Economic Models and Unemployment

Production Possibly Frontier (PPF) The PPF model can be used to illustrate changes in unemployment Any point on the frontier represents full employment A movement from the frontier to a point inside the curve shows underutilisation of resources (workers) and thus represents unemployment Increase in unemployment Capital Goods A B Consumer Goods

PPF and unemployment Decrease in Real Output/Income As an economy experiences a downturn, real output falls. As output falls the demand for labour falls, thus increasing unemployment levels. Illustrated as a movement away from the frontier line. A B

PPF and Unemployment Decrease in productive capacity Less resources available to the economy, thus there is a decrease in potential output. e.g. Emigration (people leaving) NZ Showing by a shift inwards of the PPF.

Work books page 166-169

AD/AS Model Revisited AD/AS model shows the relationship between Price Levels (inflation) and real output. The full employment line can be used to show the gap between the output that could be produced if we used all the resources (workers etc.) available to us and the output level we are currently producing. AS PL* The gap between Y* and Yf demonstrates the underutilisation of resources (unemployment) AD Y* YF Unemployment

AD/AS Model and Unemployment Decrease in AD – represents increased cyclical unemployment called – Demand deficient unemployment AS e.g. Household spending falls – they spend less on goods and services. The demand for goods and services falls . Shifts the AD curve left – Causes cyclical unemployment to occur Fall in real output and increase in unemployment PL* PL1 AD AD’ y1 Y* YF Unemployment unemployment

AD/AS and Unemployment Increased cyclical unemployment may be caused by decreases in AS – called supply side unemployment AS AS e.g. The cost of imported raw materials rises. The rise of costs of production causes the AS curve to shift to the left. This results in a fall in real output and an increase in unemployment (cyclical) PL1 PL* AD y1 Y* YF Unemployment Unemployment

Workbook page 170-173