Potential GDP in addition to the Natural Unemployment RateThe Three Main Schools of Thought

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Potential GDP in addition to the Natural Unemployment RateThe Three Main Schools of Thought

Bigay, Melissa, Executive Producer for the Total Traffic Network has reference to this Academic Journal, PHwiki organized this Journal Potential GDP in addition to the Natural Unemployment RateThe Three Main Schools of ThoughtPotential GDPThe production FunctionThe Dem in addition to in addition to Supply of LaborThe Natural Unemployment RateThe Classical viewMarket industrialized economies are inherently stable in addition to tend automatically to full employment.Government policies that aim to improve the per as long as mance of the economy do more harm than good.“Laissez-faire.”Contemporary Advocates: Finn Kidl in addition to , Edward Prescott, Robert Lucas, Neil Wallace, Thomas SargentThe Keynesian ViewJohn Maynard Keynes (1936). The General Theory of Employment, Interest, in addition to MoneyMarket, industrialized economies are inherently unstable in addition to do not automatically tend to full employment.Private spending ( in addition to most importantly, investment spending) is volatile—causing business cycle fluctuations.“The economy needs to be stabilized, the economy can be stabilized, the economy should be stabilized” (Franco Modigliani).Keynesian economics is an attack on the Classical theory. J.M. Keynes

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MonetarismMilton FriedmanAn updated version of the Classical theory.Attributes business cycle expansions in addition to contractions to erratic growth of the money supply.Favor controls on money supply growth.Free market or “laissez faire” preference. Potential GDP The value of real GDP when the economy’s resources—l in addition to , labor, capital, in addition to entrepreneurship—are fully employed.Lucas Wedge: Lost Output Due to Slow Growth

Measuring the GDP GapRecession is shadedSource: Brown’s calculation from BLS in addition to BEA dataThe Natural Rate of UnemploymentThe “full employment” unemployment rate—all unemployment is structural, seasonal, or frictional Key Points:The natural rate is not a constant—it varies over time in addition to between countries.The natural rate can change due to demographics, the availability of unemployment benefits, or structural change.

Canada Increased Unemployment Benefits in 1980. The Production Function Shows the relationship between real GDP in addition to the quantity of employment, holding all other resources constant.

Diminishing ReturnsBecause we are adding labor to a fixed quantity of other resources, each additional hour worked adds a diminishing increment to real GDP. Application of dem in addition to in addition to supply to the problem of total employment.The Labor MarketDefinitionsQuantity of labor dem in addition to ed: The total hours that all firms in the economy plan to hire in a given time period at a given real wage rate.Dem in addition to as long as labor: The relationship between the quantity of labor dem in addition to ed in addition to the real wage rate, when all other influences on hiring plans remain constant.Quantity of labor supplied : The total hours that all households in the economy plan to work in a given time period at a given real wage rate.Supply of labor: The relationship between the quantity of labor supplied in addition to the real wage rate, when all other influences on work plans remain constant.

Because the use of labor is subject to diminishing returns, employers will hire additional labor ONLY if the real wage has decreased.

Labor Market Equilibrium in addition to Potential GDP2 Key points:Potential GDP is the level of real output produced when total employment is equal to the equilibrium number of hours worked.Deviations of the economy from potential GDP must result from labor market disequilibrium.

Wage StickinessWhy should wages get stuck above their equilibrium levelSome Employers Pay an efficiency wage (above-market wage) to incentivize ef as long as t , minimize turnover, in addition to attract good people.The minimum wage law.Union wages: Wages that result from collective bargaining agreements.Job Rationing A situation in which the real wage is above its equilibrium value—in which case jobs are not rationed among job seekers by the real wage rate. There is a scarcity of jobs at prevailing wages.

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But the Minimum Wage Has Fallen in Real Terms

Bigay, Melissa Executive Producer for the Total Traffic Network

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