. This
translates to say that while prices have remained constant, product
prices have increased by 6.5%. Therefore the common American
citizen has the same number of dollars to spend on expensive
products. This now points to the difference in nominal and real wages.
While there may be nominal increases of wages by employers to
offset the inflation impact, the increase might not be enough to cover
for inflation. Therefore, when the nominal wage is adjusted to
inflation levels, we get a real increase in wages. When households
receive a real increase in wage, consumption is bound to go up.
Types of inflation
Economists agree on three types of inflation, namely as:
Demand-pull inflation
Cost-push inflation
Hyperinflation
When demand increases and this results in inflation, we describe it as
demand-pull inflation. On the other hand, when cost increases and this
causes supply to decrease in turn, and this results in inflation, we
describe it as cost-push inflation. But these two different causes of
inflation are not independent, of course. Demand-pull pull inflation
will more often than not lead to cost-push inflation. Continued
inflation in the two categories creates hyperinflation. This is usually
inflation in excess that may occur during a crisis such as war (Case
and Fair, 2006).
Current situation vs. the great depression of the 1930s
Understanding the great depression of the 1930s is like the Holy Grail
of macroeconomics, so says Bernanke, as quoted by Shane (2005).
This has been the worst financial crisis to hit the world and the US.
The current situation, as earlier said, is being compared to the Great
Depression. But the thing is, we are not yet there, but we might be
headed there if the government does not institute policies that will
deliver the economy from the imminent danger. The Great Depression
is said to have been caused by the Stock Market crash of 1929 in the
US, but the other way that some authors see it as the crash had
resulted from the depression had begun earlier than the agreed time of
1930 (Case and Fair, 2006). In the current situation, the financial and
stocks market is in grave danger, with multi-billion companies
reporting billions of losses and others filing for bankruptcy. Though
the Stocks market crash of 1929 happened in one day, the effects are
expected to be the same with a gradual crash as it is happening now.
During this 1930’s depression, unemployment levels in the US had
escalated to over 30%, with hundred of firms closing down.
Conclusion
The fact that the US economy has reportedly been on a growth path
and the life of the ordinary American citizen has been worsening calls
for urgent measures to evaluate the current system of measuring
national economic output in terms of GDP as an indicator of the
general economic position of a region. As earlier said, the disparity in
wealth distribution is highest in countries reported as having the
highest levels of GDP. In conclusion, therefore, the current method of
using GDP as a measure of growth could be wrong in saying that the
US economy. If other more competent measures were used, then it
could be revealed that the US economy is worse-off than probably
imagined and already in a bad recession.
Current situation
The US economy is in a crisis. Financial services companies are
coming down in large numbers, with most being bailed by the
government. Employees are worried t the current levels of
unemployment standing at over 6%. Inflation is also on the rise. In
short, in the few months that the financial market has been in trouble,
consumers and investors have panicked a lot and made rash decisions
with far-reaching implications in the short run and in the long run.
Many are withdrawing their deposits from banks in fear that they may
collapse. In short, there have been panic withdrawals, thereby
worsening the conditions further. This can be seen as the short-term
implications of the high inflation and financial crisis in the economy.
Unemployment
In any given economy, a certain age group of the population and main
persons between the ages of 21-65 constitutes the economy’s labor
force. According to Reinhardt (2006), this number of people is the
main contributor to the national Gross Domestic Product (GDP).
Classical economists describe the labor force as the number of people
in an economy ready to exchange their services for salaries and wages
for the prevailing wage rates. They are again the highest taxpayers
providing revenue to the government to run its activities. Factories
and industries require labor input from the labor market to facilitate
the production of goods and services. The labor market is guided by
the general law of demand and supply through complications arise due
to various factors such as level of skill and mobility of labor. Such
factors, according to Reinhardt (2006), have their own way of
producing unemployment. So what is unemployment in the first
place? Going by Lawrence’s (2003) description of the term, he says
that it is a percentage of the number of people that are considered to
belong in the labor force but cannot find employment. This brings to
our attention the fact that students and the aged are not considered as
part of the labor force; hence they are not included among the
unemployed. Another definition favored by the Keynesian school of
thought is that “unemployment is an excess supply of labor resulting
from a failure of coordination in the market economy” Classical
economists, on the other hand, define unemployment as “people
engaged in the productive work of looking for a better match between
worker and employer.” They, therefore, view the search for work as
work in itself. Thus we can deduce that the unemployed are workers
working the “job search sector.”
Unemployment is considered only a problem in the economy when it
exceeds the recommended level of 4%. This level is encouraged as
full employment; in this case, 0% unemployment, production will be
impossible. Pharis (2007) the recommended 4% is only to cushion the
labor market from unprecedented wage hikes resulting from high
demand and low supply. The recommended rate is permanent as in the
short run people will keep on switching employments. During this
transition from one employer to the other, then there will always be a
number of people unemployed in the short run, but in the long run,
they will be employed.
Long term unemployment
Long-term unemployment periods can be related to lower transition
probabilities from job search to employment. Secondly, the long term
unemployed workers “are less relevant to wage and price formation
than the newly unemployed” (Llaudes, 2005).
The author base’s his argument on the assumption that “the long term
unemployed play a marginal role in the wage formation process.”
From this, we deduce that unemployment durations do not count in the
setting of wage rates in the labor market. This is contrary to what is
predicted in the Phillips Curve, which suggests that the long-term
unemployed should receive more weight in terms of better
employment conditions and wages. However, individual economic
policies determine the role played by long-term unemployment.
Llaudes (2005) notes that long-term unemployed persons in some
Western European countries have a negligible effect on labor prices.
Long-term unemployment can, in one or another, be attributed to
short-term unemployment. This occurs due to the act that, after some
time unemployed, individuals become disheartened and reduce their
job search morale and activities, thereby decreasing their chances of
finding employment. Again, according to the Phillips Curve,
employers are biased against long-term unemployed workers as they
are assumed to be more expensive by demanding higher wage rates.
Therefore if firms consistently stick to this by hiring the newly “un-
employed because they are assumed to be more productive and less
costly, the equilibrium or “efficiency wage” is determined by the
wage demands of this preferred group” (Llaudes, 2005).
According to the Bureau of Labor Statistics, unemployment in the US
stood at 6.5% as of October this year. This is posed to continue with
the economic situation in the country not that promising. Then we
may ask ourselves what the role of government in reducing the
unemployment levels in the country is. There are two major ways
through which a government can influence the performance of the
economy, not only in growth but also in solving some of these
macroeconomic problems. In this year alone, the Bush administration
has been lowering interest rates to encourage more investment and
borrowing. This was a result reported a drastic drop in consumer
spending since late 2007.
Types of unemployment.
Frictional unemployment.
Cyclical unemployment.
Structural unemployment.
Cyclical unemployment, in particular, is defined as an excess supply
of labor and usually occurs in the long run. It results from delayed
short-term unemployment periods, and according to the Phillips curve,
it is supported by the labor market. On the other hand, frictional
employment is caused by some people being between jobs, thus a
short term, while structural unemployment is caused by problems that
arise because of a mismatch between the needs of employers and the
skills and training of the labor force. This might translate to either
long-term unemployment or short-term unemployment depending on
how far the employer is willing to compromise and high unskilled
labor and then later train the employees (Case and Fair, 2006).
Economic stagnation
Economic growth is a long-term trend largely dependent on supply-
side factors. Growth in the labor market and human capital, in general,
is viewed as a key driver to economic growth though not always.
Rueben (2007) takes note of China and India, which are heavily
relying n their human capital for very rapid growth. Another factor
that greatly contributes to economic growth, as noted by the same
author, is investments in real capital stock. He says human capital
facilitates individuals in the center to generate knowledge and new
products and production methods when viewed on the supply side.
From the demand side perspective, large human capital creates
demand for goods and services produced in that economy.
Unfortunately, differences in natural factors over different economies
create variation in the effectiveness of human capital as a contributing
factor to economic growth. In Africa, for example, high population
growth rates are blamed for the unending poverty levels in the
country. This is contrary to the above suggestions that increased
human capital is viewed as an injection to the economy.
Economists and academicians have offered different ideas as to why
the US economy is experiencing slowed growth. In any modern
economy, some basic necessities must be ensured in order to
guarantee growth. Most important, they must have a strong currency
and a positive net exports balance. These three things are
complementary to each other. A weak dollar, will in due course, lead
to high oil and commodity prices through the multiplier effect. In the
long run, this will lead to high inflation as we are experiencing now.
In response, the Federal Reserve Bank is forced to raise interest rates
in an attempt to protect consumers. This points to a very important
revelation that a weak dollar does not cause economic stagnation but
rather a weak dollar of any currency is a direct result of slowed
growth or economic stagnation.
Case and Fair (2006) say that both long term and short term economic
stagnation can be attributed to:
Weak Dollar.
Expensive Commodities.
Expensive Oil.
High Inflation.
Unmanageable Debt.
The current economic system in America possesses all of the above
characteristics. The frustrating thing is that each is one of them is
spinning out of control. In the last few years, the US economy has
been on a growth recovery path after a slowdown caused by the
terrorist attack of the World Trade Center.DDuring such economic
recovery periods, tax revenues are high, normally accounting for a
large portion of the GDP. Unfortunately, normalization of growth
after stabilizing recovery is interpreted as slowed growth. In the
current “recession” period, we have seen the opposite as slowed
growth.
Data from the Federal Bureau of Statistics shows that per capita
income in the US and growth in GDP have been on a steady increase
in the last 20 years, with GDP growth averaging 1.8%. Unfortunately,
this growth is not well represented among the low-income earning
population. A report by the IMF released by BBC early last year
shows that the difference in income between the rich and the poor is
highest in developed countries contrary to popular belief that it is
highest in developing and less developed countries. The US, as the
most developed country, does not show its reported economic growth
among the low-income earners despite the continued growth in the
economy. Weiner (2008) says this points to the inefficiency of the
GDP as a measure of economic performance/growth. He makes an
example of the buying and reselling of houses at an ever-increasing
price as being counted towards economic growth. Economists have for
a long time relied on GDP as the most all-inclusive measure of growth
in an economy. With the economic situation.
Inflation
Inflation is defined by Rueben (2007) as the general increase in price
levels. According to the Federal Bureau of Statistics, the US economy
had registered an inflation level of 6.5% in the month of October. This
translates to say that while prices have remained constant, product
prices have increased by 6.5%. Therefore the common American
citizen has the same number of dollars to spend on expensive
products. This now points to the difference in nominal and real wages.
While there may be nominal increases of wages by employers to
offset the inflation impact, the increase might not be enough to cover
for inflation. Therefore, when the nominal wage is adjusted to
inflation levels, we get a real increase in wages. When households
receive a real increase in wage, consumption is bound to go up.
Types of inflation
Economists agree on three types of inflation, namely as:
Demand-pull inflation
Cost-push inflation
Hyperinflation
When demand increases and this results in inflation, we describe it as
demand-pull inflation. On the other hand, when cost increases and this
causes supply to decrease in turn, and this results in inflation, we
describe it as cost-push inflation. But these two different causes of
inflation are not independent, of course. Demand-pull pull inflation
will more often than not lead to cost-push inflation. Continued
inflation in the two categories creates hyperinflation. This is usually
inflation in excess that may occur during a crisis such as war (Case
and Fair, 2006).
Current situation vs. the great depression of the 1930s
Understanding the great depression of the 1930s is like the Holy Grail
of macroeconomics, so says Bernanke, as quoted by Shane (2005).
This has been the worst financial crisis to hit the world and the US.
The current situation, as earlier said, is being compared to the Great
Depression. But the thing is, we are not yet there, but we might be
headed there if the government does not institute policies that will
deliver the economy from the imminent danger. The Great Depression
is said to have been caused by the Stock Market crash of 1929 in the
US, but the other way that some authors see it as the crash had
resulted from the depression had begun earlier than the agreed time of
1930 (Case and Fair, 2006). In the current situation, the financial and
stocks market is in grave danger, with multi-billion companies
reporting billions of losses and others filing for bankruptcy. Though
the Stocks market crash of 1929 happened in one day, the effects are
expected to be the same with a gradual crash as it is happening now.
During this 1930’s depression, unemployment levels in the US had
escalated to over 30%, with hundred of firms closing down.
Conclusion
The fact that the US economy has reportedly been on a growth path
and the life of the ordinary American citizen has been worsening calls
for urgent measures to evaluate the current system of measuring
national economic output in terms of GDP as an indicator of the
general economic position of a region. As earlier said, the disparity in
wealth distribution is highest in countries reported as having the
highest levels of GDP. In conclusion, therefore, the current method of
using GDP as a measure of growth could be wrong in saying that the
US economy. If other more competent measures were used, then it
could be revealed that the US economy is worse-off than probably
imagined and already in a bad recession.
Current situation
The US economy is in a crisis. Financial services companies are
coming down in large numbers, with most being bailed by the
government. Employees are worried t the current levels of
unemployment standing at over 6%. Inflation is also on the rise. In
short, in the few months that the financial market has been in trouble,
consumers and investors have panicked a lot and made rash decisions
with far-reaching implications in the short run and in the long run.
Many are withdrawing their deposits from banks in fear that they may
collapse. In short, there have been panic withdrawals, thereby
worsening the conditions further. This can be seen as the short-term
implications of the high inflation and financial crisis in the economy.
Unemployment
In any given economy, a certain age group of the population and main
persons between the ages of 21-65 constitutes the economy’s labor
force. According to Reinhardt (2006), this number of people is the
main contributor to the national Gross Domestic Product (GDP).
Classical economists describe the labor force as the number of people
in an economy ready to exchange their services for salaries and wages
for the prevailing wage rates. They are again the highest taxpayers
providing revenue to the government to run its activities. Factories
and industries require labor input from the labor market to facilitate
the production of goods and services. The labor market is guided by
the general law of demand and supply through complications arise due
to various factors such as level of skill and mobility of labor. Such
factors, according to Reinhardt (2006), have their own way of
producing unemployment. So what is unemployment in the first
place? Going by Lawrence’s (2003) description of the term, he says
that it is a percentage of the number of people that are considered to
belong in the labor force but cannot find employment. This brings to
our attention the fact that students and the aged are not considered as
part of the labor force; hence they are not included among the
unemployed. Another definition favored by the Keynesian school of
thought is that “unemployment is an excess supply of labor resulting
from a failure of coordination in the market economy” Classical
economists, on the other hand, define unemployment as “people
engaged in the productive work of looking for a better match between
worker and employer.” They, therefore, view the search for work as
work in itself. Thus we can deduce that the unemployed are workers
working the “job search sector.”
Unemployment is considered only a problem in the economy when it
exceeds the recommended level of 4%. This level is encouraged as
full employment; in this case, 0% unemployment, production will be
impossible. Pharis (2007) the recommended 4% is only to cushion the
labor market from unprecedented wage hikes resulting from high
demand and low supply. The recommended rate is permanent as in the
short run people will keep on switching employments. During this
transition from one employer to the other, then there will always be a
number of people unemployed in the short run, but in the long run,
they will be employed.
Long term unemployment
Long-term unemployment periods can be related to lower transition
probabilities from job search to employment. Secondly, the long term
unemployed workers “are less relevant to wage and price formation
than the newly unemployed” (Llaudes, 2005).
The author base’s his argument on the assumption that “the long term
unemployed play a marginal role in the wage formation process.”
From this, we deduce that unemployment durations do not count in the
setting of wage rates in the labor market. This is contrary to what is
predicted in the Phillips Curve, which suggests that the long-term
unemployed should receive more weight in terms of better
employment conditions and wages. However, individual economic
policies determine the role played by long-term unemployment.
Llaudes (2005) notes that long-term unemployed persons in some
Western European countries have a negligible effect on labor prices.
Long-term unemployment can, in one or another, be attributed to
short-term unemployment. This occurs due to the act that, after some
time unemployed, individuals become disheartened and reduce their
job search morale and activities, thereby decreasing their chances of
finding employment. Again, according to the Phillips Curve,
employers are biased against long-term unemployed workers as they
are assumed to be more expensive by demanding higher wage rates.
Therefore if firms consistently stick to this by hiring the newly “un-
employed because they are assumed to be more productive and less
costly, the equilibrium or “efficiency wage” is determined by the
wage demands of this preferred group” (Llaudes, 2005).
According to the Bureau of Labor Statistics, unemployment in the US
stood at 6.5% as of October this year. This is posed to continue with
the economic situation in the country not that promising. Then we
may ask ourselves what the role of government in reducing the
unemployment levels in the country is. There are two major ways
through which a government can influence the performance of the
economy, not only in growth but also in solving some of these
macroeconomic problems. In this year alone, the Bush administration
has been lowering interest rates to encourage more investment and
borrowing. This was a result reported a drastic drop in consumer
spending since late 2007.
Types of unemployment.
Frictional unemployment.
Cyclical unemployment.
Structural unemployment.
Cyclical unemployment, in particular, is defined as an excess supply
of labor and usually occurs in the long run. It results from delayed
short-term unemployment periods, and according to the Phillips curve,
it is supported by the labor market. On the other hand, frictional
employment is caused by some people being between jobs, thus a
short term, while structural unemployment is caused by problems that
arise because of a mismatch between the needs of employers and the
skills and training of the labor force. This might translate to either
long-term unemployment or short-term unemployment depending on
how far the employer is willing to compromise and high unskilled
labor and then later train the employees (Case and Fair, 2006).
Economic stagnation
Economic growth is a long-term trend largely dependent on supply-
side factors. Growth in the labor market and human capital, in general,
is viewed as a key driver to economic growth though not always.
Rueben (2007) takes note of China and India, which are heavily
relying n their human capital for very rapid growth. Another factor
that greatly contributes to economic growth, as noted by the same
author, is investments in real capital stock. He says human capital
facilitates individuals in the center to generate knowledge and new
products and production methods when viewed on the supply side.
From the demand side perspective, large human capital creates
demand for goods and services produced in that economy.
Unfortunately, differences in natural factors over different economies
create variation in the effectiveness of human capital as a contributing
factor to economic growth. In Africa, for example, high population
growth rates are blamed for the unending poverty levels in the
country. This is contrary to the above suggestions that increased
human capital is viewed as an injection to the economy.
Economists and academicians have offered different ideas as to why
the US economy is experiencing slowed growth. In any modern
economy, some basic necessities must be ensured in order to
guarantee growth. Most important, they must have a strong currency
and a positive net exports balance. These three things are
complementary to each other. A weak dollar, will in due course, lead
to high oil and commodity prices through the multiplier effect. In the
long run, this will lead to high inflation as we are experiencing now.
In response, the Federal Reserve Bank is forced to raise interest rates
in an attempt to protect consumers. This points to a very important
revelation that a weak dollar does not cause economic stagnation but
rather a weak dollar of any currency is a direct result of slowed
growth or economic stagnation.
Case and Fair (2006) say that both long term and short term economic
stagnation can be attributed to:
Weak Dollar.
Expensive Commodities.
Expensive Oil.
High Inflation.
Unmanageable Debt.
The current economic system in America possesses all of the above
characteristics. The frustrating thing is that each is one of them is
spinning out of control. In the last few years, the US economy has
been on a growth recovery path after a slowdown caused by the
terrorist attack of the World Trade Center.DDuring such economic
recovery periods, tax revenues are high, normally accounting for a
large portion of the GDP. Unfortunately, normalization of growth
after stabilizing recovery is interpreted as slowed growth. In the
current “recession” period, we have seen the opposite as slowed
growth.
Data from the Federal Bureau of Statistics shows that per capita
income in the US and growth in GDP have been on a steady increase
in the last 20 years, with GDP growth averaging 1.8%. Unfortunately,
this growth is not well represented among the low-income earning
population. A report by the IMF released by BBC early last year
shows that the difference in income between the rich and the poor is
highest in developed countries contrary to popular belief that it is
highest in developing and less developed countries. The US, as the
most developed country, does not show its reported economic growth
among the low-income earners despite the continued growth in the
economy. Weiner (2008) says this points to the inefficiency of the
GDP as a measure of economic performance/growth. He makes an
example of the buying and reselling of houses at an ever-increasing
price as being counted towards economic growth. Economists have for
a long time relied on GDP as the most all-inclusive measure of growth
in an economy. With the economic situation.
Inflation
Inflation is defined by Rueben (2007) as the general increase in price
levels. According to the Federal Bureau of Statistics, the US economy
had registered an inflation level of 6.5% in the month of October. This
translates to say that while prices have remained constant, product
prices have increased by 6.5%. Therefore the common American
citizen has the same number of dollars to spend on expensive
products. This now points to the difference in nominal and real wages.
While there may be nominal increases of wages by employers to
offset the inflation impact, the increase might not be enough to cover
for inflation. Therefore, when the nominal wage is adjusted to
inflation levels, we get a real increase in wages. When households
receive a real increase in wage, consumption is bound to go up.
