ECONOMIC POLICY

Essay on economic policy

Economic Policy

Macroeconomic Theories: Keynes vs. the classics Is unemployment due to labour market institutions or lack of effective demand

Presenting and contrasting the Keynesian view and the NAIRU view on unemployment.

Introduction

As the world has developed into a booming era of dynamically progressing urbanization and modernization over the past few decades, we see a periodically growing trend, the trend is in the positive and as well as in the negative aspect. Previously the countries that were lacking behind, wrapped around in their own civil and internal issues such as dictatorship, lack of freedom and below average living conditions which lead to serious diseases which engulfed the population leaving them forlorn and desolute have now begun to solve these issues and step up to higher statures in terms of bettering their countries. A perfect example would be China. A third world country a few decades ago but now a radioactive market of majority of the products manufactured in the world. The way the world has seen china capture the market and rule on it has been unbelievable.

However these victories do not come without a price. The price this era of rapidly growing modernizations and discoveries is paying is the daunting and unappealing price of unemployment. The newspapers, in media, the television and any form of mass communication is blaring the drum roll of unemployment that has plagued this era. Unemployment is been the biggest hurdle and setback of all times right now. There are a number of theories that provide a fair view as to the causes and the setbacks that have to be faced and what the population undergoes when unemployment strikes. We shall discuss these theories and relate them to our present situations. In this paper, we try to focus on this particular question, is unemployment due to labour market institutions or lack of effective demand? The paper presenting and contrasting the Keynesian view and the NAIRU view on unemployment.

NAIRU UNEMPLOYMENT THEORY: Explaining NAIRU (Unemployment theory)

NAIRU stands for the Non Accelerating Inflation Rate of Unemployment this deals with the Keynesian economic background theory; this theory aims to find reasons for unemployment in places where the inflation is extremely stable. It is somewhat associated to the NRU (Natural Rate of Unemployment), a classical theory, however it not the same at all. 

When this level of unemployment is achieved it is determined and deals with the reasons for inflation. While understanding and devising the NAIRU theory we assume that there is an imperfect slightly off the table deviations in the labour market.  Meaning some workers have collective bargaining power (e.g. In trade unions) and employers have monopsony power as they are the ones purchasing the labour (Terry, 2011, 23).

If the NAIRU is at a higher equilibrium than the actual unemployment then we see that the inflationary predictions tend to increase with the outlook that more inflation is to follow and actual inflation grows exponentially this is looked at over a period of few years. However if the NAIRU is lower than the prevailing unemployment then we notice ...