MARCO ECONOMICS

Marco Economics

Marco Economics

1- How Unemployment Is Related To the Growth in Output

Okuns Law, first formulated in the 1960's captures an empirical relationship between the unemployment rate and the growth in real output. The relation says that the change in unemployment is given by: DU = a (%DGNP - Potential GNP) However as GDP generally is more useful in international comparisons of economic activity, we have substituted GNP with GDP in the equation. The EU publication referenced also readily provides GDP data.

The coefficient a is given by the slope of the line plotting the relationship and essentially measures the flexibility of the labour force (Ackley, 2001). The coefficient depends in part on firms decisions regarding how to adjust employment in response to temporary deviations in output. These decisions depend in turn on such factors as the firms' internal organisation and the legal and social constraints on hiring and firing. One would thus expect the coefficient to be different across countries and indeed our results verify this where the coefficient is highest in the US where there are few social and legal constraints on firms adjustment of employment and smallest in Japan where Japanese firms offer a high degree of job security to their workers so variations on output have little effect on employment and thus on unemployment.

There is not a perfect relationship between unemployment and growth for a number of reasons. Some workers are needed no matter what the level of output. Training new employees is costly. Thus some firms hoard labour in bad times by keeping staff when demand is low and ask them to work overtime when the demand is high rather than hire new staff. Secondly an increase in the unemployment rate does not lead to a one for one decrease in the unemployment rate. Labour participation increases. Some jobs go to those who were classified as out of the labour force and not officially looking for a job. As labour market prospects improve, some workers return to the workforce. These are some of the ways how unemployment is related to the growth in output.

2- Why may Credit Crunch Affect the Macro Economy?

Credit crunch affect macro economy because we see that The recent credit crisis which initially started to show its colors during the end of 2008 is continuing to play the spoilsport in the growth of world economy. It's been seven to eight months when we first heard of Lehman Brothers filing for liquidity (Ackley, 2001). The root causes of present credit crisis could be summarized as the improper policy of successive governments that failed to check the financial institutions and mind gobbling schemes offered by various banks and financial institutions. The major causes could be termed as excessive liquidity, excessive lending, excessive leverage and excessive risk taking by the banks and other financial institutions. The global credit crisis posed a greater threat to UK Economy. It is estimated that almost 20,000 people will be losing their jobs alone in London's Financial Service ...