Types of inflation
Economists agree on three types of inflation, namely as:
Demand-pull inflation
Cost-push inflation
Hyperinflation
When demand increases and this results in inflation, we describe it as
demand-pull inflation. On the other hand, when cost increases and this
causes supply to decrease in turn, and this results in inflation, we
describe it as cost-push inflation. But these two different causes of
inflation are not independent, of course. Demand-pull pull inflation
will more often than not lead to cost-push inflation. Continued
inflation in the two categories creates hyperinflation. This is usually
inflation in excess that may occur during a crisis such as war (Case
and Fair, 2006).
Current situation vs. the great depression of the 1930s
Understanding the great depression of the 1930s is like the Holy Grail
of macroeconomics, so says Bernanke, as quoted by Shane (2005).
This has been the worst financial crisis to hit the world and the US.
The current situation, as earlier said, is being compared to the Great
Depression. But the thing is, we are not yet there, but we might be
headed there if the government does not institute policies that will
deliver the economy from the imminent danger. The Great Depression
is said to have been caused by the Stock Market crash of 1929 in the
US, but the other way that some authors see it as the crash had
resulted from the depression had begun earlier than the agreed time of
1930 (Case and Fair, 2006). In the current situation, the financial and
stocks market is in grave danger, with multi-billion companies
reporting billions of losses and others filing for bankruptcy. Though
the Stocks market crash of 1929 happened in one day, the effects are
expected to be the same with a gradual crash as it is happening now.
During this 1930’s depression, unemployment levels in the US had
escalated to over 30%, with hundred of firms closing down.
Conclusion
The fact that the US economy has reportedly been on a growth path
and the life of the ordinary American citizen has been worsening calls
for urgent measures to evaluate the current system of measuring
national economic output in terms of GDP as an indicator of the
general economic position of a region. As earlier said, the disparity in
wealth distribution is highest in countries reported as having the
highest levels of GDP. In conclusion, therefore, the current method of
using GDP as a measure of growth could be wrong in saying that the
US economy. If other more competent measures were used, then it
could be revealed that the US economy is worse-off than probably
imagined and already in a bad recession.
Current situation
The US economy is in a crisis. Financial services companies are
coming down in large numbers, with most being bailed by the
government. Employees are worried t the current levels of
unemployment standing at over 6%. Inflation is also on the rise. In
short, in the few months that the financial market has been in trouble,
consumers and investors have panicked a lot and made rash decisions
with far-reaching implications in the short run and in the long run.
Many are withdrawing their deposits from banks in fear that they may
collapse. In short, there have been panic withdrawals, thereby
worsening the conditions further. This can be seen as the short-term
implications of the high inflation and financial crisis in the economy.
Unemployment
In any given economy, a certain age group of the population and main
persons between the ages of 21-65 constitutes the economy’s labor
force. According to Reinhardt (2006), this number of people is the
main contributor to the national Gross Domestic Product (GDP).
Classical economists describe the labor force as the number of people
in an economy ready to exchange their services for salaries and wages
for the prevailing wage rates. They are again the highest taxpayers
providing revenue to the government to run its activities. Factories
and industries require labor input from the labor market to facilitate
the production of goods and services. The labor market is guided by
the general law of demand and supply through complications arise due
to various factors such as level of skill and mobility of labor. Such
factors, according to Reinhardt (2006), have their own way of
producing unemployment. So what is unemployment in the first
place? Going by Lawrence’s (2003) description of the term, he says
that it is a percentage of the number of people that are considered to
belong in the labor force but cannot find employment. This brings to
our attention the fact that students and the aged are not considered as
part of the labor force; hence they are not included among the
unemployed. Another definition favored by the Keynesian school of
thought is that “unemployment is an excess supply of labor resulting
from a failure of coordination in the market economy” Classical
economists, on the other hand, define unemployment as “people
engaged in the productive work of looking for a better match between
worker and employer.” They, therefore, view the search for work as
work in itself. Thus we can deduce that the unemployed are workers
working the “job search sector.”
Unemployment is considered only a problem in the economy when it
exceeds the recommended level of 4%. This level is encouraged as
full employment; in this case, 0% unemployment, production will be
impossible. Pharis (2007) the recommended 4% is only to cushion the
labor market from unprecedented wage hikes resulting from high
demand and low supply. The recommended rate is permanent as in the
short run people will keep on switching employments. During this
transition from one employer to the other, then there will always be a
number of people unemployed in the short run, but in the long run,
they will be employed.
Long term unemployment
Long-term unemployment periods can be related to lower transition
probabilities from job search to employment. Secondly, the long term
unemployed workers “are less relevant to wage and price formation
than the newly unemployed” (Llaudes, 2005).
The author base’s his argument on the assumption that “the long term
unemployed play a marginal role in the wage formation process.”
From this, we deduce that unemployment durations do not count in the
setting of wage rates in the labor market. This is contrary to what is
predicted in the Phillips Curve, which suggests that the long-term
unemployed should receive more weight in terms of better
employment conditions and wages. However, individual economic
policies determine the role played by long-term unemployment.
Llaudes (2005) notes that long-term unemployed persons in some
Western European countries have a negligible effect on labor prices.
Long-term unemployment can, in one or another, be attributed to
short-term unemployment. This occurs due to the act that, after some
time unemployed, individuals become disheartened and reduce their
job search morale and activities, thereby decreasing their chances of
finding employment. Again, according to the Phillips Curve,
employers are biased against long-term unemployed workers as they
are assumed to be more expensive by demanding higher wage rates.
Therefore if firms consistently stick to this by hiring the newly “un-
employed because they are assumed to be more productive and less
costly, the equilibrium or “efficiency wage” is determined by the
wage demands of this preferred group” (Llaudes, 2005).
According to the Bureau of Labor Statistics, unemployment in the US
stood at 6.5% as of October this year. This is posed to continue with
the economic situation in the country not that promising. Then we
may ask ourselves what the role of government in reducing the
unemployment levels in the country is. There are two major ways
through which a government can influence the performance of the
economy, not only in growth but also in solving some of these
macroeconomic problems. In this year alone, the Bush administration
has been lowering interest rates to encourage more investment and
borrowing. This was a result reported a drastic drop in consumer
spending since late 2007.
Types of unemployment.
Frictional unemployment.
Cyclical unemployment.
Structural unemployment.
Cyclical unemployment, in particular, is defined as an excess supply
of labor and usually occurs in the long run. It results from delayed
short-term unemployment periods, and according to the Phillips curve,
it is supported by the labor market. On the other hand, frictional
employment is caused by some people being between jobs, thus a
short term, while structural unemployment is caused by problems that
arise because of a mismatch between the needs of employers and the
skills and training of the labor force. This might translate to either
long-term unemployment or short-term unemployment depending on
how far the employer is willing to compromise and high unskilled
labor and then later train the employees (Case and Fair, 2006).
Economic stagnation
Economic growth is a long-term trend largely dependent on supply-
side factors. Growth in the labor market and human capital, in general,
is viewed as a key driver to economic growth though not always.
Rueben (2007) takes note of China and India, which are heavily
relying n their human capital for very rapid growth. Another factor
that greatly contributes to economic growth, as noted by the same
author, is investments in real capital stock. He says human capital
facilitates individuals in the center to generate knowledge and new
products and production methods when viewed on the supply side.
From the demand side perspective, large human capital creates
demand for goods and services produced in that economy.
Unfortunately, differences in natural factors over different economies
create variation in the effectiveness of human capital as a contributing
factor to economic growth. In Africa, for example, high population
growth rates are blamed for the unending poverty levels in the
country. This is contrary to the above suggestions that increased
human capital is viewed as an injection to the economy.
Economists and academicians have offered different ideas as to why
the US economy is experiencing slowed growth. In any modern
economy, some basic necessities must be ensured in order to
guarantee growth. Most important, they must have a strong currency
and a positive net exports balance. These three things are
complementary to each other. A weak dollar, will in due course, lead
to high oil and commodity prices through the multiplier effect. In the
long run, this will lead to high inflation as we are experiencing now.
In response, the Federal Reserve Bank is forced to raise interest rates
in an attempt to protect consumers. This points to a very important
revelation that a weak dollar does not cause economic stagnation but
rather a weak dollar of any currency is a direct result of slowed
growth or economic stagnation.
Case and Fair (2006) say that both long term and short term economic
stagnation can be attributed to:
Weak Dollar.
Expensive Commodities.
Expensive Oil.
High Inflation.
Unmanageable Debt.
The current economic system in America possesses all of the above
characteristics. The frustrating thing is that each is one of them is
spinning out of control. In the last few years, the US economy has
been on a growth recovery path after a slowdown caused by the
terrorist attack of the World Trade Center.DDuring such economic
recovery periods, tax revenues are high, normally accounting for a
large portion of the GDP. Unfortunately, normalization of growth
after stabilizing recovery is interpreted as slowed growth. In the
current “recession” period, we have seen the opposite as slowed
growth.
Data from the Federal Bureau of Statistics shows that per capita
income in the US and growth in GDP have been on a steady increase
in the last 20 years, with GDP growth averaging 1.8%. Unfortunately,
this growth is not well represented among the low-income earning
population. A report by the IMF released by BBC early last year
shows that the difference in income between the rich and the poor is
highest in developed countries contrary to popular belief that it is
highest in developing and less developed countries. The US, as the
most developed country, does not show its reported economic growth
among the low-income earners despite the continued growth in the
economy. Weiner (2008) says this points to the inefficiency of the
GDP as a measure of economic performance/growth. He makes an
example of the buying and reselling of houses at an ever-increasing
price as being counted towards economic growth. Economists have for
a long time relied on GDP as the most all-inclusive measure of growth
in an economy. With the economic situation.
Inflation
Inflation is defined by Rueben (2007) as the general increase in price
levels. According to the Federal Bureau of Statistics, the US economy
had registered an inflation level of 6.5% in the month of October. This
translates to say that while prices have remained constant, product
prices have increased by 6.5%. Therefore the common American
citizen has the same number of dollars to spend on expensive
products. This now points to the difference in nominal and real wages.
While there may be nominal increases of wages by employers to
offset the inflation impact, the increase might not be enough to cover
for inflation. Therefore, when the nominal wage is adjusted to
inflation levels, we get a real increase in wages. When households
receive a real increase in wage, consumption is bound to go up.
Types of inflation
Economists agree on three types of inflation, namely as:
Demand-pull inflation
Cost-push inflation
Hyperinflation
When demand increases and this results in inflation, we describe it as
demand-pull inflation. On the other hand, when cost increases and this
causes supply to decrease in turn, and this results in inflation, we
describe it as cost-push inflation. But these two different causes of
inflation are not independent, of course. Demand-pull pull inflation
will more often than not lead to cost-push inflation. Continued
inflation in the two categories creates hyperinflation. This is usually
inflation in excess that may occur during a crisis such as war (Case
and Fair, 2006).
Current situation vs. the great depression of the 1930s
Understanding the great depression of the 1930s is like the Holy Grail
of macroeconomics, so says Bernanke, as quoted by Shane (2005).
This has been the worst financial crisis to hit the world and the US.
The current situation, as earlier said, is being compared to the Great
Depression. But the thing is, we are not yet there, but we might be
headed there if the government does not institute policies that will
deliver the economy from the imminent danger. The Great Depression
is said to have been caused by the Stock Market crash of 1929 in the
US, but the other way that some authors see it as the crash had
resulted from the depression had begun earlier than the agreed time of
1930 (Case and Fair, 2006). In the current situation, the financial and
stocks market is in grave danger, with multi-billion companies
reporting billions of losses and others filing for bankruptcy. Though
the Stocks market crash of 1929 happened in one day, the effects are
expected to be the same with a gradual crash as it is happening now.
During this 1930’s depression, unemployment levels in the US had
escalated to over 30%, with hundred of firms closing down.
Conclusion
The fact that the US economy has reportedly been on a growth path
and the life of the ordinary American citizen has been worsening calls
for urgent measures to evaluate the current system of measuring
national economic output in terms of GDP as an indicator of the
general economic position of a region. As earlier said, the disparity in
wealth distribution is highest in countries reported as having the
highest levels of GDP. In conclusion, therefore, the current method of
using GDP as a measure of growth could be wrong in saying that the
US economy. If other more competent measures were used, then it
could be revealed that the US economy is worse-off than probably
imagined and already in a bad recession.
Current situation
The US economy is in a crisis. Financial services companies are
coming down in large numbers, with most being bailed by the
government. Employees are worried t the current levels of
unemployment standing at over 6%. Inflation is also on the rise. In
short, in the few months that the financial market has been in trouble,
consumers and investors have panicked a lot and made rash decisions
with far-reaching implications in the short run and in the long run.
Many are withdrawing their deposits from banks in fear that they may
collapse. In short, there have been panic withdrawals, thereby
worsening the conditions further. This can be seen as the short-term
implications of the high inflation and financial crisis in the economy.
Unemployment
In any given economy, a certain age group of the population and main
persons between the ages of 21-65 constitutes the economy’s labor
force. According to Reinhardt (2006), this number of people is the
main contributor to the national Gross Domestic Product (GDP).
Classical economists describe the labor force as the number of people
in an economy ready to exchange their services for salaries and wages
for the prevailing wage rates. They are again the highest taxpayers
providing revenue to the government to run its activities. Factories
and industries require labor input from the labor market to facilitate
the production of goods and services. The labor market is guided by
the general law of demand and supply through complications arise due
to various factors such as level of skill and mobility of labor. Such
factors, according to Reinhardt (2006), have their own way of
producing unemployment. So what is unemployment in the first
place? Going by Lawrence’s (2003) description of the term, he says
that it is a percentage of the number of people that are considered to
belong in the labor force but cannot find employment. This brings to
our attention the fact that students and the aged are not considered as
part of the labor force; hence they are not included among the
unemployed. Another definition favored by the Keynesian school of
thought is that “unemployment is an excess supply of labor resulting
from a failure of coordination in the market economy” Classical
economists, on the other hand, define unemployment as “people
engaged in the productive work of looking for a better match between
worker and employer.” They, therefore, view the search for work as
work in itself. Thus we can deduce that the unemployed are workers
working the “job search sector.”
Unemployment is considered only a problem in the economy when it
exceeds the recommended level of 4%. This level is encouraged as
full employment; in this case, 0% unemployment, production will be
impossible. Pharis (2007) the recommended 4% is only to cushion the
labor market from unprecedented wage hikes resulting from high
demand and low supply. The recommended rate is permanent as in the
short run people will keep on switching employments. During this
transition from one employer to the other, then there will always be a
number of people unemployed in the short run, but in the long run,
they will be employed.
Long term unemployment
Long-term unemployment periods can be related to lower transition
probabilities from job search to employment. Secondly, the long term
unemployed workers “are less relevant to wage and price formation
than the newly unemployed” (Llaudes, 2005).
The author base’s his argument on the assumption that “the long term
unemployed play a marginal role in the wage formation process.”
From this, we deduce that unemployment durations do not count in the
setting of wage rates in the labor market. This is contrary to what is
predicted in the Phillips Curve, which suggests that the long-term
unemployed should receive more weight in terms of better
employment conditions and wages. However, individual economic
policies determine the role played by long-term unemployment.
Llaudes (2005) notes that long-term unemployed persons in some
Western European countries have a negligible effect on labor prices.
Long-term unemployment can, in one or another, be attributed to
short-term unemployment. This occurs due to the act that, after some
time unemployed, individuals become disheartened and reduce their
job search morale and activities, thereby decreasing their chances of
finding employment. Again, according to the Phillips Curve,
employers are biased against long-term unemployed workers as they
are assumed to be more expensive by demanding higher wage rates.
Therefore if firms consistently stick to this by hiring the newly “un-
employed because they are assumed to be more productive and less
costly, the equilibrium or “efficiency wage” is determined by the
wage demands of this preferred group” (Llaudes, 2005).
According to the Bureau of Labor Statistics, unemployment in the US
stood at 6.5% as of October this year. This is posed to continue with
the economic situation in the country not that promising. Then we
may ask ourselves what the role of government in reducing the
unemployment levels in the country is. There are two major ways
through which a government can influence the performance of the
economy, not only in growth but also in solving some of these
macroeconomic problems. In this year alone, the Bush administration
has been lowering interest rates to encourage more investment and
borrowing. This was a result reported a drastic drop in consumer
spending since late 2007.
Types of unemployment.
Frictional unemployment.
Cyclical unemployment.
Structural unemployment.
Cyclical unemployment, in particular, is defined as an excess supply
of labor and usually occurs in the long run. It results from delayed
short-term unemployment periods, and according to the Phillips curve,
it is supported by the labor market. On the other hand, frictional
employment is caused by some people being between jobs, thus a
short term, while structural unemployment is caused by problems that
arise because of a mismatch between the needs of employers and the
skills and training of the labor force. This might translate to either
long-term unemployment or short-term unemployment depending on
how far the employer is willing to compromise and high unskilled
labor and then later train the employees (Case and Fair, 2006).
Economic stagnation
Economic growth is a long-term trend largely dependent on supply-
side factors. Growth in the labor market and human capital, in general,
is viewed as a key driver to economic growth though not always.
Rueben (2007) takes note of China and India, which are heavily
relying n their human capital for very rapid growth. Another factor
that greatly contributes to economic growth, as noted by the same
author, is investments in real capital stock. He says human capital
facilitates individuals in the center to generate knowledge and new
products and production methods when viewed on the supply side.
From the demand side perspective, large human capital creates
demand for goods and services produced in that economy.
Unfortunately, differences in natural factors over different economies
create variation in the effectiveness of human capital as a contributing
factor to economic growth. In Africa, for example, high population
growth rates are blamed for the unending poverty levels in the
country. This is contrary to the above suggestions that increased
human capital is viewed as an injection to the economy.
Economists and academicians have offered different ideas as to why
the US economy is experiencing slowed growth. In any modern
economy, some basic necessities must be ensured in order to
guarantee growth. Most important, they must have a strong currency
and a positive net exports balance. These three things are
complementary to each other. A weak dollar, will in due course, lead
to high oil and commodity prices through the multiplier effect. In the
long run, this will lead to high inflation as we are experiencing now.
In response, the Federal Reserve Bank is forced to raise interest rates
in an attempt to protect consumers. This points to a very important
revelation that a weak dollar does not cause economic stagnation but
rather a weak dollar of any currency is a direct result of slowed
growth or economic stagnation.
Case and Fair (2006) say that both long term and short term economic
stagnation can be attributed to:
Weak Dollar.
Expensive Commodities.
Expensive Oil.
High Inflation.
Unmanageable Debt.
The current economic system in America possesses all of the above
characteristics. The frustrating thing is that each is one of them is
spinning out of control. In the last few years, the US economy has
been on a growth recovery path after a slowdown caused by the
terrorist attack of the World Trade Center.DDuring such economic
recovery periods, tax revenues are high, normally accounting for a
large portion of the GDP. Unfortunately, normalization of growth
after stabilizing recovery is interpreted as slowed growth. In the
current “recession” period, we have seen the opposite as slowed
growth.
Data from the Federal Bureau of Statistics shows that per capita
income in the US and growth in GDP have been on a steady increase
in the last 20 years, with GDP growth averaging 1.8%. Unfortunately,
this growth is not well represented among the low-income earning
population. A report by the IMF released by BBC early last year
shows that the difference in income between the rich and the poor is
highest in developed countries contrary to popular belief that it is
highest in developing and less developed countries. The US, as the
most developed country, does not show its reported economic growth
among the low-income earners despite the continued growth in the
economy. Weiner (2008) says this points to the inefficiency of the
GDP as a measure of economic performance/growth. He makes an
example of the buying and reselling of houses at an ever-increasing
price as being counted towards economic growth. Economists have for
a long time relied on GDP as the most all-inclusive measure of growth
in an economy. With the economic situation.
Inflation
Inflation is defined by Rueben (2007) as the general increase in price
levels. According to the Federal Bureau of Statistics, the US economy
had registered an inflation level of 6.5% in the month of October. This
translates to say that while prices have remained constant, product
prices have increased by 6.5%. Therefore the common American
citizen has the same number of dollars to spend on expensive
products. This now points to the difference in nominal and real wages.
While there may be nominal increases of wages by employers to
offset the inflation impact, the increase might not be enough to cover
for inflation. Therefore, when the nominal wage is adjusted to
inflation levels, we get a real increase in wages. When households
receive a real increase in wage, consumption is bound to go up.
Types of inflation
Economists agree on three types of inflation, namely as:
Demand-pull inflation
Cost-push inflation
Hyperinflation
When demand increases and this results in inflation, we describe it as
demand-pull inflation. On the other hand, when cost increases and this
causes supply to decrease in turn, and this results in inflation, we
describe it as cost-push inflation. But these two different causes of
inflation are not independent, of course. Demand-pull pull inflation
will more often than not lead to cost-push inflation. Continued
inflation in the two categories creates hyperinflation. This is usually
inflation in excess that may occur during a crisis such as war (Case
and Fair, 2006).
