IB Economics Student Book Sample
IB Economics Student Book Sample
IB Economics Student Book Sample
PL
M
interactive
Economics
SA
SEAN MALEY
JASON WELKER
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Unit
1 Introduction to Economics
1. What is economics?
2. How do economists approach the world?
Unit
2 Microeconomics
3. Demand
4. Elasticities of demand
5. Supply
6. Elasticity of supply
7. Competitive market equilibrium
8. Critique of the maximising behaviour of consumers
and producers
9. Role of government in microeconomics
10. Market failure–externalities, public goods and the
market’s inability to achieve equity
11. Market power–perfect competition vs. monopoly
12. Market power–monopolistic competition and oligopoly
Unit
3 Macroeconomics
13. Measuring economic activity and illustrating its
variations
14. Variations in economic activity–aggregate demand
and aggregate supply
15. Macroeconomic objectives–low unemployment
16. Macroeconomic objectives–low and stable inflation
17. Macroeconomic objectives–economic growth
18. Economics of inequality and poverty
19. Demand management (demand side policies)–
monetary policy
20. Demand management–fiscal policy
21. Supply-side policies
Contents
Unit
4 The global economy
22. Benefits of international trade
23. Types of trade protection
24. Arguments for and against trade control/protection
25. Economic integration
26. Exchange rates
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External assessment
Internal assessment
Answers
Glossary
Index
iv
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unemployment
objectives – low
Macroeconomic
15
15 Macroeconomic objectives – low unemployment
Concepts
The level of employment is a critical indicator of an economy’s overall health.
Therefore, low unemployment is a primary macroeconomic objective of policy
makers the world over. Employment is viewed as a measure of overall economic
well-being because wages from work are most households’ primary source of income,
and national income is a measure of living standards.
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Changes in unemployment can be rapid, and can cause major social disruption as
a result. While some forms of unemployment may be accepted as normal, rising
unemployment levels can threaten the interdependence of the economy’s circular
flow. As fewer people have jobs, spending on goods and services falls, thereby reducing
revenues for firms. Such events inspire governments to stage forms of intervention to
reduce the causes and effects of unemployment.
Learning outcomes
• Explain what is meant by unemployment.
• Define the unemployment rate.
• Explain how the unemployment rate is calculated.
• Calculate the unemployment rate from a set of data.
• Explain the difficulties in measuring unemployment, including hidden
unemployment and unemployment rate disparities by subgroups.
number of unemployed
Unemployment rate (%) = × 100
labour force
According to the World Bank, a country’s labour force is the sum of employed and
unemployed persons aged 15–64 (although the exact age range may vary from nation to
nation). Persons who are neither employed nor seeking employment are not in the labour
force; this includes retired persons, full-time students, those taking care of children or
other family members, and others who are neither working nor seeking work.
2
Examples of people who are part of the labour force include the following.
• A part-time retail sales clerk, who is also going to college, is part of the labour force
because she is employed.
• A full-time nurse is part of the labour force because he is employed.
• A factory worker whose plant closed and who is applying for jobs at other firms is
part of the labour force because she is unemployed.
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• A recent college graduate interviewing at different companies for his first job is part
of the labour force because he is unemployed.
Examples of people who are not part of the labour force include the following.
• A stay-at-home parent is not part of the labour force because he or she is not
employed nor seeking employment.
• A college graduate who volunteers in a community centre is not part of the labour
force because, although she is working, she is not formally employed nor is she
seeking employment.
• A discouraged worker who has been looking for a job for 18 months but has given
up the job search is not part of the labour force because he is no longer seeking
employment.
• An engineer who goes back to school to earn a teaching degree is not part of the
labour force because she is not currently seeking employment.
Figure 15.1 shows average unemployment rates over the years 2018–20 for 17
Figure 15.1 Average
developed and developing countries. National governments employ their own means unemployment rates for
of collecting unemployment data, but the Organisation for Economic Co-operation 17 selected developed and
and Development (OECD) uses the method devised by the ILO. Therefore, the data in developing countries, 2018–20
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15 Macroeconomic objectives – low unemployment
Research and inquiry Figure 15.1 can be compared with confidence despite the fact that the figures reported
For a larger set of data, by each individual nation may vary due to different methods of collection.
search online for data from
the World Bank and find Unemployment rates vary across countries depending on the current macroeconomic
the unemployment rates conditions and institutional factors in each, such as the existence of social safety nets,
and compare them for the the education levels of the workforce and the evolving structures of the economy,
following groups.
among others.
