Labor Market Analysis - Essay Example

?Macroeconomics Section A. i. The current rate of growth of China is 8%. Therefore, according to the Rule of 70, the number of years that the realGDP of China to double is approximately equal to 8.75 years (70 divided by the annual percentage growth rate of China or 70/8) (Parkin, 2012, p. 7). ii. The current rate of growth in Brazil is 5%. Therefore, according to the Rule of 70, the number of years that the real GDP of Brazil to double is approximately equal to 14 years (70 divided by the annual percentage growth rate of Brazil or 70/5) (Parkin, 2012, p. 7). B: i. Figure: Labor Market (Parkin, 2012, p. 22) ii. Figure 2: Effect of greater immigration on Real GDP (Parkin, 2012, p. 23) iii. Due to relaxation of immigration laws large number of immigrants enters into the country and started to work as workers in various industries of the country. This increase in the number of immigrants increases the supply of labor in various industries. This increment in the number of labor supplied increases shifts the equilibrium point in the market for labor. At the existing equilibrium real wage rate (R1), there occurs excess supply for labour which causes the real wage rate to fall in the next period. The new equilibrium is achieved with the increased level of labor employment and lower level of real wage rate in the labor market. At the new equilibrium the amount of labor employed increases from L1­ from L2­ and the real wage rate falls from R1 to R2. These facts are evident from Figure 1. Again this increment in the employment of labor, given the production technologies and equipments, increases the total amounts of output produced in each industries and hence, given the number of total population in the country the real GDP of the country rises up. With the help of relaxation of the immigration laws the absolute number of workers available to the sector of production of goods and services in the country rises up. Since, the production function assumes diminishing returns to each worker, therefore the increase in the number of workers employed in the production process the Real GDP rises up, but the Real GDP per hour of labor falls. These facts are evident from Figure 2 (Parkin, 2012, pp. 22-24). C. i. Now consider the situation that all at once the technology of the internet and cell phones are introduced to a developing country. These technological advancements help producers of various goods and services to use available production techniques more efficiently and the productivity of each worker increases. Hence, the production function shifts up with the result that after the introduction of better and advanced techniques of production each worker produces higher level of output with the given levels of factors of production. With the same amount of labor employed (L) the output level rises up. These facts are clear from Figure 3 (Parkin, 2012, pp. 24-25). Figure 3: Technological change and shifts in Production Function (Parkin, 2012, pp. 35-36) ii. If the total amount of labor force employed in the process of production of goods and service remain constant in the economy, then in the face of technological advancement the efficiency of production of each of the worker will increase. This is because each worker is now given a better technology to work with which will raise the amount of goods and services produced by each worker per hour. Hence, in the production sector of the economy greater amounts of goods and services will be produced at each point of time, in comparison to the previous period with no technological advancement. Hence, the volume of real GDP will rise up in the economy. Also given the total number of population in the economy, the volume of real GDP per person will rise up too (Parkin, 2012, pp. 35-36). iii. After the introduction of new technology in the process of production of various goods and services the real GDP and the real GDP per person rises up. Also the productivity of each worker or laborer rises up. This increase in the productivity plays the crucial role in the process of increasing the amounts of both real GDP as well as real GDP per person in the economy. This increase in the productivity implies that given the new set of techniques of production each worker now produces greater amount of goods and services at each point of time. In effect, after the introduction of technological progress in the production process the hourly production capacity of each worker rises up (Parkin, 2012, pp. 35-37). D. i. According to the Neoclassical Growth Theory, the most impact of savings is to raise the level of production of goods and services in the economy and thus to raise the level of income of the economy. Increase in the volume of savings help economies to gather greater amounts of investments which raise the amount of volume of capital base in the economy. This increase in the capital base further raises the amount of output produced by each worker at each point of time (through effective investments in technological progress), and also increases the total amount of output produced in the economy (the real GDP) (Parkin, 2012, pp. 40-45). ii. This impact of savings is related to the tradeoff between current consumption and the future consumption. Greater level of savings at the current period might reduce the level of demand for goods and services and the amount of production of these goods and services at the current period. This is the most important tradeoff (Mankiw, 2012, pp. 145-146). E. In the New Growth Theory, the role of the profit is that profit needs to be used by production houses as the reinvestment in the technological progress or in the process of expansion of the production house and thus the expansion of volume of production of various goods and services (Mankiw, 2012, pp. 148-149). Section 2: a): Figure 4: Government deficit (Mankiw, 2012, pp. 658-659) In case of government deficit the spending of the government remains higher compared to the income of government. Hence, the deficit of government funds and assets occurs (Mankiw, 