Current situation vs. the great depression of the 1930s
Understanding the great depression of the 1930s is like the Holy Grail
of macroeconomics, so says Bernanke, as quoted by Shane (2005).
This has been the worst financial crisis to hit the world and the US.
The current situation, as earlier said, is being compared to the Great
Depression. But the thing is, we are not yet there, but we might be
headed there if the government does not institute policies that will
deliver the economy from the imminent danger. The Great Depression
is said to have been caused by the Stock Market crash of 1929 in the
US, but the other way that some authors see it as the crash had
resulted from the depression had begun earlier than the agreed time of
1930 (Case and Fair, 2006). In the current situation, the financial and
stocks market is in grave danger, with multi-billion companies
reporting billions of losses and others filing for bankruptcy. Though
the Stocks market crash of 1929 happened in one day, the effects are
expected to be the same with a gradual crash as it is happening now.
During this 1930’s depression, unemployment levels in the US had
escalated to over 30%, with hundred of firms closing down.
Conclusion
The fact that the US economy has reportedly been on a growth path
and the life of the ordinary American citizen has been worsening calls
for urgent measures to evaluate the current system of measuring
national economic output in terms of GDP as an indicator of the
general economic position of a region. As earlier said, the disparity in
wealth distribution is highest in countries reported as having the
highest levels of GDP. In conclusion, therefore, the current method of
using GDP as a measure of growth could be wrong in saying that the
US economy. If other more competent measures were used, then it
could be revealed that the US economy is worse-off than probably
imagined and already in a bad recession.
Current situation
The US economy is in a crisis. Financial services companies are
coming down in large numbers, with most being bailed by the
government. Employees are worried t the current levels of
unemployment standing at over 6%. Inflation is also on the rise. In
short, in the few months that the financial market has been in trouble,
consumers and investors have panicked a lot and made rash decisions
with far-reaching implications in the short run and in the long run.
Many are withdrawing their deposits from banks in fear that they may
collapse. In short, there have been panic withdrawals, thereby
worsening the conditions further. This can be seen as the short-term
implications of the high inflation and financial crisis in the economy.
Unemployment
In any given economy, a certain age group of the population and main
persons between the ages of 21-65 constitutes the economy’s labor
force. According to Reinhardt (2006), this number of people is the
main contributor to the national Gross Domestic Product (GDP).
Classical economists describe the labor force as the number of people
in an economy ready to exchange their services for salaries and wages
for the prevailing wage rates. They are again the highest taxpayers
providing revenue to the government to run its activities. Factories
and industries require labor input from the labor market to facilitate
the production of goods and services. The labor market is guided by
the general law of demand and supply through complications arise due
to various factors such as level of skill and mobility of labor. Such
factors, according to Reinhardt (2006), have their own way of
producing unemployment. So what is unemployment in the first
place? Going by Lawrence’s (2003) description of the term, he says
that it is a percentage of the number of people that are considered to
belong in the labor force but cannot find employment. This brings to
our attention the fact that students and the aged are not considered as
part of the labor force; hence they are not included among the
unemployed. Another definition favored by the Keynesian school of
thought is that “unemployment is an excess supply of labor resulting
from a failure of coordination in the market economy” Classical
economists, on the other hand, define unemployment as “people
engaged in the productive work of looking for a better match between
worker and employer.” They, therefore, view the search for work as
work in itself. Thus we can deduce that the unemployed are workers
working the “job search sector.”
Unemployment is considered only a problem in the economy when it
exceeds the recommended level of 4%. This level is encouraged as
full employment; in this case, 0% unemployment, production will be
impossible. Pharis (2007) the recommended 4% is only to cushion the
labor market from unprecedented wage hikes resulting from high
demand and low supply. The recommended rate is permanent as in the
short run people will keep on switching employments. During this
transition from one employer to the other, then there will always be a
number of people unemployed in the short run, but in the long run,
they will be employed.
Long term unemployment
Long-term unemployment periods can be related to lower transition
probabilities from job search to employment. Secondly, the long term
unemployed workers “are less relevant to wage and price formation
than the newly unemployed” (Llaudes, 2005).
The author base’s his argument on the assumption that “the long term
unemployed play a marginal role in the wage formation process.”
From this, we deduce that unemployment durations do not count in the
setting of wage rates in the labor market. This is contrary to what is
predicted in the Phillips Curve, which suggests that the long-term
unemployed should receive more weight in terms of better
employment conditions and wages. However, individual economic
policies determine the role played by long-term unemployment.
Llaudes (2005) notes that long-term unemployed persons in some
Western European countries have a negligible effect on labor prices.
Long-term unemployment can, in one or another, be attributed to
short-term unemployment. This occurs due to the act that, after some
time unemployed, individuals become disheartened and reduce their
job search morale and activities, thereby decreasing their chances of
finding employment. Again, according to the Phillips Curve,
employers are biased against long-term unemployed workers as they
are assumed to be more expensive by demanding higher wage rates.
Therefore if firms consistently stick to this by hiring the newly “un-
employed because they are assumed to be more productive and less
costly, the equilibrium or “efficiency wage” is determined by the
wage demands of this preferred group” (Llaudes, 2005).
According to the Bureau of Labor Statistics, unemployment in the US
stood at 6.5% as of October this year. This is posed to continue with
the economic situation in the country not that promising. Then we
may ask ourselves what the role of government in reducing the
unemployment levels in the country is. There are two major ways
through which a government can influence the performance of the
economy, not only in growth but also in solving some of these
macroeconomic problems. In this year alone, the Bush administration
has been lowering interest rates to encourage more investment and
borrowing. This was a result reported a drastic drop in consumer
spending since late 2007.
Types of unemployment.
Frictional unemployment.
Cyclical unemployment.
Structural unemployment.
Cyclical unemployment, in particular, is defined as an excess supply
of labor and usually occurs in the long run. It results from delayed
short-term unemployment periods, and according to the Phillips curve,
it is supported by the labor market. On the other hand, frictional
employment is caused by some people being between jobs, thus a
short term, while structural unemployment is caused by problems that
arise because of a mismatch between the needs of employers and the
skills and training of the labor force. This might translate to either
long-term unemployment or short-term unemployment depending on
how far the employer is willing to compromise and high unskilled
labor and then later train the employees (Case and Fair, 2006).
Economic stagnation
Economic growth is a long-term trend largely dependent on supply-
side factors. Growth in the labor market and human capital, in general,
is viewed as a key driver to economic growth though not always.
Rueben (2007) takes note of China and India, which are heavily
relying n their human capital for very rapid growth. Another factor
that greatly contributes to economic growth, as noted by the same
author, is investments in real capital stock. He says human capital
facilitates individuals in the center to generate knowledge and new
products and production methods when viewed on the supply side.
From the demand side perspective, large human capital creates
demand for goods and services produced in that economy.
Unfortunately, differences in natural factors over different economies
create variation in the effectiveness of human capital as a contributing
factor to economic growth. In Africa, for example, high population
growth rates are blamed for the unending poverty levels in the
country. This is contrary to the above suggestions that increased
human capital is viewed as an injection to the economy.
Economists and academicians have offered different ideas as to why
the US economy is experiencing slowed growth. In any modern
economy, some basic necessities must be ensured in order to
guarantee growth. Most important, they must have a strong currency
and a positive net exports balance. These three things are
complementary to each other. A weak dollar, will in due course, lead
to high oil and commodity prices through the multiplier effect. In the
long run, this will lead to high inflation as we are experiencing now.
In response, the Federal Reserve Bank is forced to raise interest rates
in an attempt to protect consumers. This points to a very important
revelation that a weak dollar does not cause economic stagnation but
rather a weak dollar of any currency is a direct result of slowed
growth or economic stagnation.
Case and Fair (2006) say that both long term and short term economic
stagnation can be attributed to:
Weak Dollar.
Expensive Commodities.
Expensive Oil.
High Inflation.
Unmanageable Debt.
The current economic system in America possesses all of the above
characteristics. The frustrating thing is that each is one of them is
spinning out of control. In the last few years, the US economy has
been on a growth recovery path after a slowdown caused by the
terrorist attack of the World Trade Center.DDuring such economic
recovery periods, tax revenues are high, normally accounting for a
large portion of the GDP. Unfortunately, normalization of growth
after stabilizing recovery is interpreted as slowed growth. In the
current “recession” period, we have seen the opposite as slowed
growth.
Data from the Federal Bureau of Statistics shows that per capita
income in the US and growth in GDP have been on a steady increase
in the last 20 years, with GDP growth averaging 1.8%. Unfortunately,
this growth is not well represented among the low-income earning
population. A report by the IMF released by BBC early last year
shows that the difference in income between the rich and the poor is
highest in developed countries contrary to popular belief that it is
highest in developing and less developed countries. The US, as the
most developed country, does not show its reported economic growth
among the low-income earners despite the continued growth in the
economy. Weiner (2008) says this points to the inefficiency of the
GDP as a measure of economic performance/growth. He makes an
example of the buying and reselling of houses at an ever-increasing
price as being counted towards economic growth. Economists have for
a long time relied on GDP as the most all-inclusive measure of growth
in an economy. With the economic situation.
Inflation
Inflation is defined by Rueben (2007) as the general increase in price
levels. According to the Federal Bureau of Statistics, the US economy
had registered an inflation level of 6.5% in the month of October. This
translates to say that while prices have remained constant, product
prices have increased by 6.5%. Therefore the common American
citizen has the same number of dollars to spend on expensive
products. This now points to the difference in nominal and real wages.
While there may be nominal increases of wages by employers to
offset the inflation impact, the increase might not be enough to cover
for inflation. Therefore, when the nominal wage is adjusted to
inflation levels, we get a real increase in wages. When households
receive a real increase in wage, consumption is bound to go up.
Types of inflation
Economists agree on three types of inflation, namely as:
Demand-pull inflation
Cost-push inflation
Hyperinflation
When demand increases and this results in inflation, we describe it as
demand-pull inflation. On the other hand, when cost increases and this
causes supply to decrease in turn, and this results in inflation, we
describe it as cost-push inflation. But these two different causes of
inflation are not independent, of course. Demand-pull pull inflation
will more often than not lead to cost-push inflation. Continued
inflation in the two categories creates hyperinflation. This is usually
inflation in excess that may occur during a crisis such as war (Case
and Fair, 2006).
Current situation vs. the great depression of the 1930s
Understanding the great depression of the 1930s is like the Holy Grail
of macroeconomics, so says Bernanke, as quoted by Shane (2005).
This has been the worst financial crisis to hit the world and the US.
The current situation, as earlier said, is being compared to the Great
Depression. But the thing is, we are not yet there, but we might be
headed there if the government does not institute policies that will
deliver the economy from the imminent danger. The Great Depression
is said to have been caused by the Stock Market crash of 1929 in the
US, but the other way that some authors see it as the crash had
resulted from the depression had begun earlier than the agreed time of
1930 (Case and Fair, 2006). In the current situation, the financial and
stocks market is in grave danger, with multi-billion companies
reporting billions of losses and others filing for bankruptcy. Though
the Stocks market crash of 1929 happened in one day, the effects are
expected to be the same with a gradual crash as it is happening now.
During this 1930’s depression, unemployment levels in the US had
escalated to over 30%, with hundred of firms closing down.
Conclusion
The fact that the US economy has reportedly been on a growth path
and the life of the ordinary American citizen has been worsening calls
for urgent measures to evaluate the current system of measuring
national economic output in terms of GDP as an indicator of the
general economic position of a region. As earlier said, the disparity in
wealth distribution is highest in countries reported as having the
highest levels of GDP. In conclusion, therefore, the current method of
using GDP as a measure of growth could be wrong in saying that the
US economy. If other more competent measures were used, then it
could be revealed that the US economy is worse-off than probably
imagined and already in a bad recession.
Current situation
The US economy is in a crisis. Financial services companies are
coming down in large numbers, with most being bailed by the
government. Employees are worried t the current levels of
unemployment standing at over 6%. Inflation is also on the rise. In
short, in the few months that the financial market has been in trouble,
consumers and investors have panicked a lot and made rash decisions
with far-reaching implications in the short run and in the long run.
Many are withdrawing their deposits from banks in fear that they may
collapse. In short, there have been panic withdrawals, thereby
worsening the conditions further. This can be seen as the short-term
implications of the high inflation and financial crisis in the economy.
Unemployment
In any given economy, a certain age group of the population and main
persons between the ages of 21-65 constitutes the economy’s labor
force. According to Reinhardt (2006), this number of people is the
main contributor to the national Gross Domestic Product (GDP).
Classical economists describe the labor force as the number of people
in an economy ready to exchange their services for salaries and wages
for the prevailing wage rates. They are again the highest taxpayers
providing revenue to the government to run its activities. Factories
and industries require labor input from the labor market to facilitate
the production of goods and services. The labor market is guided by
the general law of demand and supply through complications arise due
to various factors such as level of skill and mobility of labor. Such
factors, according to Reinhardt (2006), have their own way of
producing unemployment. So what is unemployment in the first
place? Going by Lawrence’s (2003) description of the term, he says
that it is a percentage of the number of people that are considered to
belong in the labor force but cannot find employment. This brings to
our attention the fact that students and the aged are not considered as
part of the labor force; hence they are not included among the
unemployed. Another definition favored by the Keynesian school of
thought is that “unemployment is an excess supply of labor resulting
from a failure of coordination in the market economy” Classical
economists, on the other hand, define unemployment as “people
engaged in the productive work of looking for a better match between
worker and employer.” They, therefore, view the search for work as
work in itself. Thus we can deduce that the unemployed are workers
working the “job search sector.”
Unemployment is considered only a problem in the economy when it
exceeds the recommended level of 4%. This level is encouraged as
full employment; in this case, 0% unemployment, production will be
impossible. Pharis (2007) the recommended 4% is only to cushion the
labor market from unprecedented wage hikes resulting from high
demand and low supply. The recommended rate is permanent as in the
short run people will keep on switching employments. During this
transition from one employer to the other, then there will always be a
number of people unemployed in the short run, but in the long run,
they will be employed.
Long term unemployment
Long-term unemployment periods can be related to lower transition
probabilities from job search to employment. Secondly, the long term
unemployed workers “are less relevant to wage and price formation
than the newly unemployed” (Llaudes, 2005).
The author base’s his argument on the assumption that “the long term
unemployed play a marginal role in the wage formation process.”
From this, we deduce that unemployment durations do not count in the
setting of wage rates in the labor market. This is contrary to what is
predicted in the Phillips Curve, which suggests that the long-term
unemployed should receive more weight in terms of better
employment conditions and wages. However, individual economic
policies determine the role played by long-term unemployment.
Llaudes (2005) notes that long-term unemployed persons in some
Western European countries have a negligible effect on labor prices.
Long-term unemployment can, in one or another, be attributed to
short-term unemployment. This occurs due to the act that, after some
time unemployed, individuals become disheartened and reduce their
job search morale and activities, thereby decreasing their chances of
finding employment. Again, according to the Phillips Curve,
employers are biased against long-term unemployed workers as they
are assumed to be more expensive by demanding higher wage rates.
Therefore if firms consistently stick to this by hiring the newly “un-
employed because they are assumed to be more productive and less
costly, the equilibrium or “efficiency wage” is determined by the
wage demands of this preferred group” (Llaudes, 2005).
According to the Bureau of Labor Statistics, unemployment in the US
stood at 6.5% as of October this year. This is posed to continue with
the economic situation in the country not that promising. Then we
may ask ourselves what the role of government in reducing the
unemployment levels in the country is. There are two major ways
through which a government can influence the performance of the
economy, not only in growth but also in solving some of these
macroeconomic problems. In this year alone, the Bush administration
has been lowering interest rates to encourage more investment and
borrowing. This was a result reported a drastic drop in consumer
spending since late 2007.
Types of unemployment.
Frictional unemployment.
Cyclical unemployment.
Structural unemployment.
Cyclical unemployment, in particular, is defined as an excess supply
of labor and usually occurs in the long run. It results from delayed
short-term unemployment periods, and according to the Phillips curve,
it is supported by the labor market. On the other hand, frictional
employment is caused by some people being between jobs, thus a
short term, while structural unemployment is caused by problems that
arise because of a mismatch between the needs of employers and the
skills and training of the labor force. This might translate to either
long-term unemployment or short-term unemployment depending on
how far the employer is willing to compromise and high unskilled
labor and then later train the employees (Case and Fair, 2006).
Economic stagnation
Economic growth is a long-term trend largely dependent on supply-
side factors. Growth in the labor market and human capital, in general,
is viewed as a key driver to economic growth though not always.
Rueben (2007) takes note of China and India, which are heavily
relying n their human capital for very rapid growth. Another factor
that greatly contributes to economic growth, as noted by the same
author, is investments in real capital stock. He says human capital
facilitates individuals in the center to generate knowledge and new
products and production methods when viewed on the supply side.
From the demand side perspective, large human capital creates
demand for goods and services produced in that economy.
Unfortunately, differences in natural factors over different economies
create variation in the effectiveness of human capital as a contributing
factor to economic growth. In Africa, for example, high population
growth rates are blamed for the unending poverty levels in the
country. This is contrary to the above suggestions that increased
human capital is viewed as an injection to the economy.
Economists and academicians have offered different ideas as to why
the US economy is experiencing slowed growth. In any modern
economy, some basic necessities must be ensured in order to
guarantee growth. Most important, they must have a strong currency
and a positive net exports balance. These three things are
complementary to each other. A weak dollar, will in due course, lead
to high oil and commodity prices through the multiplier effect. In the
long run, this will lead to high inflation as we are experiencing now.
In response, the Federal Reserve Bank is forced to raise interest rates
in an attempt to protect consumers. This points to a very important
revelation that a weak dollar does not cause economic stagnation but
rather a weak dollar of any currency is a direct result of slowed
growth or economic stagnation.
Case and Fair (2006) say that both long term and short term economic
stagnation can be attributed to:
Weak Dollar.
Expensive Commodities.
Expensive Oil.
High Inflation.
Unmanageable Debt.
The current economic system in America possesses all of the above
characteristics. The frustrating thing is that each is one of them is
spinning out of control. In the last few years, the US economy has
been on a growth recovery path after a slowdown caused by the
terrorist attack of the World Trade Center.DDuring such economic
recovery periods, tax revenues are high, normally accounting for a
large portion of the GDP. Unfortunately, normalization of growth
after stabilizing recovery is interpreted as slowed growth. In the
current “recession” period, we have seen the opposite as slowed
growth.
Data from the Federal Bureau of Statistics shows that per capita
income in the US and growth in GDP have been on a steady increase
in the last 20 years, with GDP growth averaging 1.8%. Unfortunately,
this growth is not well represented among the low-income earning
population. A report by the IMF released by BBC early last year
shows that the difference in income between the rich and the poor is
highest in developed countries contrary to popular belief that it is
highest in developing and less developed countries. The US, as the
most developed country, does not show its reported economic growth
among the low-income earners despite the continued growth in the
economy. Weiner (2008) says this points to the inefficiency of the
GDP as a measure of economic performance/growth. He makes an
example of the buying and reselling of houses at an ever-increasing
price as being counted towards economic growth. Economists have for
a long time relied on GDP as the most all-inclusive measure of growth
in an economy. With the economic situation.
Inflation
Inflation is defined by Rueben (2007) as the general increase in price
levels. According to the Federal Bureau of Statistics, the US economy
had registered an inflation level of 6.5% in the month of October. This
translates to say that while prices have remained constant, product
prices have increased by 6.5%. Therefore the common American
citizen has the same number of dollars to spend on expensive
products. This now points to the difference in nominal and real wages.
While there may be nominal increases of wages by employers to
offset the inflation impact, the increase might not be enough to cover
for inflation. Therefore, when the nominal wage is adjusted to
inflation levels, we get a real increase in wages. When households
receive a real increase in wage, consumption is bound to go up.
Types of inflation
Economists agree on three types of inflation, namely as:
Demand-pull inflation
Cost-push inflation
Hyperinflation
When demand increases and this results in inflation, we describe it as
demand-pull inflation. On the other hand, when cost increases and this
causes supply to decrease in turn, and this results in inflation, we
describe it as cost-push inflation. But these two different causes of
inflation are not independent, of course. Demand-pull pull inflation
will more often than not lead to cost-push inflation. Continued
inflation in the two categories creates hyperinflation. This is usually
inflation in excess that may occur during a crisis such as war (Case
and Fair, 2006).
Current situation vs. the great depression of the 1930s
Understanding the great depression of the 1930s is like the Holy Grail
of macroeconomics, so says Bernanke, as quoted by Shane (2005).
This has been the worst financial crisis to hit the world and the US.
