Econ 2.4 Summary

Economics 2.4 Internal

Frannie Aquino

A recession is a period of temporary economic decline during which trade and industrial activity are reduced. In 2008-2009, New Zealand was in recession. This can be seen with the Department of Labor figures, where the percentage change in GDP was at

-1.25%, which means that output was falling. When in recession, unemployment increases because household incomes, business profits and GDP decrease, so unemployment is increased because of the global recession. Since household income decreases, their spending decreases, which means firms will earn less profit. Budget cuts will then need to be made so people are made redundant as less workers are needed to produce less. Making people redundant is a big way of cutting costs, so unemployment increases because people lose their jobs. This worsens the recession, as household spending will decrease even more because of people being made redundant, so firms will be receiving less

profit and will have to get rid of more employees, and unemployment will increase even more. This can be seen on the business cycle with a drop, because real GDP is going down as output decreases, so unemployment increases.
On the labor market graph, a decrease in demand is shown with a shift to the left from D to D1, since the demand for workers decreases because businesses are receiving less.
Cyclical unemployment relates to the business cycle and the trends in growth and production that occur within it. Structural unemployment is due to an excess in quantity of labor supplied over quantity of labor demanded. People’s skills no longer match the demand. This is also known as technological unemployment, which is when people are unemployed due to technology. Frictional unemployment results from temporary transitioning between jobs, careers or location. Therefore, unemployment that results from recession is cyclical unemployment because when the business cycle is low, GDP decreases as there is less that is being produced, which means unemployment increases.
GDP, which stands for Gross Domestic Product, is the monetary value of the goods and services that were produced within the country. When GDP decreases, unemployment figures will be high, because unemployment due to the recession means what is being produced is decreased, therefore GDP will decrease. In 2008-2009, New Zealand’s real
GDP decreased by 1.8%, which means unemployment rates increased. This is because the higher the GDP is, the lower the unemployment rate, but when GDP is low, the unemployment increases.
Households are significantly affected by the increase in unemployment.

The demand for workers is decreasing because fewer workers are needed to produce less which decreases the amount of available jobs. Since less is going to be produced, employees make budget cuts and let off the workers who are no longer needed. This worsens the economy because as household income decreases, they won’t have as much money to spend so household spending decreases resulting in firms receiving less. They will no longer be able to afford luxury goods so will only buy the necessities. Government benefit increases as they help people without enough money to survive The decrease in demand for workers can be seen on the labor market graph with a shift of demand to the left from D to D1, because businesses are receiving less so will be producing less and will no longer need as many workers, so demand for workers decreases. Voluntary unemployment also increases because people are not willing to work at the lower equilibrium wage

rate.
Firms are also greatly affected by this with a decrease in their revenue. A decrease in
Households’ disposable income will mean they won’t be spending as much, so firms will not receive as much revenue as they used to. Cuts will then be made to costs of production and they will lessen the amount being produced because it is not being consumed so will not be profitable. This may cause some firms to go under, which will only increase unemployment even more and worsen recession. With less being produced, the firm’s spare capacity will increase. A decrease in the demand of workers is shown on the labor market graph with a shift to the left from D to D1 because the business is receiving less revenue so will produce less and will need fewer people for production. Voluntary unemployment then increases.
The Production Possibility Frontier (PPF) is a curve that shows the maximum output possibilities of two or more goods given fixed resources. Because of the recession, households do not have as much disposable income, so the demand for goods have decreased. The PPF shows unemployment at Point C which represents labor that is not being used efficiently. Firms are producing at Point C because that is what meets the quantity demanded, but this is below the possibility that could be produced. This shows that Labor is a resource that is being underutilised. Points
A and B represent the points at which production for the goods is most efficient, and if we were producing at those points there would be no unemployment as resources, ie Labor, is being utilised efficiently.
Derived demand is the demand for a good or service that results from the demand for another. Demand for labor is derived from the demand of a good or service. During recession or heavy unemployment, the demand for hospitality goods will decrease as eating out is a luxury that people cannot afford when their income has decreased. So demand for hospitality workers will decrease as not as many of them will be needed because less is needed to be produced. This will cause the demand curve to shift to the left from D to D1 on the labor market, because they will need fewer workers at each and every price. Voluntary unemployment is increased. On the other hand, the demand for education workers will remain fairly constant as education is a necessity so will hardly be affected. If anything, an increase in the demand for education might occur as some of the people who were let off might want to study or retrain, so the demand for workers will increase causing the demand curve to shift to the right from D to D1 as more education workers are demanded at each and every price.