• Home region: find the rates
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= 12.03%
Disparities by group
Subgroups within the broad population may have higher or lower unemployment
rates than the overall national figure.
• Regional disparities: Larger countries tend to have greater variance than smaller
ones. Turkey is among the countries with the largest variance, with a 20-point
difference between regions with the lowest and highest rate.
• Ethnic/racial disparities: Unemployment rates are typically higher among
ethnic minorities, especially those that have experienced formal and informal
discrimination. Countries that identify indigenous populations typically also
report higher unemployment rates among those populations.
4
• Gender variance: The ILO reports that globally approximately 75% of men
participate in the labour force, compared to only 50% of women. Many women,
therefore, may not have work but are not counted in the official unemployment
figures (see below). Officially, the unemployment rate for women is 6.1% while for
men it is only 5.1% (ILO). However, this varies tremendously by country. Algeria
reports that unemployment for women is twice as high as for men, while Saudi
Arabia reports four times the level of unemployment for women as for men.
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• Forced retirement: Workers above the age of 50 may find it difficult to find
employment and retire ‘early’.
• Return to school: Some choose to go back to school for more training rather than
compete in a bad labour market.
• Family childcare: In countries without subsidised childcare, workers may decide
their low wages are not sufficient to cover child care costs and so decide to stay at
home.
Discouraged workers
Especially during recessions, when the number of cyclically unemployed people
grows dramatically, workers may find it difficult to find new jobs. Whatever their
motivations, when discouraged workers stop looking for a job, they leave the labour
force, and are therefore no longer considered unemployed. These people, when
added to the official figures, can raise the ‘true’ level of unemployment by several
percentage points.
5
15 Macroeconomic objectives – low unemployment
unemployment rate.
Exercise
Calculate the missing values in this table of labour market data.
Learning outcomes
• Explain, using a diagram, how the labour market sets the equilibrium wage and
quantity of labour.
• Describe, using examples, the meaning of frictional, structural, seasonal and
cyclical (demand-deficient) unemployment.
• Distinguish between the causes of frictional, structural, seasonal and cyclical
(demand-deficient) unemployment.
• Explain, using a diagram, how a deflationary gap causes cyclical unemployment.
• Explain, using a diagram, that structural unemployment is caused by changes in
the demand for particular labour skills or changes in the geographical location
of industries.
• Explain, using a diagram, how labour market rigidities, such as a minimum
wage, contribute to structural unemployment.
• Explain that the natural rate of unemployment (NRU) is composed of structural
and frictional unemployment.
• Evaluate government policies to reduce the different types of unemployment.
In the market for any particular type of labour, it is households that provide workers to
an industry and firms that demand workers. In Chapter 7 we studied product markets,
in which households are the demanders and firms are the supplier. In labour markets,
which are an example of a factor market, the roles are reversed. The supply curve
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Consider our example, one with which you might relate, of the market for
international school teachers. In the international teacher marketplace the buyers,
representing the demand for labour, are international schools and the sellers,
representing the supply of labour, are households whose family members are willing
and able to teach in international schools. Much like in a product market, there is a
‘price’ for labour, which is called the wage rate, and there is a quantity of labour, which
can be interpreted as the number of workers currently employed or the total number
of hours worked, depending on how you look at it.
The equilibrium wage rate and quantity of labour employed in any particular market is
determined by the demand for and supply of labour at any given time. In Figure 15.2
the demand for labour (DL) represents how many teachers all the international
schools are willing and able to employ at a range of wage rates. At higher wage rates,
the number of teachers demanded is lower, as schools will choose to have larger class
sizes or offer more online classes due to the high cost of employing teachers. However,
at lower wage rates the number of teachers demanded is much greater, and schools
will have much smaller class sizes and opt for more face-to-face classes due to the
comparatively low cost of employing teachers. In other words, there is an inverse
relationship between the wage rate and the quantity of labour demanded.