The current situation, as earlier said, is being compared to the Great
Depression. But the thing is, we are not yet there, but we might be
headed there if the government does not institute policies that will
deliver the economy from the imminent danger. The Great Depression
is said to have been caused by the Stock Market crash of 1929 in the
US, but the other way that some authors see it as the crash had
resulted from the depression had begun earlier than the agreed time of
1930 (Case and Fair, 2006). In the current situation, the financial and
stocks market is in grave danger, with multi-billion companies
reporting billions of losses and others filing for bankruptcy. Though
the Stocks market crash of 1929 happened in one day, the effects are
expected to be the same with a gradual crash as it is happening now.
During this 1930’s depression, unemployment levels in the US had
escalated to over 30%, with hundred of firms closing down.
Conclusion
The fact that the US economy has reportedly been on a growth path
and the life of the ordinary American citizen has been worsening calls
for urgent measures to evaluate the current system of measuring
national economic output in terms of GDP as an indicator of the
general economic position of a region. As earlier said, the disparity in
wealth distribution is highest in countries reported as having the
highest levels of GDP. In conclusion, therefore, the current method of
using GDP as a measure of growth could be wrong in saying that the
US economy. If other more competent measures were used, then it
could be revealed that the US economy is worse-off than probably
imagined and already in a bad recession.
Current situation
The US economy is in a crisis. Financial services companies are
coming down in large numbers, with most being bailed by the
government. Employees are worried t the current levels of
unemployment standing at over 6%. Inflation is also on the rise. In
short, in the few months that the financial market has been in trouble,
consumers and investors have panicked a lot and made rash decisions
with far-reaching implications in the short run and in the long run.
Many are withdrawing their deposits from banks in fear that they may
collapse. In short, there have been panic withdrawals, thereby
worsening the conditions further. This can be seen as the short-term
implications of the high inflation and financial crisis in the economy.
Unemployment
In any given economy, a certain age group of the population and main
persons between the ages of 21-65 constitutes the economy’s labor
force. According to Reinhardt (2006), this number of people is the
main contributor to the national Gross Domestic Product (GDP).
Classical economists describe the labor force as the number of people
in an economy ready to exchange their services for salaries and wages
for the prevailing wage rates. They are again the highest taxpayers
providing revenue to the government to run its activities. Factories
and industries require labor input from the labor market to facilitate
the production of goods and services. The labor market is guided by
the general law of demand and supply through complications arise due
to various factors such as level of skill and mobility of labor. Such
factors, according to Reinhardt (2006), have their own way of
producing unemployment. So what is unemployment in the first
place? Going by Lawrence’s (2003) description of the term, he says
that it is a percentage of the number of people that are considered to
belong in the labor force but cannot find employment. This brings to
our attention the fact that students and the aged are not considered as
part of the labor force; hence they are not included among the
unemployed. Another definition favored by the Keynesian school of
thought is that “unemployment is an excess supply of labor resulting
from a failure of coordination in the market economy” Classical
economists, on the other hand, define unemployment as “people
engaged in the productive work of looking for a better match between
worker and employer.” They, therefore, view the search for work as
work in itself. Thus we can deduce that the unemployed are workers
working the “job search sector.”
Unemployment is considered only a problem in the economy when it
exceeds the recommended level of 4%. This level is encouraged as
full employment; in this case, 0% unemployment, production will be
impossible. Pharis (2007) the recommended 4% is only to cushion the
labor market from unprecedented wage hikes resulting from high
demand and low supply. The recommended rate is permanent as in the
short run people will keep on switching employments. During this
transition from one employer to the other, then there will always be a
number of people unemployed in the short run, but in the long run,
they will be employed.
Long term unemployment
Long-term unemployment periods can be related to lower transition
probabilities from job search to employment. Secondly, the long term
unemployed workers “are less relevant to wage and price formation
than the newly unemployed” (Llaudes, 2005).
The author base’s his argument on the assumption that “the long term
unemployed play a marginal role in the wage formation process.”
From this, we deduce that unemployment durations do not count in the
setting of wage rates in the labor market. This is contrary to what is
predicted in the Phillips Curve, which suggests that the long-term
unemployed should receive more weight in terms of better
employment conditions and wages. However, individual economic
policies determine the role played by long-term unemployment.
Llaudes (2005) notes that long-term unemployed persons in some
Western European countries have a negligible effect on labor prices.
Long-term unemployment can, in one or another, be attributed to
short-term unemployment. This occurs due to the act that, after some
time unemployed, individuals become disheartened and reduce their
job search morale and activities, thereby decreasing their chances of
finding employment. Again, according to the Phillips Curve,
employers are biased against long-term unemployed workers as they
are assumed to be more expensive by demanding higher wage rates.
Therefore if firms consistently stick to this by hiring the newly “un-
employed because they are assumed to be more productive and less
costly, the equilibrium or “efficiency wage” is determined by the
wage demands of this preferred group” (Llaudes, 2005).
According to the Bureau of Labor Statistics, unemployment in the US
stood at 6.5% as of October this year. This is posed to continue with
the economic situation in the country not that promising. Then we
may ask ourselves what the role of government in reducing the
unemployment levels in the country is. There are two major ways
through which a government can influence the performance of the
economy, not only in growth but also in solving some of these
macroeconomic problems. In this year alone, the Bush administration
has been lowering interest rates to encourage more investment and
borrowing. This was a result reported a drastic drop in consumer
spending since late 2007.
Types of unemployment.
Frictional unemployment.
Cyclical unemployment.
Structural unemployment.
Cyclical unemployment, in particular, is defined as an excess supply
of labor and usually occurs in the long run. It results from delayed
short-term unemployment periods, and according to the Phillips curve,
it is supported by the labor market. On the other hand, frictional
employment is caused by some people being between jobs, thus a
short term, while structural unemployment is caused by problems that
arise because of a mismatch between the needs of employers and the
skills and training of the labor force. This might translate to either
long-term unemployment or short-term unemployment depending on
how far the employer is willing to compromise and high unskilled
labor and then later train the employees (Case and Fair, 2006).
Economic stagnation
Economic growth is a long-term trend largely dependent on supply-
side factors. Growth in the labor market and human capital, in general,
is viewed as a key driver to economic growth though not always.
Rueben (2007) takes note of China and India, which are heavily
relying n their human capital for very rapid growth. Another factor
that greatly contributes to economic growth, as noted by the same
author, is investments in real capital stock. He says human capital
facilitates individuals in the center to generate knowledge and new
products and production methods when viewed on the supply side.
From the demand side perspective, large human capital creates
demand for goods and services produced in that economy.
Unfortunately, differences in natural factors over different economies
create variation in the effectiveness of human capital as a contributing
factor to economic growth. In Africa, for example, high population
growth rates are blamed for the unending poverty levels in the
country. This is contrary to the above suggestions that increased
human capital is viewed as an injection to the economy.
Economists and academicians have offered different ideas as to why
the US economy is experiencing slowed growth. In any modern
economy, some basic necessities must be ensured in order to
guarantee growth. Most important, they must have a strong currency
and a positive net exports balance. These three things are
complementary to each other. A weak dollar, will in due course, lead
to high oil and commodity prices through the multiplier effect. In the
long run, this will lead to high inflation as we are experiencing now.
In response, the Federal Reserve Bank is forced to raise interest rates
in an attempt to protect consumers. This points to a very important
revelation that a weak dollar does not cause economic stagnation but
rather a weak dollar of any currency is a direct result of slowed
growth or economic stagnation.
Case and Fair (2006) say that both long term and short term economic
stagnation can be attributed to:
Weak Dollar.
Expensive Commodities.
Expensive Oil.
High Inflation.
Unmanageable Debt.
The current economic system in America possesses all of the above
characteristics. The frustrating thing is that each is one of them is
spinning out of control. In the last few years, the US economy has
been on a growth recovery path after a slowdown caused by the
terrorist attack of the World Trade Center.DDuring such economic
recovery periods, tax revenues are high, normally accounting for a
large portion of the GDP. Unfortunately, normalization of growth
after stabilizing recovery is interpreted as slowed growth. In the
current “recession” period, we have seen the opposite as slowed
growth.
Data from the Federal Bureau of Statistics shows that per capita
income in the US and growth in GDP have been on a steady increase
in the last 20 years, with GDP growth averaging 1.8%. Unfortunately,
this growth is not well represented among the low-income earning
population. A report by the IMF released by BBC early last year
shows that the difference in income between the rich and the poor is
highest in developed countries contrary to popular belief that it is
highest in developing and less developed countries. The US, as the
most developed country, does not show its reported economic growth
among the low-income earners despite the continued growth in the
economy. Weiner (2008) says this points to the inefficiency of the
GDP as a measure of economic performance/growth. He makes an
example of the buying and reselling of houses at an ever-increasing
price as being counted towards economic growth. Economists have for
a long time relied on GDP as the most all-inclusive measure of growth
in an economy. With the economic situation.
Inflation
Inflation is defined by Rueben (2007) as the general increase in price
levels. According to the Federal Bureau of Statistics, the US economy
had registered an inflation level of 6.5% in the month of October. This
translates to say that while prices have remained constant, product
prices have increased by 6.5%. Therefore the common American
citizen has the same number of dollars to spend on expensive
products. This now points to the difference in nominal and real wages.
While there may be nominal increases of wages by employers to
offset the inflation impact, the increase might not be enough to cover
for inflation. Therefore, when the nominal wage is adjusted to
inflation levels, we get a real increase in wages. When households
receive a real increase in wage, consumption is bound to go up.
Types of inflation
Economists agree on three types of inflation, namely as:
Demand-pull inflation
Cost-push inflation
Hyperinflation
When demand increases and this results in inflation, we describe it as
demand-pull inflation. On the other hand, when cost increases and this
causes supply to decrease in turn, and this results in inflation, we
describe it as cost-push inflation. But these two different causes of
inflation are not independent, of course. Demand-pull pull inflation
will more often than not lead to cost-push inflation. Continued
inflation in the two categories creates hyperinflation. This is usually
inflation in excess that may occur during a crisis such as war (Case
and Fair, 2006).
Current situation vs. the great depression of the 1930s
Understanding the great depression of the 1930s is like the Holy Grail
of macroeconomics, so says Bernanke, as quoted by Shane (2005).
This has been the worst financial crisis to hit the world and the US.
The current situation, as earlier said, is being compared to the Great
Depression. But the thing is, we are not yet there, but we might be
headed there if the government does not institute policies that will
deliver the economy from the imminent danger. The Great Depression
is said to have been caused by the Stock Market crash of 1929 in the
US, but the other way that some authors see it as the crash had
resulted from the depression had begun earlier than the agreed time of
1930 (Case and Fair, 2006). In the current situation, the financial and
stocks market is in grave danger, with multi-billion companies
reporting billions of losses and others filing for bankruptcy. Though
the Stocks market crash of 1929 happened in one day, the effects are
expected to be the same with a gradual crash as it is happening now.
During this 1930’s depression, unemployment levels in the US had
escalated to over 30%, with hundred of firms closing down.
Conclusion
The fact that the US economy has reportedly been on a growth path
and the life of the ordinary American citizen has been worsening calls
for urgent measures to evaluate the current system of measuring
national economic output in terms of GDP as an indicator of the
general economic position of a region. As earlier said, the disparity in
wealth distribution is highest in countries reported as having the
highest levels of GDP. In conclusion, therefore, the current method of
using GDP as a measure of growth could be wrong in saying that the
US economy. If other more competent measures were used, then it
could be revealed that the US economy is worse-off than probably
imagined and already in a bad recession.
Current situation
The US economy is in a crisis. Financial services companies are
coming down in large numbers, with most being bailed by the
government. Employees are worried t the current levels of
unemployment standing at over 6%. Inflation is also on the rise. In
short, in the few months that the financial market has been in trouble,
consumers and investors have panicked a lot and made rash decisions
with far-reaching implications in the short run and in the long run.
Many are withdrawing their deposits from banks in fear that they may
collapse. In short, there have been panic withdrawals, thereby
worsening the conditions further. This can be seen as the short-term
implications of the high inflation and financial crisis in the economy.
Unemployment
In any given economy, a certain age group of the population and main
persons between the ages of 21-65 constitutes the economy’s labor
force. According to Reinhardt (2006), this number of people is the
main contributor to the national Gross Domestic Product (GDP).
Classical economists describe the labor force as the number of people
in an economy ready to exchange their services for salaries and wages
for the prevailing wage rates. They are again the highest taxpayers
providing revenue to the government to run its activities. Factories
and industries require labor input from the labor market to facilitate
the production of goods and services. The labor market is guided by
the general law of demand and supply through complications arise due
to various factors such as level of skill and mobility of labor. Such
factors, according to Reinhardt (2006), have their own way of
producing unemployment. So what is unemployment in the first
place? Going by Lawrence’s (2003) description of the term, he says
that it is a percentage of the number of people that are considered to
belong in the labor force but cannot find employment. This brings to
our attention the fact that students and the aged are not considered as
part of the labor force; hence they are not included among the
unemployed. Another definition favored by the Keynesian school of
thought is that “unemployment is an excess supply of labor resulting
from a failure of coordination in the market economy” Classical
economists, on the other hand, define unemployment as “people
engaged in the productive work of looking for a better match between
worker and employer.” They, therefore, view the search for work as
work in itself. Thus we can deduce that the unemployed are workers
working the “job search sector.”
Unemployment is considered only a problem in the economy when it
exceeds the recommended level of 4%. This level is encouraged as
full employment; in this case, 0% unemployment, production will be
impossible. Pharis (2007) the recommended 4% is only to cushion the
labor market from unprecedented wage hikes resulting from high
demand and low supply. The recommended rate is permanent as in the
short run people will keep on switching employments. During this
transition from one employer to the other, then there will always be a
number of people unemployed in the short run, but in the long run,
they will be employed.
Long term unemployment
Long-term unemployment periods can be related to lower transition
probabilities from job search to employment. Secondly, the long term
unemployed workers “are less relevant to wage and price formation
than the newly unemployed” (Llaudes, 2005).
The author base’s his argument on the assumption that “the long term
unemployed play a marginal role in the wage formation process.”
From this, we deduce that unemployment durations do not count in the
setting of wage rates in the labor market. This is contrary to what is
predicted in the Phillips Curve, which suggests that the long-term
unemployed should receive more weight in terms of better
employment conditions and wages. However, individual economic
policies determine the role played by long-term unemployment.
Llaudes (2005) notes that long-term unemployed persons in some
Western European countries have a negligible effect on labor prices.
Long-term unemployment can, in one or another, be attributed to
short-term unemployment. This occurs due to the act that, after some
time unemployed, individuals become disheartened and reduce their
job search morale and activities, thereby decreasing their chances of
finding employment. Again, according to the Phillips Curve,
employers are biased against long-term unemployed workers as they
are assumed to be more expensive by demanding higher wage rates.
Therefore if firms consistently stick to this by hiring the newly “un-
employed because they are assumed to be more productive and less
costly, the equilibrium or “efficiency wage” is determined by the
wage demands of this preferred group” (Llaudes, 2005).
According to the Bureau of Labor Statistics, unemployment in the US
stood at 6.5% as of October this year. This is posed to continue with
the economic situation in the country not that promising. Then we
may ask ourselves what the role of government in reducing the
unemployment levels in the country is. There are two major ways
through which a government can influence the performance of the
economy, not only in growth but also in solving some of these
macroeconomic problems. In this year alone, the Bush administration
has been lowering interest rates to encourage more investment and
borrowing. This was a result reported a drastic drop in consumer
spending since late 2007.
Types of unemployment.
Frictional unemployment.
Cyclical unemployment.
Structural unemployment.
Cyclical unemployment, in particular, is defined as an excess supply
of labor and usually occurs in the long run. It results from delayed
short-term unemployment periods, and according to the Phillips curve,
it is supported by the labor market. On the other hand, frictional
employment is caused by some people being between jobs, thus a
short term, while structural unemployment is caused by problems that
arise because of a mismatch between the needs of employers and the
skills and training of the labor force. This might translate to either
long-term unemployment or short-term unemployment depending on
how far the employer is willing to compromise and high unskilled
labor and then later train the employees (Case and Fair, 2006).
Economic stagnation
Economic growth is a long-term trend largely dependent on supply-
side factors. Growth in the labor market and human capital, in general,
is viewed as a key driver to economic growth though not always.
Rueben (2007) takes note of China and India, which are heavily
relying n their human capital for very rapid growth. Another factor
that greatly contributes to economic growth, as noted by the same
author, is investments in real capital stock. He says human capital
facilitates individuals in the center to generate knowledge and new
products and production methods when viewed on the supply side.
From the demand side perspective, large human capital creates
demand for goods and services produced in that economy.
Unfortunately, differences in natural factors over different economies
create variation in the effectiveness of human capital as a contributing
factor to economic growth. In Africa, for example, high population
growth rates are blamed for the unending poverty levels in the
country. This is contrary to the above suggestions that increased
human capital is viewed as an injection to the economy.
Economists and academicians have offered different ideas as to why
the US economy is experiencing slowed growth. In any modern
economy, some basic necessities must be ensured in order to
guarantee growth. Most important, they must have a strong currency
and a positive net exports balance. These three things are
complementary to each other. A weak dollar, will in due course, lead
to high oil and commodity prices through the multiplier effect. In the
long run, this will lead to high inflation as we are experiencing now.
In response, the Federal Reserve Bank is forced to raise interest rates
in an attempt to protect consumers. This points to a very important
revelation that a weak dollar does not cause economic stagnation but
rather a weak dollar of any currency is a direct result of slowed
growth or economic stagnation.
Case and Fair (2006) say that both long term and short term economic
stagnation can be attributed to:
Weak Dollar.
Expensive Commodities.
Expensive Oil.
High Inflation.
Unmanageable Debt.
The current economic system in America possesses all of the above
characteristics. The frustrating thing is that each is one of them is
spinning out of control. In the last few years, the US economy has
been on a growth recovery path after a slowdown caused by the
terrorist attack of the World Trade Center.DDuring such economic
recovery periods, tax revenues are high, normally accounting for a
large portion of the GDP. Unfortunately, normalization of growth
after stabilizing recovery is interpreted as slowed growth. In the
current “recession” period, we have seen the opposite as slowed
growth.
Data from the Federal Bureau of Statistics shows that per capita
income in the US and growth in GDP have been on a steady increase
in the last 20 years, with GDP growth averaging 1.8%. Unfortunately,
this growth is not well represented among the low-income earning
population. A report by the IMF released by BBC early last year
shows that the difference in income between the rich and the poor is
highest in developed countries contrary to popular belief that it is
highest in developing and less developed countries. The US, as the
most developed country, does not show its reported economic growth
among the low-income earners despite the continued growth in the
economy. Weiner (2008) says this points to the inefficiency of the
GDP as a measure of economic performance/growth. He makes an
example of the buying and reselling of houses at an ever-increasing
price as being counted towards economic growth. Economists have for
a long time relied on GDP as the most all-inclusive measure of growth
in an economy. With the economic situation.
Inflation
Inflation is defined by Rueben (2007) as the general increase in price
levels. According to the Federal Bureau of Statistics, the US economy
had registered an inflation level of 6.5% in the month of October. This
translates to say that while prices have remained constant, product
prices have increased by 6.5%. Therefore the common American
citizen has the same number of dollars to spend on expensive
products. This now points to the difference in nominal and real wages.
While there may be nominal increases of wages by employers to
offset the inflation impact, the increase might not be enough to cover
for inflation. Therefore, when the nominal wage is adjusted to
inflation levels, we get a real increase in wages. When households
receive a real increase in wage, consumption is bound to go up.
Types of inflation
Economists agree on three types of inflation, namely as:
Demand-pull inflation
Cost-push inflation
Hyperinflation
When demand increases and this results in inflation, we describe it as
demand-pull inflation. On the other hand, when cost increases and this
causes supply to decrease in turn, and this results in inflation, we
describe it as cost-push inflation. But these two different causes of
inflation are not independent, of course. Demand-pull pull inflation
will more often than not lead to cost-push inflation. Continued
inflation in the two categories creates hyperinflation. This is usually
inflation in excess that may occur during a crisis such as war (Case
and Fair, 2006).
Current situation vs. the great depression of the 1930s
Understanding the great depression of the 1930s is like the Holy Grail
of macroeconomics, so says Bernanke, as quoted by Shane (2005).
This has been the worst financial crisis to hit the world and the US.
The current situation, as earlier said, is being compared to the Great
Depression. But the thing is, we are not yet there, but we might be
headed there if the government does not institute policies that will
deliver the economy from the imminent danger. The Great Depression
is said to have been caused by the Stock Market crash of 1929 in the
US, but the other way that some authors see it as the crash had
resulted from the depression had begun earlier than the agreed time of
1930 (Case and Fair, 2006). In the current situation, the financial and
stocks market is in grave danger, with multi-billion companies
reporting billions of losses and others filing for bankruptcy. Though
the Stocks market crash of 1929 happened in one day, the effects are
expected to be the same with a gradual crash as it is happening now.
