Real and Nominal Interest Rates

Economists call the interest rate that the bank pays the Nominal interest rate and the increase in your purchasing power the real interest rate.

i = r + p

This shows the relationship between the nominal interest rate and the rate of inflation, where

r is real interest rate,

i is the nominal interest rate and

p (пи) is the rate of inflation, and remember that p is simply the percentage change of the price level P.

The Fisher Equation illuminates the distinction between the real and nominal rate of interest. It shows that the nominal interest can change for two reasons: because the real interest rate changes or because the inflation rate changes. The quantity theory and the Fisher equation together tell us how money growth affects the nominal interest rate. According to the quantity theory, an increase in the rate of money growth of one percent causes a 1% increase in the rate of inflation.

According to the Fisher equation, a 1% increase in the rate of inflation in turn causes a 1% increase in the nominal interest rates.

Here is the exact link between our two familiar equations: The quantity equation in percentage change form and the Fisher equation.

What is the price mechanism?

The adjustment of prices in response to changing market conditions. Some prices will always increase because of the price mechanism

Labor Market

• The nominal market in which workers find paying work, employers find willing workers, and wage rates are determined

• Labor markets may be local or national (even international) in their scope and are made up of smaller, interacting labor markets for different qualifications, skills, and geographical locations.

• They depend on exchange of information between employers and job seekers about wage rates,conditions of employment, level of competition, and job location.

The labour market is an example of a factor market

Supply of labour – those people seeking employment-foglalkoztatás (employees-munkavállaló)

Demand for labour – from employers-munkáltató

How does an employer decide how many people to hire?

*Basic Market Assumptions:

Firms want to maximize profits

Firms use (only) Labor and capital.

The only cost of hiring labor is the hourly wage

Labor and product markets are competitive

The firm is a price taker in both the Labor and Output Markets

* Additional Assumption: Capital is Fixed

We are in the Short-RUN

WAYS to calculate the needed number of employees

*Marginal Analysis -

-(Recall from Principles of Micro) MR=MC where MR – Marginal Revenue and MC – Marginal Cost

*A Stepwise Manner

-Hiring the First worker, second, etc, until MR=MC

*Another Equivalent Method:

Hire as long as MRP >=Wage

Where MRP is the marginal value of additional workers

MRP = P*MPL where P is the output’s price

So What Determines MPL:

Not Personal Characteristics

MPL depends on Capital (K) and Technology

*Diminishing (Ослабить, уменьшить) Marginal Returns (Diminishing Marginal Productivity)

The proportions:

Cost of labor increase, the number of workers decreases

Output increase, the number of workers increases

As Fixed Cost (remains the same regardless of the company’s production output. Owners, directors, managers and supervisors are the common types) Decreases/ Increases the Number of Workers Hired __Remains Unchanged__.

● The Supply of Labour

● The amount of people offering their labour at different wage rates.

– Involves an opportunity cost – work v. leisure

– Wage rate must be sufficient
to overcome the opportunity cost
of leisure

● An inelastic supply of labour – a substantial rise in the wage rate only brings forth a small increase in the amount of people willing and able to do such work.

● The reason may be the number with those particular skills and qualifications, the time it takes to get those skills, geographical immobility etc.

WHAT DETERMINES THE SUPPLY

• Demographic processes (natural increase, or decrease, migration, changes in the age composition etc)

• workforce size (the working population-appropriate mental and physical abilities)

• working population, willingness to work (versus leisure-time, gainful employment versus domestic work, labor versus unemployment benefits, etc..)

• economically active population (employed and unemployed)

SECTORAL SHIFTS IN EMPLOYMENT

primary sector (agricultural) employment has declined as a share of the labor force,

secondary sector (industrial) employment has declined slightly as a share of the labor force, but only in the past few decades, and

tertiary sector (service sector) employment has increased as a share of the labor force.

NOMINAL AND REAL WAGES

Nominal wages are not adjusted for inflation and are said to be expressed in terms of “current HUF.”

Real wages are wages that have been adjusted to take into account the effect of inflation. Real wages are expressed in terms of dollars from a given base year and are said to be expressed in “constant HUF”

• A WORKING DEFINITION OF UNEMPLOYMENT

– People able, available and willing to find work and actively seeking work – but not employed

– The unemployed are included in the labour force

• Employees (Employed) - people who are paid for their work, or who have a job, but sickness, holidays etc..

• Self-employed as well.

• Unemployed - who have no work but they are looking for work and they want to return to work, or they laid off, or they enter to the labor market (fresh graduate)

• Economically inactive population -Retired

unemployment rateThe ratio of the number of people unemployed to the total number of people in the labor force

labor force participation rateThe ratio of the labor force to the total population 16 years old or older.

Types of Unemployment

• Frictional -The portion of unemployment that is due to the normal working of the labor market; used to denote short-run job/skill matching problems.

– Transitional unemployment due to people moving between jobs: Includes people experiencing short spells of unemployment

– Includes new and returning entrants into the labour market

– Imperfect information about available job opportunities can lengthen the period of someone’s job search

• Structural - The portion of unemployment that is due to changes in the structure of the economy that result in a significant loss of jobs in certain industries.

– Arises from the mismatch of skills and job opportunities as the pattern of labour demand in the economy changes

– Occupational immobility of labour

– Often involves long-term unemployment

– Prevalent in regions where industries go into long-term decline

– Good examples include industries such as mining, engineering and textiles