2012, pp. 658-659). b) Real interest rate puts important role in the above deficit structure. A reduction in the real interest rate encourages investors to take greater amounts of loans and thus increases the volume of production of goods and services and raises the tax income of government and thus reduces the volume of government deficit (Mankiw, 2012, pp. 658-659). c) “Crowding Out” is explained as the reduction in output which is caused by the increase in the real rate of interest which causes the demand for loans to fall and thus the amount of investment to fall (Mankiw, 2012, pp. 450-452). Section 3: a) Physical capital is used directly in the process of production of goods and services and this capital consists of machines and equipments and buildings, vehicles etc. This capital is already-manufactured asset. On the contrary, financial capital is the amount of money which is used by the producer to buy the physical capital (Parkin, 2012, pp. 91-92). b) A fall in the real interest rate will cause an increase in the Quantity Demanded of Loanable Funds and a decrease in the Quantity Supplied of Loanable Funds. The fall in the interest rate will reduce the cost of loans and hence, demanders will demand more loans. On the other hand the fall in the interest rate will reduce the income from providing loans and hence, the supply of loans will fall (Parkin, 2012, pp. 59-60). c) If the consumers start to save more, then the amount of loanable funds will rise up in the economy, because the amount of asset in the economy will rise up due to greater amount of savings (Parkin, 2012, pp. 59-60). d) Figure 5: Loanable funds market (Parkin, 2012, pp. 51-52) In the market for loanable funds greater amount of savings implies greater amount of supply of funds which lowers the rate of interest from rt1 to rt2 and thus raises the equilibrium amount of loanable fund from LS1 to LS2 (Parkin, 2012, pp. 51-53). e) Due to greater amount of savings the supply of loanable funds rises up and given the demand for loanable funds the real interest rate will fall to attract greater amount of people to take greater amounts of loans (Parkin, 2012, pp. 51-53). Sections 4: a) Classical Growth Theory is Malthusian in nature. The classical theory is closely related to Thomas Malthus’s theory of economic growth. Like the Classical Growth Theory the Malthusian Growth Theory also suggests that if the rate of growth of population outstrips the rate of growth of production, then economy returns back to the subsistence level of production and consumption. This theory was given by Thomas Malthus in 1798 (Parkin, 2012, p. 46). b) In the process of economic growth of any country there lie two main factors which play the most important role in the process of economic growth. These are: population growth which controls all per capital variables and growth of capital accumulation which leads to technological changes and changes in the labor productivity (Parkin, 2012, p. 47). c) The rate of accumulation of capital is very important factor in the process of economic growth for any economy. The article, “To Prevent Bubbles, Restrain the Fed Obama would be a fool to trust his economy to the discretion of central bankers” published in Wall Street Journal talks of the way Capital accumulation helps in the production process to augment the amount of output produced at the present and also in the future production processes. Greater amount of accumulation of capital is required to increase the productivity of each worker. Accumulation of capital helps workers not only to increase the level of production, but also helps them to augment the quality of goods and services produced by them. Again greater amount of accumulation of capital is also dependent on the volume of savings in the economy. Greater amounts of savings helps producers to take greater amounts of loans from banks and other financial intermediaries and thus to increase the amount of investment made in the process of accumulation of capital. This again helps producers to spend greater amount of technological advancements to initiate. This technological advancement is regarded as the most important form of accumulation of capital. This technological improvement causes the per-worker productivity to rise up and thus the volume of output in the economy to rise. These increases in the per worker productivity and also in the aggregate increase in the volume of GDP in the economy increases the level of nominal as well as the level of real income of the economy to rise up (assuming that the level of prices of goods and services are constant over the time phase). These increments in the level of output and thus income raise the amount of economic activities in the economy, such as trade with other countries (both exports and imports of various goods and services). Hence, the amount of output produced in the country and the amount of income received by each and every citizen of the rises up. These increments further causes producers to get encouraged in implementing further accumulation of capital and thus the level of economic activities and income rises up by even greater amount. All these processes eventually lead to greater economic progress and growth of the concerned economy. The economy starts to enjoy greater growth of economic activities like greater absolute production of various goods and services and greater per capita production. Eventually the rate of savings of citizens of the country raises up which causes the economy to raise the level of accumulation of capital by even faster rate. Hence, the economy starts to emerge as developed country (O'DRISCOLL, 2008, p. 1). References: 1. Mankiw, N. G. (2012), Macroeconomics, USA: McGraw-Hill 2. O'DRISCOLL JR., G. P. (2008), To Prevent Bubbles, Restrain the Fed Obama would be a fool to trust his economy to the discretion of central bankers, Wall Street Journal, retrieved on February 29, 2012 from http://online.wsj.com/article/SB122688652214032407.html 3. Parkin, M. (2012), Chapter 23, Macroeconomics, USA: Addison Wesley Publishers Read More