During this 1930’s depression, unemployment levels in the US had
escalated to over 30%, with hundred of firms closing down.
Conclusion
The fact that the US economy has reportedly been on a growth path
and the life of the ordinary American citizen has been worsening calls
for urgent measures to evaluate the current system of measuring
national economic output in terms of GDP as an indicator of the
general economic position of a region. As earlier said, the disparity in
wealth distribution is highest in countries reported as having the
highest levels of GDP. In conclusion, therefore, the current method of
using GDP as a measure of growth could be wrong in saying that the
US economy. If other more competent measures were used, then it
could be revealed that the US economy is worse-off than probably
imagined and already in a bad recession.
Current situation
The US economy is in a crisis. Financial services companies are
coming down in large numbers, with most being bailed by the
government. Employees are worried t the current levels of
unemployment standing at over 6%. Inflation is also on the rise. In
short, in the few months that the financial market has been in trouble,
consumers and investors have panicked a lot and made rash decisions
with far-reaching implications in the short run and in the long run.
Many are withdrawing their deposits from banks in fear that they may
collapse. In short, there have been panic withdrawals, thereby
worsening the conditions further. This can be seen as the short-term
implications of the high inflation and financial crisis in the economy.
Unemployment
In any given economy, a certain age group of the population and main
persons between the ages of 21-65 constitutes the economy’s labor
force. According to Reinhardt (2006), this number of people is the
main contributor to the national Gross Domestic Product (GDP).
Classical economists describe the labor force as the number of people
in an economy ready to exchange their services for salaries and wages
for the prevailing wage rates. They are again the highest taxpayers
providing revenue to the government to run its activities. Factories
and industries require labor input from the labor market to facilitate
the production of goods and services. The labor market is guided by
the general law of demand and supply through complications arise due
to various factors such as level of skill and mobility of labor. Such
factors, according to Reinhardt (2006), have their own way of
producing unemployment. So what is unemployment in the first
place? Going by Lawrence’s (2003) description of the term, he says
that it is a percentage of the number of people that are considered to
belong in the labor force but cannot find employment. This brings to
our attention the fact that students and the aged are not considered as
part of the labor force; hence they are not included among the
unemployed. Another definition favored by the Keynesian school of
thought is that “unemployment is an excess supply of labor resulting
from a failure of coordination in the market economy” Classical
economists, on the other hand, define unemployment as “people
engaged in the productive work of looking for a better match between
worker and employer.” They, therefore, view the search for work as
work in itself. Thus we can deduce that the unemployed are workers
working the “job search sector.”
Unemployment is considered only a problem in the economy when it
exceeds the recommended level of 4%. This level is encouraged as
full employment; in this case, 0% unemployment, production will be
impossible. Pharis (2007) the recommended 4% is only to cushion the
labor market from unprecedented wage hikes resulting from high
demand and low supply. The recommended rate is permanent as in the
short run people will keep on switching employments. During this
transition from one employer to the other, then there will always be a
number of people unemployed in the short run, but in the long run,
they will be employed.
Long term unemployment
Long-term unemployment periods can be related to lower transition
probabilities from job search to employment. Secondly, the long term
unemployed workers “are less relevant to wage and price formation
than the newly unemployed” (Llaudes, 2005).
The author base’s his argument on the assumption that “the long term
unemployed play a marginal role in the wage formation process.”
From this, we deduce that unemployment durations do not count in the
setting of wage rates in the labor market. This is contrary to what is
predicted in the Phillips Curve, which suggests that the long-term
unemployed should receive more weight in terms of better
employment conditions and wages. However, individual economic
policies determine the role played by long-term unemployment.
Llaudes (2005) notes that long-term unemployed persons in some
Western European countries have a negligible effect on labor prices.
Long-term unemployment can, in one or another, be attributed to
short-term unemployment. This occurs due to the act that, after some
time unemployed, individuals become disheartened and reduce their
job search morale and activities, thereby decreasing their chances of
finding employment. Again, according to the Phillips Curve,
employers are biased against long-term unemployed workers as they
are assumed to be more expensive by demanding higher wage rates.
Therefore if firms consistently stick to this by hiring the newly “un-
employed because they are assumed to be more productive and less
costly, the equilibrium or “efficiency wage” is determined by the
wage demands of this preferred group” (Llaudes, 2005).
According to the Bureau of Labor Statistics, unemployment in the US
stood at 6.5% as of October this year. This is posed to continue with
the economic situation in the country not that promising. Then we
may ask ourselves what the role of government in reducing the
unemployment levels in the country is. There are two major ways
through which a government can influence the performance of the
economy, not only in growth but also in solving some of these
macroeconomic problems. In this year alone, the Bush administration
has been lowering interest rates to encourage more investment and
borrowing. This was a result reported a drastic drop in consumer
spending since late 2007.
Types of unemployment.
Frictional unemployment.
Cyclical unemployment.
Structural unemployment.
Cyclical unemployment, in particular, is defined as an excess supply
of labor and usually occurs in the long run. It results from delayed
short-term unemployment periods, and according to the Phillips curve,
it is supported by the labor market. On the other hand, frictional
employment is caused by some people being between jobs, thus a
short term, while structural unemployment is caused by problems that
arise because of a mismatch between the needs of employers and the
skills and training of the labor force. This might translate to either
long-term unemployment or short-term unemployment depending on
how far the employer is willing to compromise and high unskilled
labor and then later train the employees (Case and Fair, 2006).
Economic stagnation
Economic growth is a long-term trend largely dependent on supply-
side factors. Growth in the labor market and human capital, in general,
is viewed as a key driver to economic growth though not always.
Rueben (2007) takes note of China and India, which are heavily
relying n their human capital for very rapid growth. Another factor
that greatly contributes to economic growth, as noted by the same
author, is investments in real capital stock. He says human capital
facilitates individuals in the center to generate knowledge and new
products and production methods when viewed on the supply side.
From the demand side perspective, large human capital creates
demand for goods and services produced in that economy.
Unfortunately, differences in natural factors over different economies
create variation in the effectiveness of human capital as a contributing
factor to economic growth. In Africa, for example, high population
growth rates are blamed for the unending poverty levels in the
country. This is contrary to the above suggestions that increased
human capital is viewed as an injection to the economy.
Economists and academicians have offered different ideas as to why
the US economy is experiencing slowed growth. In any modern
economy, some basic necessities must be ensured in order to
guarantee growth. Most important, they must have a strong currency
and a positive net exports balance. These three things are
complementary to each other. A weak dollar, will in due course, lead
to high oil and commodity prices through the multiplier effect. In the
long run, this will lead to high inflation as we are experiencing now.
In response, the Federal Reserve Bank is forced to raise interest rates
in an attempt to protect consumers. This points to a very important
revelation that a weak dollar does not cause economic stagnation but
rather a weak dollar of any currency is a direct result of slowed
growth or economic stagnation.
Case and Fair (2006) say that both long term and short term economic
stagnation can be attributed to:
Weak Dollar.
Expensive Commodities.
Expensive Oil.
High Inflation.
Unmanageable Debt.
The current economic system in America possesses all of the above
characteristics. The frustrating thing is that each is one of them is
spinning out of control. In the last few years, the US economy has
been on a growth recovery path after a slowdown caused by the
terrorist attack of the World Trade Center.DDuring such economic
recovery periods, tax revenues are high, normally accounting for a
large portion of the GDP. Unfortunately, normalization of growth
after stabilizing recovery is interpreted as slowed growth. In the
current “recession” period, we have seen the opposite as slowed
growth.
Data from the Federal Bureau of Statistics shows that per capita
income in the US and growth in GDP have been on a steady increase
in the last 20 years, with GDP growth averaging 1.8%. Unfortunately,
this growth is not well represented among the low-income earning
population. A report by the IMF released by BBC early last year
shows that the difference in income between the rich and the poor is
highest in developed countries contrary to popular belief that it is
highest in developing and less developed countries. The US, as the
most developed country, does not show its reported economic growth
among the low-income earners despite the continued growth in the
economy. Weiner (2008) says this points to the inefficiency of the
GDP as a measure of economic performance/growth. He makes an
example of the buying and reselling of houses at an ever-increasing
price as being counted towards economic growth. Economists have for
a long time relied on GDP as the most all-inclusive measure of growth
in an economy. With the economic situation.
Inflation
Inflation is defined by Rueben (2007) as the general increase in price
levels. According to the Federal Bureau of Statistics, the US economy
had registered an inflation level of 6.5% in the month of October. This
translates to say that while prices have remained constant, product
prices have increased by 6.5%. Therefore the common American
citizen has the same number of dollars to spend on expensive
products. This now points to the difference in nominal and real wages.
While there may be nominal increases of wages by employers to
offset the inflation impact, the increase might not be enough to cover
for inflation. Therefore, when the nominal wage is adjusted to
inflation levels, we get a real increase in wages. When households
receive a real increase in wage, consumption is bound to go up.
Types of inflation
Economists agree on three types of inflation, namely as:
Demand-pull inflation
Cost-push inflation
Hyperinflation
When demand increases and this results in inflation, we describe it as
demand-pull inflation. On the other hand, when cost increases and this
causes supply to decrease in turn, and this results in inflation, we
describe it as cost-push inflation. But these two different causes of
inflation are not independent, of course. Demand-pull pull inflation
will more often than not lead to cost-push inflation. Continued
inflation in the two categories creates hyperinflation. This is usually
inflation in excess that may occur during a crisis such as war (Case
and Fair, 2006).
Current situation vs. the great depression of the 1930s
Understanding the great depression of the 1930s is like the Holy Grail
of macroeconomics, so says Bernanke, as quoted by Shane (2005).
This has been the worst financial crisis to hit the world and the US.
The current situation, as earlier said, is being compared to the Great
Depression. But the thing is, we are not yet there, but we might be
headed there if the government does not institute policies that will
deliver the economy from the imminent danger. The Great Depression
is said to have been caused by the Stock Market crash of 1929 in the
US, but the other way that some authors see it as the crash had
resulted from the depression had begun earlier than the agreed time of
1930 (Case and Fair, 2006). In the current situation, the financial and
stocks market is in grave danger, with multi-billion companies
reporting billions of losses and others filing for bankruptcy. Though
the Stocks market crash of 1929 happened in one day, the effects are
expected to be the same with a gradual crash as it is happening now.
During this 1930’s depression, unemployment levels in the US had
escalated to over 30%, with hundred of firms closing down.
Conclusion
The fact that the US economy has reportedly been on a growth path
and the life of the ordinary American citizen has been worsening calls
for urgent measures to evaluate the current system of measuring
national economic output in terms of GDP as an indicator of the
general economic position of a region. As earlier said, the disparity in
wealth distribution is highest in countries reported as having the
highest levels of GDP. In conclusion, therefore, the current method of
using GDP as a measure of growth could be wrong in saying that the
US economy. If other more competent measures were used, then it
could be revealed that the US economy is worse-off than probably
imagined and already in a bad recession.
Current situation
The US economy is in a crisis. Financial services companies are
coming down in large numbers, with most being bailed by the
government. Employees are worried t the current levels of
unemployment standing at over 6%. Inflation is also on the rise. In
short, in the few months that the financial market has been in trouble,
consumers and investors have panicked a lot and made rash decisions
with far-reaching implications in the short run and in the long run.
Many are withdrawing their deposits from banks in fear that they may
collapse. In short, there have been panic withdrawals, thereby
worsening the conditions further. This can be seen as the short-term
implications of the high inflation and financial crisis in the economy.
Unemployment
In any given economy, a certain age group of the population and main
persons between the ages of 21-65 constitutes the economy’s labor
force. According to Reinhardt (2006), this number of people is the
main contributor to the national Gross Domestic Product (GDP).
Classical economists describe the labor force as the number of people
in an economy ready to exchange their services for salaries and wages
for the prevailing wage rates. They are again the highest taxpayers
providing revenue to the government to run its activities. Factories
and industries require labor input from the labor market to facilitate
the production of goods and services. The labor market is guided by
the general law of demand and supply through complications arise due
to various factors such as level of skill and mobility of labor. Such
factors, according to Reinhardt (2006), have their own way of
producing unemployment. So what is unemployment in the first
place? Going by Lawrence’s (2003) description of the term, he says
that it is a percentage of the number of people that are considered to
belong in the labor force but cannot find employment. This brings to
our attention the fact that students and the aged are not considered as
part of the labor force; hence they are not included among the
unemployed. Another definition favored by the Keynesian school of
thought is that “unemployment is an excess supply of labor resulting
from a failure of coordination in the market economy” Classical
economists, on the other hand, define unemployment as “people
engaged in the productive work of looking for a better match between
worker and employer.” They, therefore, view the search for work as
work in itself. Thus we can deduce that the unemployed are workers
working the “job search sector.”
Unemployment is considered only a problem in the economy when it
exceeds the recommended level of 4%. This level is encouraged as
full employment; in this case, 0% unemployment, production will be
impossible. Pharis (2007) the recommended 4% is only to cushion the
labor market from unprecedented wage hikes resulting from high
demand and low supply. The recommended rate is permanent as in the
short run people will keep on switching employments. During this
transition from one employer to the other, then there will always be a
number of people unemployed in the short run, but in the long run,
they will be employed.
Long term unemployment
Long-term unemployment periods can be related to lower transition
probabilities from job search to employment. Secondly, the long term
unemployed workers “are less relevant to wage and price formation
than the newly unemployed” (Llaudes, 2005).
The author base’s his argument on the assumption that “the long term
unemployed play a marginal role in the wage formation process.”
From this, we deduce that unemployment durations do not count in the
setting of wage rates in the labor market. This is contrary to what is
predicted in the Phillips Curve, which suggests that the long-term
unemployed should receive more weight in terms of better
employment conditions and wages. However, individual economic
policies determine the role played by long-term unemployment.
Llaudes (2005) notes that long-term unemployed persons in some
Western European countries have a negligible effect on labor prices.
Long-term unemployment can, in one or another, be attributed to
short-term unemployment. This occurs due to the act that, after some
time unemployed, individuals become disheartened and reduce their
job search morale and activities, thereby decreasing their chances of
finding employment. Again, according to the Phillips Curve,
employers are biased against long-term unemployed workers as they
are assumed to be more expensive by demanding higher wage rates.
Therefore if firms consistently stick to this by hiring the newly “un-
employed because they are assumed to be more productive and less
costly, the equilibrium or “efficiency wage” is determined by the
wage demands of this preferred group” (Llaudes, 2005).
According to the Bureau of Labor Statistics, unemployment in the US
stood at 6.5% as of October this year. This is posed to continue with
the economic situation in the country not that promising. Then we
may ask ourselves what the role of government in reducing the
unemployment levels in the country is. There are two major ways
through which a government can influence the performance of the
economy, not only in growth but also in solving some of these
macroeconomic problems. In this year alone, the Bush administration
has been lowering interest rates to encourage more investment and
borrowing. This was a result reported a drastic drop in consumer
spending since late 2007.
Types of unemployment.
Frictional unemployment.
Cyclical unemployment.
Structural unemployment.
Cyclical unemployment, in particular, is defined as an excess supply
of labor and usually occurs in the long run. It results from delayed
short-term unemployment periods, and according to the Phillips curve,
it is supported by the labor market. On the other hand, frictional
employment is caused by some people being between jobs, thus a
short term, while structural unemployment is caused by problems that
arise because of a mismatch between the needs of employers and the
skills and training of the labor force. This might translate to either
long-term unemployment or short-term unemployment depending on
how far the employer is willing to compromise and high unskilled
labor and then later train the employees (Case and Fair, 2006).
Economic stagnation
Economic growth is a long-term trend largely dependent on supply-
side factors. Growth in the labor market and human capital, in general,
is viewed as a key driver to economic growth though not always.
Rueben (2007) takes note of China and India, which are heavily
relying n their human capital for very rapid growth. Another factor
that greatly contributes to economic growth, as noted by the same
author, is investments in real capital stock. He says human capital
facilitates individuals in the center to generate knowledge and new
products and production methods when viewed on the supply side.
From the demand side perspective, large human capital creates
demand for goods and services produced in that economy.
Unfortunately, differences in natural factors over different economies
create variation in the effectiveness of human capital as a contributing
factor to economic growth. In Africa, for example, high population
growth rates are blamed for the unending poverty levels in the
country. This is contrary to the above suggestions that increased
human capital is viewed as an injection to the economy.
Economists and academicians have offered different ideas as to why
the US economy is experiencing slowed growth. In any modern
economy, some basic necessities must be ensured in order to
guarantee growth. Most important, they must have a strong currency
and a positive net exports balance. These three things are
complementary to each other. A weak dollar, will in due course, lead
to high oil and commodity prices through the multiplier effect. In the
long run, this will lead to high inflation as we are experiencing now.
In response, the Federal Reserve Bank is forced to raise interest rates
in an attempt to protect consumers. This points to a very important
revelation that a weak dollar does not cause economic stagnation but
rather a weak dollar of any currency is a direct result of slowed
growth or economic stagnation.
Case and Fair (2006) say that both long term and short term economic
stagnation can be attributed to:
Weak Dollar.
Expensive Commodities.
Expensive Oil.
High Inflation.
Unmanageable Debt.
The current economic system in America possesses all of the above
characteristics. The frustrating thing is that each is one of them is
spinning out of control. In the last few years, the US economy has
been on a growth recovery path after a slowdown caused by the
terrorist attack of the World Trade Center.DDuring such economic
recovery periods, tax revenues are high, normally accounting for a
large portion of the GDP. Unfortunately, normalization of growth
after stabilizing recovery is interpreted as slowed growth. In the
current “recession” period, we have seen the opposite as slowed
growth.
Data from the Federal Bureau of Statistics shows that per capita
income in the US and growth in GDP have been on a steady increase
in the last 20 years, with GDP growth averaging 1.8%. Unfortunately,
this growth is not well represented among the low-income earning
population. A report by the IMF released by BBC early last year
shows that the difference in income between the rich and the poor is
highest in developed countries contrary to popular belief that it is
highest in developing and less developed countries. The US, as the
most developed country, does not show its reported economic growth
among the low-income earners despite the continued growth in the
economy. Weiner (2008) says this points to the inefficiency of the
GDP as a measure of economic performance/growth. He makes an
example of the buying and reselling of houses at an ever-increasing
price as being counted towards economic growth. Economists have for
a long time relied on GDP as the most all-inclusive measure of growth
in an economy. With the economic situation.
Inflation
Inflation is defined by Rueben (2007) as the general increase in price
levels. According to the Federal Bureau of Statistics, the US economy
had registered an inflation level of 6.5% in the month of October. This
translates to say that while prices have remained constant, product
prices have increased by 6.5%. Therefore the common American
citizen has the same number of dollars to spend on expensive
products. This now points to the difference in nominal and real wages.
While there may be nominal increases of wages by employers to
offset the inflation impact, the increase might not be enough to cover
for inflation. Therefore, when the nominal wage is adjusted to
inflation levels, we get a real increase in wages. When households
receive a real increase in wage, consumption is bound to go up.
Types of inflation
Economists agree on three types of inflation, namely as:
Demand-pull inflation
Cost-push inflation
Hyperinflation
When demand increases and this results in inflation, we describe it as
demand-pull inflation. On the other hand, when cost increases and this
causes supply to decrease in turn, and this results in inflation, we
describe it as cost-push inflation. But these two different causes of
inflation are not independent, of course. Demand-pull pull inflation
will more often than not lead to cost-push inflation. Continued
inflation in the two categories creates hyperinflation. This is usually
inflation in excess that may occur during a crisis such as war (Case
and Fair, 2006).
Current situation vs. the great depression of the 1930s
Understanding the great depression of the 1930s is like the Holy Grail
of macroeconomics, so says Bernanke, as quoted by Shane (2005).
This has been the worst financial crisis to hit the world and the US.
The current situation, as earlier said, is being compared to the Great
Depression. But the thing is, we are not yet there, but we might be
headed there if the government does not institute policies that will
deliver the economy from the imminent danger. The Great Depression
is said to have been caused by the Stock Market crash of 1929 in the
US, but the other way that some authors see it as the crash had
resulted from the depression had begun earlier than the agreed time of
1930 (Case and Fair, 2006). In the current situation, the financial and
stocks market is in grave danger, with multi-billion companies
reporting billions of losses and others filing for bankruptcy. Though
the Stocks market crash of 1929 happened in one day, the effects are
expected to be the same with a gradual crash as it is happening now.
During this 1930’s depression, unemployment levels in the US had
escalated to over 30%, with hundred of firms closing down.