Labour supply (SL), representing all households who might be willing to enter the
international teaching field, is up-sloping, reflecting the direct relationship between the
wage rate and the quantity of labour supplied. At higher wages more people are willing
to become international teachers, due to the comparatively high income relative to
Wage rate
SL
WRe
Figure 15.2 Market for
international school teachers
DL
Qe Quantity of labour
7
15 Macroeconomic objectives – low unemployment
other professional fields. At lower wage rates, fewer people are willing to teach in
international schools, since other careers will appear more attractive due to the low
wage offered to teachers.
As in all markets, the equilibrium level of employment (Qe) and wage rate (WRe)
are where the demand and supply meet. Later in this chapter we will learn that
unemployment arises due to a disequilibrium in the labour market, or when the wage
rate does adjust efficiently to the level of demand for and supply of a particular type
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The most dramatic example of cyclical unemployment in the modern era is almost
certainly the increase in joblessness that resulted from the decline in economic
activity accompanying the spread of the novel coronavirus, SARS-CoV-2, and the
resulting Covid-19 pandemic of 2020. Most of the decade preceding the onset of the
global pandemic had been characterised by growing economic output and record low
unemployment rates the world over; but within the span of a couple of months, across
countries both rich and poor, the unemployment situation rapidly deteriorated as
economies were shut down and consumers forced to stay at home.
In the two months between February 2020 and April 2020, unemployment in the
United States went from a near historic low of 3.5% to the highest level the country
had seen since unemployment statistics began being measured in the 1950s, at 14.7%
(Figure 15.3). Nearly 20 million Americans lost their jobs in the first two months of
the Covid-19 pandemic: the result not of any shift in the structure of the American
economy nor by the decision of millions of people to quit their jobs in search of another
job, rather because of a massive fall in the total demand for goods and services brought
on by the mandatory stay-at-home orders imposed on the citizens of all 50 states.
A public health crisis aside, cyclical unemployment is normally the result of more
regular fluctuations in an economy’s business cycle. For example, the last global
8
15.0
Unemployment Rate April 2020 - 14.7%
12.5
Percent
10.0
2.5
Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
recession of 2008–9 saw unemployment rise around the world as household wealth
declined amid a collapse in housing prices, triggering a decrease in aggregate
consumption across Europe and the United States. Between 2009 and 2013 the Greek
economy saw unemployment climb from 8% to 27%, largely as a result of a debt crisis
that required the Greek government to massively reduce its public sector spending.
In other cases, cyclical unemployment can result from declines in private sector
investment or in response to falling exports.
In other words, cyclical unemployment arises whenever workers lose their jobs not
because of a lack of skills, a change in the composition of the economy’s output or any
other structural shifts in the economy, rather because of a decline in either household
consumption (as was the case in 2009 and 2020), government spending (Greece between
2009 and 2013), private sector investment, net exports or any combination of these.
In Figure 15.4 aggregate demand has fallen from AD to AD1 due to a contraction in
either consumption, investment, government expenditures or net exports. Falling
demand leads to a decrease in the price level from PLe to PL1 and a decrease in
equilibrium output from Yfe (full employment national income) to Ye (equilibrium
national income, which in this case is below full employment).
The notion that wages tend to hold steady during a recession originated with the
Keynesian explanation of the Great Depression of the 1930s, and has several rationales.
1 Firms choose to fire some workers and retain the rest at full wages to avoid the
morale reducing effect of lower wages.
9
15 Macroeconomic objectives – low unemployment
PL LRAS SRAS
PLe
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AD
AD1
2 Unemployment benefits may reduce the need for workers to automatically take
any lower-paying job after being laid off.
3 Unions can negotiate wages that are higher than average, and may also lock firms
into those wages for several years at a time, regardless of a sudden recession.
Because of this wage stickiness, the equilibrium wage holds for some time, creating a
surplus of workers in the economy, otherwise known as cyclical unemployment.