Conclusion
The fact that the US economy has reportedly been on a growth path
and the life of the ordinary American citizen has been worsening calls
for urgent measures to evaluate the current system of measuring
national economic output in terms of GDP as an indicator of the
general economic position of a region. As earlier said, the disparity in
wealth distribution is highest in countries reported as having the
highest levels of GDP. In conclusion, therefore, the current method of
using GDP as a measure of growth could be wrong in saying that the
US economy. If other more competent measures were used, then it
could be revealed that the US economy is worse-off than probably
imagined and already in a bad recession.
Current situation
The US economy is in a crisis. Financial services companies are
coming down in large numbers, with most being bailed by the
government. Employees are worried t the current levels of
unemployment standing at over 6%. Inflation is also on the rise. In
short, in the few months that the financial market has been in trouble,
consumers and investors have panicked a lot and made rash decisions
with far-reaching implications in the short run and in the long run.
Many are withdrawing their deposits from banks in fear that they may
collapse. In short, there have been panic withdrawals, thereby
worsening the conditions further. This can be seen as the short-term
implications of the high inflation and financial crisis in the economy.
Unemployment
In any given economy, a certain age group of the population and main
persons between the ages of 21-65 constitutes the economy’s labor
force. According to Reinhardt (2006), this number of people is the
main contributor to the national Gross Domestic Product (GDP).
Classical economists describe the labor force as the number of people
in an economy ready to exchange their services for salaries and wages
for the prevailing wage rates. They are again the highest taxpayers
providing revenue to the government to run its activities. Factories
and industries require labor input from the labor market to facilitate
the production of goods and services. The labor market is guided by
the general law of demand and supply through complications arise due
to various factors such as level of skill and mobility of labor. Such
factors, according to Reinhardt (2006), have their own way of
producing unemployment. So what is unemployment in the first
place? Going by Lawrence’s (2003) description of the term, he says
that it is a percentage of the number of people that are considered to
belong in the labor force but cannot find employment. This brings to
our attention the fact that students and the aged are not considered as
part of the labor force; hence they are not included among the
unemployed. Another definition favored by the Keynesian school of
thought is that “unemployment is an excess supply of labor resulting
from a failure of coordination in the market economy” Classical
economists, on the other hand, define unemployment as “people
engaged in the productive work of looking for a better match between
worker and employer.” They, therefore, view the search for work as
work in itself. Thus we can deduce that the unemployed are workers
working the “job search sector.”
Unemployment is considered only a problem in the economy when it
exceeds the recommended level of 4%. This level is encouraged as
full employment; in this case, 0% unemployment, production will be
impossible. Pharis (2007) the recommended 4% is only to cushion the
labor market from unprecedented wage hikes resulting from high
demand and low supply. The recommended rate is permanent as in the
short run people will keep on switching employments. During this
transition from one employer to the other, then there will always be a
number of people unemployed in the short run, but in the long run,
they will be employed.
Long term unemployment
Long-term unemployment periods can be related to lower transition
probabilities from job search to employment. Secondly, the long term
unemployed workers “are less relevant to wage and price formation
than the newly unemployed” (Llaudes, 2005).
The author base’s his argument on the assumption that “the long term
unemployed play a marginal role in the wage formation process.”
From this, we deduce that unemployment durations do not count in the
setting of wage rates in the labor market. This is contrary to what is
predicted in the Phillips Curve, which suggests that the long-term
unemployed should receive more weight in terms of better
employment conditions and wages. However, individual economic
policies determine the role played by long-term unemployment.
Llaudes (2005) notes that long-term unemployed persons in some
Western European countries have a negligible effect on labor prices.
Long-term unemployment can, in one or another, be attributed to
short-term unemployment. This occurs due to the act that, after some
time unemployed, individuals become disheartened and reduce their
job search morale and activities, thereby decreasing their chances of
finding employment. Again, according to the Phillips Curve,
employers are biased against long-term unemployed workers as they
are assumed to be more expensive by demanding higher wage rates.
Therefore if firms consistently stick to this by hiring the newly “un-
employed because they are assumed to be more productive and less
costly, the equilibrium or “efficiency wage” is determined by the
wage demands of this preferred group” (Llaudes, 2005).
According to the Bureau of Labor Statistics, unemployment in the US
stood at 6.5% as of October this year. This is posed to continue with
the economic situation in the country not that promising. Then we
may ask ourselves what the role of government in reducing the
unemployment levels in the country is. There are two major ways
through which a government can influence the performance of the
economy, not only in growth but also in solving some of these
macroeconomic problems. In this year alone, the Bush administration
has been lowering interest rates to encourage more investment and
borrowing. This was a result reported a drastic drop in consumer
spending since late 2007.
Types of unemployment.
Frictional unemployment.
Cyclical unemployment.
Structural unemployment.
Cyclical unemployment, in particular, is defined as an excess supply
of labor and usually occurs in the long run. It results from delayed
short-term unemployment periods, and according to the Phillips curve,
it is supported by the labor market. On the other hand, frictional
employment is caused by some people being between jobs, thus a
short term, while structural unemployment is caused by problems that
arise because of a mismatch between the needs of employers and the
skills and training of the labor force. This might translate to either
long-term unemployment or short-term unemployment depending on
how far the employer is willing to compromise and high unskilled
labor and then later train the employees (Case and Fair, 2006).
Economic stagnation
Economic growth is a long-term trend largely dependent on supply-
side factors. Growth in the labor market and human capital, in general,
is viewed as a key driver to economic growth though not always.
Rueben (2007) takes note of China and India, which are heavily
relying n their human capital for very rapid growth. Another factor
that greatly contributes to economic growth, as noted by the same
author, is investments in real capital stock. He says human capital
facilitates individuals in the center to generate knowledge and new
products and production methods when viewed on the supply side.
From the demand side perspective, large human capital creates
demand for goods and services produced in that economy.
Unfortunately, differences in natural factors over different economies
create variation in the effectiveness of human capital as a contributing
factor to economic growth. In Africa, for example, high population
growth rates are blamed for the unending poverty levels in the
country. This is contrary to the above suggestions that increased
human capital is viewed as an injection to the economy.
Economists and academicians have offered different ideas as to why
the US economy is experiencing slowed growth. In any modern
economy, some basic necessities must be ensured in order to
guarantee growth. Most important, they must have a strong currency
and a positive net exports balance. These three things are
complementary to each other. A weak dollar, will in due course, lead
to high oil and commodity prices through the multiplier effect. In the
long run, this will lead to high inflation as we are experiencing now.
In response, the Federal Reserve Bank is forced to raise interest rates
in an attempt to protect consumers. This points to a very important
revelation that a weak dollar does not cause economic stagnation but
rather a weak dollar of any currency is a direct result of slowed
growth or economic stagnation.
Case and Fair (2006) say that both long term and short term economic
stagnation can be attributed to:
Weak Dollar.
Expensive Commodities.
Expensive Oil.
High Inflation.
Unmanageable Debt.
The current economic system in America possesses all of the above
characteristics. The frustrating thing is that each is one of them is
spinning out of control. In the last few years, the US economy has
been on a growth recovery path after a slowdown caused by the
terrorist attack of the World Trade Center.DDuring such economic
recovery periods, tax revenues are high, normally accounting for a
large portion of the GDP. Unfortunately, normalization of growth
after stabilizing recovery is interpreted as slowed growth. In the
current “recession” period, we have seen the opposite as slowed
growth.
Data from the Federal Bureau of Statistics shows that per capita
income in the US and growth in GDP have been on a steady increase
in the last 20 years, with GDP growth averaging 1.8%. Unfortunately,
this growth is not well represented among the low-income earning
population. A report by the IMF released by BBC early last year
shows that the difference in income between the rich and the poor is
highest in developed countries contrary to popular belief that it is
highest in developing and less developed countries. The US, as the
most developed country, does not show its reported economic growth
among the low-income earners despite the continued growth in the
economy. Weiner (2008) says this points to the inefficiency of the
GDP as a measure of economic performance/growth. He makes an
example of the buying and reselling of houses at an ever-increasing
price as being counted towards economic growth. Economists have for
a long time relied on GDP as the most all-inclusive measure of growth
in an economy. With the economic situation.
Inflation
Inflation is defined by Rueben (2007) as the general increase in price
levels. According to the Federal Bureau of Statistics, the US economy
had registered an inflation level of 6.5% in the month of October. This
translates to say that while prices have remained constant, product
prices have increased by 6.5%. Therefore the common American
citizen has the same number of dollars to spend on expensive
products. This now points to the difference in nominal and real wages.
While there may be nominal increases of wages by employers to
offset the inflation impact, the increase might not be enough to cover
for inflation. Therefore, when the nominal wage is adjusted to
inflation levels, we get a real increase in wages. When households
receive a real increase in wage, consumption is bound to go up.
Types of inflation
Economists agree on three types of inflation, namely as:
Demand-pull inflation
Cost-push inflation
Hyperinflation
When demand increases and this results in inflation, we describe it as
demand-pull inflation. On the other hand, when cost increases and this
causes supply to decrease in turn, and this results in inflation, we
describe it as cost-push inflation. But these two different causes of
inflation are not independent, of course. Demand-pull pull inflation
will more often than not lead to cost-push inflation. Continued
inflation in the two categories creates hyperinflation. This is usually
inflation in excess that may occur during a crisis such as war (Case
and Fair, 2006).
Current situation vs. the great depression of the 1930s
Understanding the great depression of the 1930s is like the Holy Grail
of macroeconomics, so says Bernanke, as quoted by Shane (2005).
This has been the worst financial crisis to hit the world and the US.
The current situation, as earlier said, is being compared to the Great
Depression. But the thing is, we are not yet there, but we might be
headed there if the government does not institute policies that will
deliver the economy from the imminent danger. The Great Depression
is said to have been caused by the Stock Market crash of 1929 in the
US, but the other way that some authors see it as the crash had
resulted from the depression had begun earlier than the agreed time of
1930 (Case and Fair, 2006). In the current situation, the financial and
stocks market is in grave danger, with multi-billion companies
reporting billions of losses and others filing for bankruptcy. Though
the Stocks market crash of 1929 happened in one day, the effects are
expected to be the same with a gradual crash as it is happening now.
During this 1930’s depression, unemployment levels in the US had
escalated to over 30%, with hundred of firms closing down.
Conclusion
The fact that the US economy has reportedly been on a growth path
and the life of the ordinary American citizen has been worsening calls
for urgent measures to evaluate the current system of measuring
national economic output in terms of GDP as an indicator of the
general economic position of a region. As earlier said, the disparity in
wealth distribution is highest in countries reported as having the
highest levels of GDP. In conclusion, therefore, the current method of
using GDP as a measure of growth could be wrong in saying that the
US economy. If other more competent measures were used, then it
could be revealed that the US economy is worse-off than probably
imagined and already in a bad recession.
Current situation
The US economy is in a crisis. Financial services companies are
coming down in large numbers, with most being bailed by the
government. Employees are worried t the current levels of
unemployment standing at over 6%. Inflation is also on the rise. In
short, in the few months that the financial market has been in trouble,
consumers and investors have panicked a lot and made rash decisions
with far-reaching implications in the short run and in the long run.
Many are withdrawing their deposits from banks in fear that they may
collapse. In short, there have been panic withdrawals, thereby
worsening the conditions further. This can be seen as the short-term
implications of the high inflation and financial crisis in the economy.
Unemployment
In any given economy, a certain age group of the population and main
persons between the ages of 21-65 constitutes the economy’s labor
force. According to Reinhardt (2006), this number of people is the
main contributor to the national Gross Domestic Product (GDP).
Classical economists describe the labor force as the number of people
in an economy ready to exchange their services for salaries and wages
for the prevailing wage rates. They are again the highest taxpayers
providing revenue to the government to run its activities. Factories
and industries require labor input from the labor market to facilitate
the production of goods and services. The labor market is guided by
the general law of demand and supply through complications arise due
to various factors such as level of skill and mobility of labor. Such
factors, according to Reinhardt (2006), have their own way of
producing unemployment. So what is unemployment in the first
place? Going by Lawrence’s (2003) description of the term, he says
that it is a percentage of the number of people that are considered to
belong in the labor force but cannot find employment. This brings to
our attention the fact that students and the aged are not considered as
part of the labor force; hence they are not included among the
unemployed. Another definition favored by the Keynesian school of
thought is that “unemployment is an excess supply of labor resulting
from a failure of coordination in the market economy” Classical
economists, on the other hand, define unemployment as “people
engaged in the productive work of looking for a better match between
worker and employer.” They, therefore, view the search for work as
work in itself. Thus we can deduce that the unemployed are workers
working the “job search sector.”
Unemployment is considered only a problem in the economy when it
exceeds the recommended level of 4%. This level is encouraged as
full employment; in this case, 0% unemployment, production will be
impossible. Pharis (2007) the recommended 4% is only to cushion the
labor market from unprecedented wage hikes resulting from high
demand and low supply. The recommended rate is permanent as in the
short run people will keep on switching employments. During this
transition from one employer to the other, then there will always be a
number of people unemployed in the short run, but in the long run,
they will be employed.
Long term unemployment
Long-term unemployment periods can be related to lower transition
probabilities from job search to employment. Secondly, the long term
unemployed workers “are less relevant to wage and price formation
than the newly unemployed” (Llaudes, 2005).
The author base’s his argument on the assumption that “the long term
unemployed play a marginal role in the wage formation process.”
From this, we deduce that unemployment durations do not count in the
setting of wage rates in the labor market. This is contrary to what is
predicted in the Phillips Curve, which suggests that the long-term
unemployed should receive more weight in terms of better
employment conditions and wages. However, individual economic
policies determine the role played by long-term unemployment.
Llaudes (2005) notes that long-term unemployed persons in some
Western European countries have a negligible effect on labor prices.
Long-term unemployment can, in one or another, be attributed to
short-term unemployment. This occurs due to the act that, after some
time unemployed, individuals become disheartened and reduce their
job search morale and activities, thereby decreasing their chances of
finding employment. Again, according to the Phillips Curve,
employers are biased against long-term unemployed workers as they
are assumed to be more expensive by demanding higher wage rates.
Therefore if firms consistently stick to this by hiring the newly “un-
employed because they are assumed to be more productive and less
costly, the equilibrium or “efficiency wage” is determined by the
wage demands of this preferred group” (Llaudes, 2005).
According to the Bureau of Labor Statistics, unemployment in the US
stood at 6.5% as of October this year. This is posed to continue with
the economic situation in the country not that promising. Then we
may ask ourselves what the role of government in reducing the
unemployment levels in the country is. There are two major ways
through which a government can influence the performance of the
economy, not only in growth but also in solving some of these
macroeconomic problems. In this year alone, the Bush administration
has been lowering interest rates to encourage more investment and
borrowing. This was a result reported a drastic drop in consumer
spending since late 2007.
Types of unemployment.
Frictional unemployment.
Cyclical unemployment.
Structural unemployment.
Cyclical unemployment, in particular, is defined as an excess supply
of labor and usually occurs in the long run. It results from delayed
short-term unemployment periods, and according to the Phillips curve,
it is supported by the labor market. On the other hand, frictional
employment is caused by some people being between jobs, thus a
short term, while structural unemployment is caused by problems that
arise because of a mismatch between the needs of employers and the
skills and training of the labor force. This might translate to either
long-term unemployment or short-term unemployment depending on
how far the employer is willing to compromise and high unskilled
labor and then later train the employees (Case and Fair, 2006).
Economic stagnation
Economic growth is a long-term trend largely dependent on supply-
side factors. Growth in the labor market and human capital, in general,
is viewed as a key driver to economic growth though not always.
Rueben (2007) takes note of China and India, which are heavily
relying n their human capital for very rapid growth. Another factor
that greatly contributes to economic growth, as noted by the same
author, is investments in real capital stock. He says human capital
facilitates individuals in the center to generate knowledge and new
products and production methods when viewed on the supply side.
From the demand side perspective, large human capital creates
demand for goods and services produced in that economy.
Unfortunately, differences in natural factors over different economies
create variation in the effectiveness of human capital as a contributing
factor to economic growth. In Africa, for example, high population
growth rates are blamed for the unending poverty levels in the
country. This is contrary to the above suggestions that increased
human capital is viewed as an injection to the economy.
Economists and academicians have offered different ideas as to why
the US economy is experiencing slowed growth. In any modern
economy, some basic necessities must be ensured in order to
guarantee growth. Most important, they must have a strong currency
and a positive net exports balance. These three things are
complementary to each other. A weak dollar, will in due course, lead
to high oil and commodity prices through the multiplier effect. In the
long run, this will lead to high inflation as we are experiencing now.
In response, the Federal Reserve Bank is forced to raise interest rates
in an attempt to protect consumers. This points to a very important
revelation that a weak dollar does not cause economic stagnation but
rather a weak dollar of any currency is a direct result of slowed
growth or economic stagnation.
Case and Fair (2006) say that both long term and short term economic
stagnation can be attributed to:
Weak Dollar.
Expensive Commodities.
Expensive Oil.
High Inflation.
Unmanageable Debt.
The current economic system in America possesses all of the above
characteristics. The frustrating thing is that each is one of them is
spinning out of control. In the last few years, the US economy has
been on a growth recovery path after a slowdown caused by the
terrorist attack of the World Trade Center.DDuring such economic
recovery periods, tax revenues are high, normally accounting for a
large portion of the GDP. Unfortunately, normalization of growth
after stabilizing recovery is interpreted as slowed growth. In the
current “recession” period, we have seen the opposite as slowed
growth.
Data from the Federal Bureau of Statistics shows that per capita
income in the US and growth in GDP have been on a steady increase
in the last 20 years, with GDP growth averaging 1.8%. Unfortunately,
this growth is not well represented among the low-income earning
population. A report by the IMF released by BBC early last year
shows that the difference in income between the rich and the poor is
highest in developed countries contrary to popular belief that it is
highest in developing and less developed countries. The US, as the
most developed country, does not show its reported economic growth
among the low-income earners despite the continued growth in the
economy. Weiner (2008) says this points to the inefficiency of the
GDP as a measure of economic performance/growth. He makes an
example of the buying and reselling of houses at an ever-increasing
price as being counted towards economic growth. Economists have for
a long time relied on GDP as the most all-inclusive measure of growth
in an economy. With the economic situation.
Inflation
Inflation is defined by Rueben (2007) as the general increase in price
levels. According to the Federal Bureau of Statistics, the US economy
had registered an inflation level of 6.5% in the month of October. This
translates to say that while prices have remained constant, product
prices have increased by 6.5%. Therefore the common American
citizen has the same number of dollars to spend on expensive
products. This now points to the difference in nominal and real wages.
While there may be nominal increases of wages by employers to
offset the inflation impact, the increase might not be enough to cover
for inflation. Therefore, when the nominal wage is adjusted to
inflation levels, we get a real increase in wages. When households
receive a real increase in wage, consumption is bound to go up.
Types of inflation
Economists agree on three types of inflation, namely as:
Demand-pull inflation
Cost-push inflation
Hyperinflation
When demand increases and this results in inflation, we describe it as
demand-pull inflation. On the other hand, when cost increases and this
causes supply to decrease in turn, and this results in inflation, we
describe it as cost-push inflation. But these two different causes of
inflation are not independent, of course. Demand-pull pull inflation
will more often than not lead to cost-push inflation. Continued
inflation in the two categories creates hyperinflation. This is usually
inflation in excess that may occur during a crisis such as war (Case
and Fair, 2006).
Current situation vs. the great depression of the 1930s
Understanding the great depression of the 1930s is like the Holy Grail
of macroeconomics, so says Bernanke, as quoted by Shane (2005).
This has been the worst financial crisis to hit the world and the US.
The current situation, as earlier said, is being compared to the Great
Depression. But the thing is, we are not yet there, but we might be
headed there if the government does not institute policies that will
deliver the economy from the imminent danger. The Great Depression
is said to have been caused by the Stock Market crash of 1929 in the
US, but the other way that some authors see it as the crash had
resulted from the depression had begun earlier than the agreed time of
1930 (Case and Fair, 2006). In the current situation, the financial and
stocks market is in grave danger, with multi-billion companies
reporting billions of losses and others filing for bankruptcy. Though
the Stocks market crash of 1929 happened in one day, the effects are
expected to be the same with a gradual crash as it is happening now.
During this 1930’s depression, unemployment levels in the US had
escalated to over 30%, with hundred of firms closing down.
Conclusion
The fact that the US economy has reportedly been on a growth path
and the life of the ordinary American citizen has been worsening calls
for urgent measures to evaluate the current system of measuring
national economic output in terms of GDP as an indicator of the
general economic position of a region. As earlier said, the disparity in
wealth distribution is highest in countries reported as having the
highest levels of GDP. In conclusion, therefore, the current method of
using GDP as a measure of growth could be wrong in saying that the
US economy. If other more competent measures were used, then it
could be revealed that the US economy is worse-off than probably
imagined and already in a bad recession.
Current situation
The US economy is in a crisis. Financial services companies are
coming down in large numbers, with most being bailed by the
government. Employees are worried t the current levels of
unemployment standing at over 6%. Inflation is also on the rise. In
short, in the few months that the financial market has been in trouble,
consumers and investors have panicked a lot and made rash decisions
with far-reaching implications in the short run and in the long run.
Many are withdrawing their deposits from banks in fear that they may
collapse. In short, there have been panic withdrawals, thereby
worsening the conditions further. This can be seen as the short-term
implications of the high inflation and financial crisis in the economy.
Unemployment
In any given economy, a certain age group of the population and main
persons between the ages of 21-65 constitutes the economy’s labor
force. According to Reinhardt (2006), this number of people is the
main contributor to the national Gross Domestic Product (GDP).
Classical economists describe the labor force as the number of people
in an economy ready to exchange their services for salaries and wages
for the prevailing wage rates. They are again the highest taxpayers
providing revenue to the government to run its activities. Factories
and industries require labor input from the labor market to facilitate
the production of goods and services. The labor market is guided by
the general law of demand and supply through complications arise due
to various factors such as level of skill and mobility of labor. Such
factors, according to Reinhardt (2006), have their own way of
producing unemployment. So what is unemployment in the first
place? Going by Lawrence’s (2003) description of the term, he says
that it is a percentage of the number of people that are considered to
belong in the labor force but cannot find employment. This brings to
our attention the fact that students and the aged are not considered as
part of the labor force; hence they are not included among the
unemployed. Another definition favored by the Keynesian school of
thought is that “unemployment is an excess supply of labor resulting
from a failure of coordination in the market economy” Classical
economists, on the other hand, define unemployment as “people
engaged in the productive work of looking for a better match between
worker and employer.” They, therefore, view the search for work as
work in itself. Thus we can deduce that the unemployed are workers
working the “job search sector.”
Unemployment is considered only a problem in the economy when it
exceeds the recommended level of 4%. This level is encouraged as
full employment; in this case, 0% unemployment, production will be
impossible. Pharis (2007) the recommended 4% is only to cushion the
labor market from unprecedented wage hikes resulting from high
demand and low supply. The recommended rate is permanent as in the
short run people will keep on switching employments. During this
transition from one employer to the other, then there will always be a
number of people unemployed in the short run, but in the long run,
they will be employed.
Long term unemployment
Long-term unemployment periods can be related to lower transition
probabilities from job search to employment. Secondly, the long term
unemployed workers “are less relevant to wage and price formation
than the newly unemployed” (Llaudes, 2005).
The author base’s his argument on the assumption that “the long term
unemployed play a marginal role in the wage formation process.”
From this, we deduce that unemployment durations do not count in the
setting of wage rates in the labor market. This is contrary to what is
predicted in the Phillips Curve, which suggests that the long-term
unemployed should receive more weight in terms of better
employment conditions and wages. However, individual economic
policies determine the role played by long-term unemployment.
Llaudes (2005) notes that long-term unemployed persons in some
Western European countries have a negligible effect on labor prices.
Long-term unemployment can, in one or another, be attributed to
short-term unemployment. This occurs due to the act that, after some
time unemployed, individuals become disheartened and reduce their
job search morale and activities, thereby decreasing their chances of
finding employment. Again, according to the Phillips Curve,
employers are biased against long-term unemployed workers as they
are assumed to be more expensive by demanding higher wage rates.
Therefore if firms consistently stick to this by hiring the newly “un-
employed because they are assumed to be more productive and less
costly, the equilibrium or “efficiency wage” is determined by the
wage demands of this preferred group” (Llaudes, 2005).
According to the Bureau of Labor Statistics, unemployment in the US
stood at 6.5% as of October this year. This is posed to continue with
the economic situation in the country not that promising. Then we
may ask ourselves what the role of government in reducing the
unemployment levels in the country is. There are two major ways
through which a government can influence the performance of the
economy, not only in growth but also in solving some of these
macroeconomic problems. In this year alone, the Bush administration
has been lowering interest rates to encourage more investment and
borrowing. This was a result reported a drastic drop in consumer
spending since late 2007.
Types of unemployment.
Frictional unemployment.
Cyclical unemployment.
Structural unemployment.
Cyclical unemployment, in particular, is defined as an excess supply
of labor and usually occurs in the long run. It results from delayed
short-term unemployment periods, and according to the Phillips curve,
it is supported by the labor market. On the other hand, frictional
employment is caused by some people being between jobs, thus a
short term, while structural unemployment is caused by problems that
arise because of a mismatch between the needs of employers and the
skills and training of the labor force. This might translate to either
long-term unemployment or short-term unemployment depending on
how far the employer is willing to compromise and high unskilled
labor and then later train the employees (Case and Fair, 2006).
Economic stagnation
Economic growth is a long-term trend largely dependent on supply-
side factors. Growth in the labor market and human capital, in general,
is viewed as a key driver to economic growth though not always.
Rueben (2007) takes note of China and India, which are heavily
relying n their human capital for very rapid growth. Another factor
that greatly contributes to economic growth, as noted by the same
author, is investments in real capital stock. He says human capital
facilitates individuals in the center to generate knowledge and new
products and production methods when viewed on the supply side.
From the demand side perspective, large human capital creates
demand for goods and services produced in that economy.
Unfortunately, differences in natural factors over different economies
create variation in the effectiveness of human capital as a contributing
factor to economic growth. In Africa, for example, high population
growth rates are blamed for the unending poverty levels in the
country. This is contrary to the above suggestions that increased
human capital is viewed as an injection to the economy.
Economists and academicians have offered different ideas as to why
the US economy is experiencing slowed growth. In any modern
economy, some basic necessities must be ensured in order to
guarantee growth. Most important, they must have a strong currency
and a positive net exports balance. These three things are
complementary to each other. A weak dollar, will in due course, lead
to high oil and commodity prices through the multiplier effect. In the
long run, this will lead to high inflation as we are experiencing now.
In response, the Federal Reserve Bank is forced to raise interest rates
in an attempt to protect consumers. This points to a very important
revelation that a weak dollar does not cause economic stagnation but
rather a weak dollar of any currency is a direct result of slowed
growth or economic stagnation.
Case and Fair (2006) say that both long term and short term economic
stagnation can be attributed to:
Weak Dollar.
Expensive Commodities.
Expensive Oil.
High Inflation.
Unmanageable Debt.
The current economic system in America possesses all of the above
characteristics. The frustrating thing is that each is one of them is
spinning out of control. In the last few years, the US economy has
been on a growth recovery path after a slowdown caused by the
terrorist attack of the World Trade Center.DDuring such economic
recovery periods, tax revenues are high, normally accounting for a
large portion of the GDP. Unfortunately, normalization of growth
after stabilizing recovery is interpreted as slowed growth. In the
current “recession” period, we have seen the opposite as slowed
growth.
Data from the Federal Bureau of Statistics shows that per capita
income in the US and growth in GDP have been on a steady increase
in the last 20 years, with GDP growth averaging 1.8%. Unfortunately,
this growth is not well represented among the low-income earning
population. A report by the IMF released by BBC early last year
shows that the difference in income between the rich and the poor is
highest in developed countries contrary to popular belief that it is
highest in developing and less developed countries. The US, as the
most developed country, does not show its reported economic growth
among the low-income earners despite the continued growth in the
economy. Weiner (2008) says this points to the inefficiency of the
GDP as a measure of economic performance/growth. He makes an
example of the buying and reselling of houses at an ever-increasing
price as being counted towards economic growth. Economists have for
a long time relied on GDP as the most all-inclusive measure of growth
in an economy. With the economic situation.
Inflation
Inflation is defined by Rueben (2007) as the general increase in price
levels. According to the Federal Bureau of Statistics, the US economy
had registered an inflation level of 6.5% in the month of October. This
translates to say that while prices have remained constant, product
prices have increased by 6.5%. Therefore the common American
citizen has the same number of dollars to spend on expensive
products. This now points to the difference in nominal and real wages.
While there may be nominal increases of wages by employers to
offset the inflation impact, the increase might not be enough to cover
for inflation. Therefore, when the nominal wage is adjusted to
inflation levels, we get a real increase in wages. When households
receive a real increase in wage, consumption is bound to go up.
Types of inflation
Economists agree on three types of inflation, namely as:
Demand-pull inflation
Cost-push inflation
Hyperinflation
When demand increases and this results in inflation, we describe it as
demand-pull inflation. On the other hand, when cost increases and this
causes supply to decrease in turn, and this results in inflation, we
describe it as cost-push inflation. But these two different causes of
inflation are not independent, of course. Demand-pull pull inflation
will more often than not lead to cost-push inflation. Continued
inflation in the two categories creates hyperinflation. This is usually
inflation in excess that may occur during a crisis such as war (Case
and Fair, 2006).
Current situation vs. the great depression of the 1930s
Understanding the great depression of the 1930s is like the Holy Grail
of macroeconomics, so says Bernanke, as quoted by Shane (2005).
This has been the worst financial crisis to hit the world and the US.
The current situation, as earlier said, is being compared to the Great
Depression. But the thing is, we are not yet there, but we might be
headed there if the government does not institute policies that will
deliver the economy from the imminent danger. The Great Depression
is said to have been caused by the Stock Market crash of 1929 in the
US, but the other way that some authors see it as the crash had
resulted from the depression had begun earlier than the agreed time of
1930 (Case and Fair, 2006). In the current situation, the financial and
stocks market is in grave danger, with multi-billion companies
reporting billions of losses and others filing for bankruptcy. Though
the Stocks market crash of 1929 happened in one day, the effects are
expected to be the same with a gradual crash as it is happening now.
During this 1930’s depression, unemployment levels in the US had
escalated to over 30%, with hundred of firms closing down.
Conclusion
The fact that the US economy has reportedly been on a growth path
and the life of the ordinary American citizen has been worsening calls
for urgent measures to evaluate the current system of measuring
national economic output in terms of GDP as an indicator of the
general economic position of a region. As earlier said, the disparity in
wealth distribution is highest in countries reported as having the
highest levels of GDP. In conclusion, therefore, the current method of
using GDP as a measure of growth could be wrong in saying that the
US economy. If other more competent measures were used, then it
could be revealed that the US economy is worse-off than probably
imagined and already in a bad recession.
Current situation
The US economy is in a crisis. Financial services companies are
coming down in large numbers, with most being bailed by the
government. Employees are worried t the current levels of
unemployment standing at over 6%. Inflation is also on the rise. In
short, in the few months that the financial market has been in trouble,
consumers and investors have panicked a lot and made rash decisions
with far-reaching implications in the short run and in the long run.
Many are withdrawing their deposits from banks in fear that they may
collapse. In short, there have been panic withdrawals, thereby
worsening the conditions further. This can be seen as the short-term
implications of the high inflation and financial crisis in the economy.
Unemployment
In any given economy, a certain age group of the population and main
persons between the ages of 21-65 constitutes the economy’s labor
force. According to Reinhardt (2006), this number of people is the
main contributor to the national Gross Domestic Product (GDP).
Classical economists describe the labor force as the number of people
in an economy ready to exchange their services for salaries and wages
for the prevailing wage rates. They are again the highest taxpayers
providing revenue to the government to run its activities. Factories
and industries require labor input from the labor market to facilitate
the production of goods and services. The labor market is guided by
the general law of demand and supply through complications arise due
to various factors such as level of skill and mobility of labor. Such
factors, according to Reinhardt (2006), have their own way of
producing unemployment. So what is unemployment in the first
place? Going by Lawrence’s (2003) description of the term, he says
that it is a percentage of the number of people that are considered to
belong in the labor force but cannot find employment. This brings to
our attention the fact that students and the aged are not considered as
part of the labor force; hence they are not included among the
unemployed. Another definition favored by the Keynesian school of
thought is that “unemployment is an excess supply of labor resulting
from a failure of coordination in the market economy” Classical
economists, on the other hand, define unemployment as “people
engaged in the productive work of looking for a better match between
worker and employer.” They, therefore, view the search for work as
work in itself. Thus we can deduce that the unemployed are workers
working the “job search sector.”
Unemployment is considered only a problem in the economy when it
exceeds the recommended level of 4%. This level is encouraged as
full employment; in this case, 0% unemployment, production will be
impossible. Pharis (2007) the recommended 4% is only to cushion the
labor market from unprecedented wage hikes resulting from high
demand and low supply. The recommended rate is permanent as in the
short run people will keep on switching employments. During this
transition from one employer to the other, then there will always be a
number of people unemployed in the short run, but in the long run,
they will be employed.
Long term unemployment
Long-term unemployment periods can be related to lower transition
probabilities from job search to employment. Secondly, the long term
unemployed workers “are less relevant to wage and price formation
than the newly unemployed” (Llaudes, 2005).
The author base’s his argument on the assumption that “the long term
unemployed play a marginal role in the wage formation process.”
From this, we deduce that unemployment durations do not count in the
setting of wage rates in the labor market. This is contrary to what is
predicted in the Phillips Curve, which suggests that the long-term
unemployed should receive more weight in terms of better
employment conditions and wages. However, individual economic
policies determine the role played by long-term unemployment.
Llaudes (2005) notes that long-term unemployed persons in some
Western European countries have a negligible effect on labor prices.
Long-term unemployment can, in one or another, be attributed to
short-term unemployment. This occurs due to the act that, after some
time unemployed, individuals become disheartened and reduce their
job search morale and activities, thereby decreasing their chances of
finding employment. Again, according to the Phillips Curve,
employers are biased against long-term unemployed workers as they
are assumed to be more expensive by demanding higher wage rates.
Therefore if firms consistently stick to this by hiring the newly “un-
employed because they are assumed to be more productive and less
costly, the equilibrium or “efficiency wage” is determined by the
wage demands of this preferred group” (Llaudes, 2005).
According to the Bureau of Labor Statistics, unemployment in the US
stood at 6.5% as of October this year. This is posed to continue with
the economic situation in the country not that promising. Then we
may ask ourselves what the role of government in reducing the
unemployment levels in the country is. There are two major ways
through which a government can influence the performance of the
economy, not only in growth but also in solving some of these
macroeconomic problems. In this year alone, the Bush administration
has been lowering interest rates to encourage more investment and
borrowing. This was a result reported a drastic drop in consumer
spending since late 2007.
Types of unemployment.
Frictional unemployment.
Cyclical unemployment.
Structural unemployment.
Cyclical unemployment, in particular, is defined as an excess supply
of labor and usually occurs in the long run. It results from delayed
short-term unemployment periods, and according to the Phillips curve,
it is supported by the labor market. On the other hand, frictional
employment is caused by some people being between jobs, thus a
short term, while structural unemployment is caused by problems that
arise because of a mismatch between the needs of employers and the
skills and training of the labor force. This might translate to either
long-term unemployment or short-term unemployment depending on
how far the employer is willing to compromise and high unskilled
labor and then later train the employees (Case and Fair, 2006).
Economic stagnation
Economic growth is a long-term trend largely dependent on supply-
side factors. Growth in the labor market and human capital, in general,
is viewed as a key driver to economic growth though not always.
Rueben (2007) takes note of China and India, which are heavily
relying n their human capital for very rapid growth. Another factor
that greatly contributes to economic growth, as noted by the same
author, is investments in real capital stock. He says human capital
facilitates individuals in the center to generate knowledge and new
products and production methods when viewed on the supply side.
From the demand side perspective, large human capital creates
demand for goods and services produced in that economy.
Unfortunately, differences in natural factors over different economies
create variation in the effectiveness of human capital as a contributing
factor to economic growth. In Africa, for example, high population
growth rates are blamed for the unending poverty levels in the
country. This is contrary to the above suggestions that increased
human capital is viewed as an injection to the economy.
Economists and academicians have offered different ideas as to why
the US economy is experiencing slowed growth. In any modern
economy, some basic necessities must be ensured in order to
guarantee growth. Most important, they must have a strong currency
and a positive net exports balance. These three things are
complementary to each other. A weak dollar, will in due course, lead
to high oil and commodity prices through the multiplier effect. In the
long run, this will lead to high inflation as we are experiencing now.
In response, the Federal Reserve Bank is forced to raise interest rates
in an attempt to protect consumers. This points to a very important
revelation that a weak dollar does not cause economic stagnation but
rather a weak dollar of any currency is a direct result of slowed
growth or economic stagnation.
Case and Fair (2006) say that both long term and short term economic
stagnation can be attributed to:
Weak Dollar.
Expensive Commodities.
Expensive Oil.
High Inflation.
Unmanageable Debt.
The current economic system in America possesses all of the above
characteristics. The frustrating thing is that each is one of them is
spinning out of control. In the last few years, the US economy has
been on a growth recovery path after a slowdown caused by the
terrorist attack of the World Trade Center.DDuring such economic
recovery periods, tax revenues are high, normally accounting for a
large portion of the GDP. Unfortunately, normalization of growth
after stabilizing recovery is interpreted as slowed growth. In the
current “recession” period, we have seen the opposite as slowed
growth.
Data from the Federal Bureau of Statistics shows that per capita
income in the US and growth in GDP have been on a steady increase
in the last 20 years, with GDP growth averaging 1.8%. Unfortunately,
this growth is not well represented among the low-income earning
population. A report by the IMF released by BBC early last year
shows that the difference in income between the rich and the poor is
highest in developed countries contrary to popular belief that it is
highest in developing and less developed countries. The US, as the
most developed country, does not show its reported economic growth
among the low-income earners despite the continued growth in the
economy. Weiner (2008) says this points to the inefficiency of the
GDP as a measure of economic performance/growth. He makes an
example of the buying and reselling of houses at an ever-increasing
price as being counted towards economic growth. Economists have for
a long time relied on GDP as the most all-inclusive measure of growth
in an economy. With the economic situation.
Inflation
Inflation is defined by Rueben (2007) as the general increase in price
levels. According to the Federal Bureau of Statistics, the US economy
had registered an inflation level of 6.5% in the month of October. This
translates to say that while prices have remained constant, product
prices have increased by 6.5%. Therefore the common American
citizen has the same number of dollars to spend on expensive
products. This now points to the difference in nominal and real wages.
While there may be nominal increases of wages by employers to
offset the inflation impact, the increase might not be enough to cover
for inflation. Therefore, when the nominal wage is adjusted to
inflation levels, we get a real increase in wages. When households
receive a real increase in wage, consumption is bound to go up.
Types of inflation
Economists agree on three types of inflation, namely as:
Demand-pull inflation
Cost-push inflation
Hyperinflation
When demand increases and this results in inflation, we describe it as
demand-pull inflation. On the other hand, when cost increases and this
causes supply to decrease in turn, and this results in inflation, we
describe it as cost-push inflation. But these two different causes of
inflation are not independent, of course. Demand-pull pull inflation
will more often than not lead to cost-push inflation. Continued
inflation in the two categories creates hyperinflation. This is usually
inflation in excess that may occur during a crisis such as war (Case
and Fair, 2006).
Current situation vs. the great depression of the 1930s
Understanding the great depression of the 1930s is like the Holy Grail
of macroeconomics, so says Bernanke, as quoted by Shane (2005).
This has been the worst financial crisis to hit the world and the US.
The current situation, as earlier said, is being compared to the Great
Depression. But the thing is, we are not yet there, but we might be
headed there if the government does not institute policies that will
deliver the economy from the imminent danger. The Great Depression
is said to have been caused by the Stock Market crash of 1929 in the
US, but the other way that some authors see it as the crash had
resulted from the depression had begun earlier than the agreed time of
1930 (Case and Fair, 2006). In the current situation, the financial and
stocks market is in grave danger, with multi-billion companies
reporting billions of losses and others filing for bankruptcy. Though
the Stocks market crash of 1929 happened in one day, the effects are
expected to be the same with a gradual crash as it is happening now.
During this 1930’s depression, unemployment levels in the US had
escalated to over 30%, with hundred of firms closing down.
Conclusion
The fact that the US economy has reportedly been on a growth path
and the life of the ordinary American citizen has been worsening calls
for urgent measures to evaluate the current system of measuring
national economic output in terms of GDP as an indicator of the
general economic position of a region. As earlier said, the disparity in
wealth distribution is highest in countries reported as having the
highest levels of GDP. In conclusion, therefore, the current method of
using GDP as a measure of growth could be wrong in saying that the
US economy. If other more competent measures were used, then it
could be revealed that the US economy is worse-off than probably
imagined and already in a bad recession.
Current situation
The US economy is in a crisis. Financial services companies are
coming down in large numbers, with most being bailed by the
government. Employees are worried t the current levels of
unemployment standing at over 6%. Inflation is also on the rise. In
short, in the few months that the financial market has been in trouble,
consumers and investors have panicked a lot and made rash decisions
with far-reaching implications in the short run and in the long run.
Many are withdrawing their deposits from banks in fear that they may
collapse. In short, there have been panic withdrawals, thereby
worsening the conditions further. This can be seen as the short-term
implications of the high inflation and financial crisis in the economy.
Unemployment
In any given economy, a certain age group of the population and main
persons between the ages of 21-65 constitutes the economy’s labor
force. According to Reinhardt (2006), this number of people is the
main contributor to the national Gross Domestic Product (GDP).
Classical economists describe the labor force as the number of people
in an economy ready to exchange their services for salaries and wages
for the prevailing wage rates. They are again the highest taxpayers
providing revenue to the government to run its activities. Factories
and industries require labor input from the labor market to facilitate
the production of goods and services. The labor market is guided by
the general law of demand and supply through complications arise due
to various factors such as level of skill and mobility of labor. Such
factors, according to Reinhardt (2006), have their own way of
producing unemployment. So what is unemployment in the first
place? Going by Lawrence’s (2003) description of the term, he says
that it is a percentage of the number of people that are considered to
belong in the labor force but cannot find employment. This brings to
our attention the fact that students and the aged are not considered as
part of the labor force; hence they are not included among the
unemployed. Another definition favored by the Keynesian school of
thought is that “unemployment is an excess supply of labor resulting
from a failure of coordination in the market economy” Classical
economists, on the other hand, define unemployment as “people
engaged in the productive work of looking for a better match between
worker and employer.” They, therefore, view the search for work as
work in itself. Thus we can deduce that the unemployed are workers
working the “job search sector.”
Unemployment is considered only a problem in the economy when it
exceeds the recommended level of 4%. This level is encouraged as
full employment; in this case, 0% unemployment, production will be
impossible. Pharis (2007) the recommended 4% is only to cushion the
labor market from unprecedented wage hikes resulting from high
demand and low supply. The recommended rate is permanent as in the
short run people will keep on switching employments. During this
transition from one employer to the other, then there will always be a
number of people unemployed in the short run, but in the long run,
they will be employed.
Long term unemployment
Long-term unemployment periods can be related to lower transition
probabilities from job search to employment. Secondly, the long term
unemployed workers “are less relevant to wage and price formation
than the newly unemployed” (Llaudes, 2005).
The author base’s his argument on the assumption that “the long term
unemployed play a marginal role in the wage formation process.”
From this, we deduce that unemployment durations do not count in the
setting of wage rates in the labor market. This is contrary to what is
predicted in the Phillips Curve, which suggests that the long-term
unemployed should receive more weight in terms of better
employment conditions and wages. However, individual economic
policies determine the role played by long-term unemployment.
Llaudes (2005) notes that long-term unemployed persons in some
Western European countries have a negligible effect on labor prices.
Long-term unemployment can, in one or another, be attributed to
short-term unemployment. This occurs due to the act that, after some
time unemployed, individuals become disheartened and reduce their
job search morale and activities, thereby decreasing their chances of
finding employment. Again, according to the Phillips Curve,
employers are biased against long-term unemployed workers as they
are assumed to be more expensive by demanding higher wage rates.
Therefore if firms consistently stick to this by hiring the newly “un-
employed because they are assumed to be more productive and less
costly, the equilibrium or “efficiency wage” is determined by the
wage demands of this preferred group” (Llaudes, 2005).
According to the Bureau of Labor Statistics, unemployment in the US
stood at 6.5% as of October this year. This is posed to continue with
the economic situation in the country not that promising. Then we
may ask ourselves what the role of government in reducing the
unemployment levels in the country is. There are two major ways
through which a government can influence the performance of the
economy, not only in growth but also in solving some of these
macroeconomic problems. In this year alone, the Bush administration
has been lowering interest rates to encourage more investment and
borrowing. This was a result reported a drastic drop in consumer
spending since late 2007.
Types of unemployment.
Frictional unemployment.
Cyclical unemployment.
Structural unemployment.
Cyclical unemployment, in particular, is defined as an excess supply
of labor and usually occurs in the long run. It results from delayed
short-term unemployment periods, and according to the Phillips curve,
it is supported by the labor market. On the other hand, frictional
employment is caused by some people being between jobs, thus a
short term, while structural unemployment is caused by problems that
arise because of a mismatch between the needs of employers and the
skills and training of the labor force. This might translate to either
long-term unemployment or short-term unemployment depending on
how far the employer is willing to compromise and high unskilled
labor and then later train the employees (Case and Fair, 2006).
Economic stagnation
Economic growth is a long-term trend largely dependent on supply-
side factors. Growth in the labor market and human capital, in general,
is viewed as a key driver to economic growth though not always.
Rueben (2007) takes note of China and India, which are heavily
relying n their human capital for very rapid growth. Another factor
that greatly contributes to economic growth, as noted by the same
author, is investments in real capital stock. He says human capital
facilitates individuals in the center to generate knowledge and new
products and production methods when viewed on the supply side.
From the demand side perspective, large human capital creates
demand for goods and services produced in that economy.
Unfortunately, differences in natural factors over different economies
create variation in the effectiveness of human capital as a contributing
factor to economic growth. In Africa, for example, high population
growth rates are blamed for the unending poverty levels in the
country. This is contrary to the above suggestions that increased
human capital is viewed as an injection to the economy.
Economists and academicians have offered different ideas as to why
the US economy is experiencing slowed growth. In any modern
economy, some basic necessities must be ensured in order to
guarantee growth. Most important, they must have a strong currency
and a positive net exports balance. These three things are
complementary to each other. A weak dollar, will in due course, lead
to high oil and commodity prices through the multiplier effect. In the
long run, this will lead to high inflation as we are experiencing now.
In response, the Federal Reserve Bank is forced to raise interest rates
in an attempt to protect consumers. This points to a very important
revelation that a weak dollar does not cause economic stagnation but
rather a weak dollar of any currency is a direct result of slowed
growth or economic stagnation.
Case and Fair (2006) say that both long term and short term economic
stagnation can be attributed to:
Weak Dollar.
Expensive Commodities.
Expensive Oil.
High Inflation.
Unmanageable Debt.
The current economic system in America possesses all of the above
characteristics. The frustrating thing is that each is one of them is
spinning out of control. In the last few years, the US economy has
been on a growth recovery path after a slowdown caused by the
terrorist attack of the World Trade Center.DDuring such economic
recovery periods, tax revenues are high, normally accounting for a
large portion of the GDP. Unfortunately, normalization of growth
after stabilizing recovery is interpreted as slowed growth. In the
current “recession” period, we have seen the opposite as slowed
growth.
Data from the Federal Bureau of Statistics shows that per capita
income in the US and growth in GDP have been on a steady increase
in the last 20 years, with GDP growth averaging 1.8%. Unfortunately,
this growth is not well represented among the low-income earning
population. A report by the IMF released by BBC early last year
shows that the difference in income between the rich and the poor is
highest in developed countries contrary to popular belief that it is
highest in developing and less developed countries. The US, as the
most developed country, does not show its reported economic growth
among the low-income earners despite the continued growth in the
economy. Weiner (2008) says this points to the inefficiency of the
GDP as a measure of economic performance/growth. He makes an
example of the buying and reselling of houses at an ever-increasing
price as being counted towards economic growth. Economists have for
a long time relied on GDP as the most all-inclusive measure of growth
in an economy. With the economic situation.
Inflation
Inflation is defined by Rueben (2007) as the general increase in price
levels. According to the Federal Bureau of Statistics, the US economy
had registered an inflation level of 6.5% in the month of October. This
translates to say that while prices have remained constant, product
prices have increased by 6.5%. Therefore the common American
citizen has the same number of dollars to spend on expensive
products. This now points to the difference in nominal and real wages.
While there may be nominal increases of wages by employers to
offset the inflation impact, the increase might not be enough to cover
for inflation. Therefore, when the nominal wage is adjusted to
inflation levels, we get a real increase in wages. When households
receive a real increase in wage, consumption is bound to go up.
Types of inflation
Economists agree on three types of inflation, namely as:
Demand-pull inflation
Cost-push inflation
Hyperinflation
When demand increases and this results in inflation, we describe it as
demand-pull inflation. On the other hand, when cost increases and this
causes supply to decrease in turn, and this results in inflation, we
describe it as cost-push inflation. But these two different causes of
inflation are not independent, of course. Demand-pull pull inflation
will more often than not lead to cost-push inflation. Continued
inflation in the two categories creates hyperinflation. This is usually
inflation in excess that may occur during a crisis such as war (Case
and Fair, 2006).
Current situation vs. the great depression of the 1930s
Understanding the great depression of the 1930s is like the Holy Grail
of macroeconomics, so says Bernanke, as quoted by Shane (2005).
This has been the worst financial crisis to hit the world and the US.
The current situation, as earlier said, is being compared to the Great
Depression. But the thing is, we are not yet there, but we might be
headed there if the government does not institute policies that will
deliver the economy from the imminent danger. The Great Depression
is said to have been caused by the Stock Market crash of 1929 in the
US, but the other way that some authors see it as the crash had
resulted from the depression had begun earlier than the agreed time of
1930 (Case and Fair, 2006). In the current situation, the financial and
stocks market is in grave danger, with multi-billion companies
reporting billions of losses and others filing for bankruptcy. Though
the Stocks market crash of 1929 happened in one day, the effects are
expected to be the same with a gradual crash as it is happening now.
During this 1930’s depression, unemployment levels in the US had
escalated to over 30%, with hundred of firms closing down.
Conclusion
The fact that the US economy has reportedly been on a growth path
and the life of the ordinary American citizen has been worsening calls
for urgent measures to evaluate the current system of measuring
national economic output in terms of GDP as an indicator of the
general economic position of a region. As earlier said, the disparity in
wealth distribution is highest in countries reported as having the
highest levels of GDP. In conclusion, therefore, the current method of
using GDP as a measure of growth could be wrong in saying that the
US economy. If other more competent measures were used, then it
could be revealed that the US economy is worse-off than probably
imagined and already in a bad recession.
Current situation
The US economy is in a crisis. Financial services companies are
coming down in large numbers, with most being bailed by the
government. Employees are worried t the current levels of
unemployment standing at over 6%. Inflation is also on the rise. In
short, in the few months that the financial market has been in trouble,
consumers and investors have panicked a lot and made rash decisions
with far-reaching implications in the short run and in the long run.
Many are withdrawing their deposits from banks in fear that they may
collapse. In short, there have been panic withdrawals, thereby
worsening the conditions further. This can be seen as the short-term
implications of the high inflation and financial crisis in the economy.
Unemployment
In any given economy, a certain age group of the population and main
persons between the ages of 21-65 constitutes the economy’s labor
force. According to Reinhardt (2006), this number of people is the
main contributor to the national Gross Domestic Product (GDP).
Classical economists describe the labor force as the number of people
in an economy ready to exchange their services for salaries and wages
for the prevailing wage rates. They are again the highest taxpayers
providing revenue to the government to run its activities. Factories
and industries require labor input from the labor market to facilitate
the production of goods and services. The labor market is guided by
the general law of demand and supply through complications arise due
to various factors such as level of skill and mobility of labor. Such
factors, according to Reinhardt (2006), have their own way of
producing unemployment. So what is unemployment in the first
place? Going by Lawrence’s (2003) description of the term, he says
that it is a percentage of the number of people that are considered to
belong in the labor force but cannot find employment. This brings to
our attention the fact that students and the aged are not considered as
part of the labor force; hence they are not included among the
unemployed. Another definition favored by the Keynesian school of
thought is that “unemployment is an excess supply of labor resulting
from a failure of coordination in the market economy” Classical
economists, on the other hand, define unemployment as “people
engaged in the productive work of looking for a better match between
worker and employer.” They, therefore, view the search for work as
work in itself. Thus we can deduce that the unemployed are workers
working the “job search sector.”
Unemployment is considered only a problem in the economy when it
exceeds the recommended level of 4%. This level is encouraged as
full employment; in this case, 0% unemployment, production will be
impossible. Pharis (2007) the recommended 4% is only to cushion the
labor market from unprecedented wage hikes resulting from high
demand and low supply. The recommended rate is permanent as in the
short run people will keep on switching employments. During this
transition from one employer to the other, then there will always be a
number of people unemployed in the short run, but in the long run,
they will be employed.
Long term unemployment
Long-term unemployment periods can be related to lower transition
probabilities from job search to employment. Secondly, the long term
unemployed workers “are less relevant to wage and price formation
than the newly unemployed” (Llaudes, 2005).
The author base’s his argument on the assumption that “the long term
unemployed play a marginal role in the wage formation process.”
From this, we deduce that unemployment durations do not count in the
setting of wage rates in the labor market. This is contrary to what is
predicted in the Phillips Curve, which suggests that the long-term
unemployed should receive more weight in terms of better
employment conditions and wages. However, individual economic
policies determine the role played by long-term unemployment.
Llaudes (2005) notes that long-term unemployed persons in some
Western European countries have a negligible effect on labor prices.
Long-term unemployment can, in one or another, be attributed to
short-term unemployment. This occurs due to the act that, after some
time unemployed, individuals become disheartened and reduce their
job search morale and activities, thereby decreasing their chances of
finding employment. Again, according to the Phillips Curve,
employers are biased against long-term unemployed workers as they
are assumed to be more expensive by demanding higher wage rates.
Therefore if firms consistently stick to this by hiring the newly “un-
employed because they are assumed to be more productive and less
costly, the equilibrium or “efficiency wage” is determined by the
wage demands of this preferred group” (Llaudes, 2005).
According to the Bureau of Labor Statistics, unemployment in the US
stood at 6.5% as of October this year. This is posed to continue with
the economic situation in the country not that promising. Then we
may ask ourselves what the role of government in reducing the
unemployment levels in the country is. There are two major ways
through which a government can influence the performance of the
economy, not only in growth but also in solving some of these
macroeconomic problems. In this year alone, the Bush administration
has been lowering interest rates to encourage more investment and
borrowing. This was a result reported a drastic drop in consumer
spending since late 2007.
Types of unemployment.
Frictional unemployment.
Cyclical unemployment.
Structural unemployment.
Cyclical unemployment, in particular, is defined as an excess supply
of labor and usually occurs in the long run. It results from delayed
short-term unemployment periods, and according to the Phillips curve,
it is supported by the labor market. On the other hand, frictional
employment is caused by some people being between jobs, thus a
short term, while structural unemployment is caused by problems that
arise because of a mismatch between the needs of employers and the
skills and training of the labor force. This might translate to either
long-term unemployment or short-term unemployment depending on
how far the employer is willing to compromise and high unskilled
labor and then later train the employees (Case and Fair, 2006).
Economic stagnation
Economic growth is a long-term trend largely dependent on supply-
side factors. Growth in the labor market and human capital, in general,
is viewed as a key driver to economic growth though not always.
Rueben (2007) takes note of China and India, which are heavily
relying n their human capital for very rapid growth. Another factor
that greatly contributes to economic growth, as noted by the same
author, is investments in real capital stock. He says human capital
facilitates individuals in the center to generate knowledge and new
products and production methods when viewed on the supply side.
From the demand side perspective, large human capital creates
demand for goods and services produced in that economy.
Unfortunately, differences in natural factors over different economies
create variation in the effectiveness of human capital as a contributing
factor to economic growth. In Africa, for example, high population
growth rates are blamed for the unending poverty levels in the
country. This is contrary to the above suggestions that increased
human capital is viewed as an injection to the economy.
Economists and academicians have offered different ideas as to why
the US economy is experiencing slowed growth. In any modern
economy, some basic necessities must be ensured in order to
guarantee growth. Most important, they must have a strong currency
and a positive net exports balance. These three things are
complementary to each other. A weak dollar, will in due course, lead
to high oil and commodity prices through the multiplier effect. In the
long run, this will lead to high inflation as we are experiencing now.
In response, the Federal Reserve Bank is forced to raise interest rates
in an attempt to protect consumers. This points to a very important
revelation that a weak dollar does not cause economic stagnation but
rather a weak dollar of any currency is a direct result of slowed
growth or economic stagnation.
Case and Fair (2006) say that both long term and short term economic
stagnation can be attributed to:
Weak Dollar.
Expensive Commodities.
Expensive Oil.
High Inflation.
Unmanageable Debt.
The current economic system in America possesses all of the above
characteristics. The frustrating thing is that each is one of them is
spinning out of control. In the last few years, the US economy has
been on a growth recovery path after a slowdown caused by the
terrorist attack of the World Trade Center.DDuring such economic
recovery periods, tax revenues are high, normally accounting for a
large portion of the GDP. Unfortunately, normalization of growth
after stabilizing recovery is interpreted as slowed growth. In the
current “recession” period, we have seen the opposite as slowed
growth.
Data from the Federal Bureau of Statistics shows that per capita
income in the US and growth in GDP have been on a steady increase
in the last 20 years, with GDP growth averaging 1.8%. Unfortunately,
this growth is not well represented among the low-income earning
population. A report by the IMF released by BBC early last year
shows that the difference in income between the rich and the poor is
highest in developed countries contrary to popular belief that it is
highest in developing and less developed countries. The US, as the
most developed country, does not show its reported economic growth
among the low-income earners despite the continued growth in the
economy. Weiner (2008) says this points to the inefficiency of the
GDP as a measure of economic performance/growth. He makes an
example of the buying and reselling of houses at an ever-increasing
price as being counted towards economic growth. Economists have for
a long time relied on GDP as the most all-inclusive measure of growth
in an economy. With the economic situation.
Inflation
Inflation is defined by Rueben (2007) as the general increase in price
levels. According to the Federal Bureau of Statistics, the US economy
had registered an inflation level of 6.5% in the month of October. This
translates to say that while prices have remained constant, product
prices have increased by 6.5%. Therefore the common American
citizen has the same number of dollars to spend on expensive
products. This now points to the difference in nominal and real wages.
While there may be nominal increases of wages by employers to
offset the inflation impact, the increase might not be enough to cover
for inflation. Therefore, when the nominal wage is adjusted to
inflation levels, we get a real increase in wages. When households
receive a real increase in wage, consumption is bound to go up.
Types of inflation
Economists agree on three types of inflation, namely as:
Demand-pull inflation
Cost-push inflation
Hyperinflation
When demand increases and this results in inflation, we describe it as
demand-pull inflation. On the other hand, when cost increases and this
causes supply to decrease in turn, and this results in inflation, we
describe it as cost-push inflation. But these two different causes of
inflation are not independent, of course. Demand-pull pull inflation
will more often than not lead to cost-push inflation. Continued
inflation in the two categories creates hyperinflation. This is usually
inflation in excess that may occur during a crisis such as war (Case
and Fair, 2006).
Current situation vs. the great depression of the 1930s
Understanding the great depression of the 1930s is like the Holy Grail
of macroeconomics, so says Bernanke, as quoted by Shane (2005).
This has been the worst financial crisis to hit the world and the US.
The current situation, as earlier said, is being compared to the Great
Depression. But the thing is, we are not yet there, but we might be
headed there if the government does not institute policies that will
deliver the economy from the imminent danger. The Great Depression
is said to have been caused by the Stock Market crash of 1929 in the
US, but the other way that some authors see it as the crash had
resulted from the depression had begun earlier than the agreed time of
1930 (Case and Fair, 2006). In the current situation, the financial and
stocks market is in grave danger, with multi-billion companies
reporting billions of losses and others filing for bankruptcy. Though
the Stocks market crash of 1929 happened in one day, the effects are
expected to be the same with a gradual crash as it is happening now.
During this 1930’s depression, unemployment levels in the US had
escalated to over 30%, with hundred of firms closing down.
Conclusion
The fact that the US economy has reportedly been on a growth path
and the life of the ordinary American citizen has been worsening calls
for urgent measures to evaluate the current system of measuring
national economic output in terms of GDP as an indicator of the
general economic position of a region. As earlier said, the disparity in
wealth distribution is highest in countries reported as having the
highest levels of GDP. In conclusion, therefore, the current method of
using GDP as a measure of growth could be wrong in saying that the
US economy. If other more competent measures were used, then it
could be revealed that the US economy is worse-off than probably
imagined and already in a bad recession.
References
Weiner, B. (2008).DIntroduction in economics, New York: Prentice
Hall, pp. 111, 122.
Rueben, F. (2007).DMacroeconomics, 4th$ed. New Jersey: Sage, pp.
123-126.
Reinhardt, S. (2006).DPrinciples of economics, London: MacMilan, pp.
234, 236.
Pharis, Y. (2007).DModern economics, New York: McGraw Hill, pp.
450-453.
Kathleen, Murdoch, (2007).DEconomics of the great depression,
London , Pearson, pp 208.
Keller, Michael, (2003).DModern economics,DBoston: Bates, pp. 34.
Shane, K. (2005).DMacro and microeconomics handbook, Boston:
Wesley, pp. 23.
Llaudes, Ricardo (2005). The Phillips curve and long-term
unemployment, No.441. 2008. Web.
Case, K. and Fair, R. (2006) Principles of Economics 7th Edition,
New York: Academic Internet Publishers.