If wages were perfectly flexible, the economy would be able to maintain output at the
full employment level even as aggregate demand decreased. Recall that the monetarist/
new classical view of aggregate supply assumes that wages are perfectly flexible and
thus the economy is always at its full employment level of output. Figure 15.5 shows
that in a world of perfectly flexible wages and prices, a fall in aggregate demand
would result in no change in output and employment, but a much larger decrease in
PL LRAS
AD
AD1
SRAS1
AD
AD1
the aggregate price level, as workers’ nominal wages are slashed in response to weak
demand, while employment and output remain at the full employment level.
However, in the real world wages are sticky in the short run, therefore a disequilibrium
results in the nation’s economy when aggregate demand decreases: as demand for output
and workers decrease, wages remain stubbornly high, therefore firms must lay workers
off to reduce their costs in the short run. In the long run, cyclical unemployment may be
reduced as wages adjust to the decreased demand across the economy.
Only over time, whatever period it takes for wages to fall, will cyclical unemployment
begin to decrease and the economy settle at a new, lower wage rate, while employment
recovers. Recall from Chapter 14 that in the long run an economy self-adjusts following
a negative demand shock; high cyclical unemployment puts downward pressure
on wages, and as wages fall the quantity of labour demanded increases, causing
employment and output to slowly increase back towards the full employment level.
Figure 15.6 shows the self-adjustment that takes place to reduce cyclical
unemployment in the long run following a demand-deficient recession. In later
chapters, we will explore government interventions that could help either avoid
cyclical unemployment altogether or help reduce it without having to wait for wages
to decrease in the long run, an outcome based more in classical/monetarist economic
theories than in observations of real world economic outcomes.
may replace workers with technology. Firms may move operations ‘off-shore’,
outsourcing production to lower-cost countries. Shifts in technology may make some
jobs, and the skills for producing them, irrelevant.
Structural unemployment arises when demand for a certain type of labour decreases, as
opposed to demand for all labour decreasing (as in the case of cyclical unemployment).
As with cyclical unemployment, however, the stickiness of wages is at the core a cause
of structural unemployment, as we will see below.
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SL
$10
Figure 15.7 Market for
textile workers: structural
unemployment arises when
demand for labour falls
DL2 DL1
Qd Qe Quantity of labour
Unemployment
12
Because textile wages in South Korea cannot fall to the level required to ‘clear the
market’ (that is, firms decide it is once again worth hiring back unemployed workers,
who are now more competitive compared to overseas workers or compared to
technology), textile jobs will leave the country and relocate to lower-wage economies.
Previously employed textile workers in South Korea have become structurally
unemployed. If they wish to work again they must either accept a wage rate
competitive with what workers in China or Morocco earn or learn skills that will allow
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them to gain employment in an industry in which labour is still in demand at the wage
rates expected of workers in South Korea.
Structural unemployment can be resolved by the free market when one of two things
happen: either the equilibrium wage rate in the affected industry must fall to a level
that ‘clears the market’, or the supply of labour in the industry must decrease until the
quantity of labour supplied once again equals the quantity demanded at a wage rate
that workers are willing to accept. For supply to decrease, structurally unemployed
workers in the affected industry must leave that industry and either exit the labour
force or seek employment in another sector.
The emergence of structural unemployment in an economy may at first seem
incredibly undesirable, as those who have been ‘made redundant’ are the unfortunate
victims of economic change. However, structural unemployment is considered a
‘natural’ form of joblessness as it is expected that as a nation grows, its production will
become more capital intensive and it will incorporate into the global economy, causing
both a change in the makeup of its output and the types of skills demanded of its
workers. Generally, however, the existence of structural unemployment accompanies
economic growth and an increasingly diverse and globalised national economy, thus it
is both natural and desired.
Economists view unemployment derived from an effective minimum wage as part of
structural unemployment as well. Recall from Chapter 9 that putting a price floor on
labour can cause unemployment. Figure 15.8 shows a labour market diagram in the
Wage rate
SL
$15
Figure 15.8 Market for
retail employees with a
$11 minimum wage
DL
Q1 Qe Q2 Quantity of labour
Unemployment
13
15 Macroeconomic objectives – low unemployment
market for retail shop workers who before government intervention were earning an
equilibrium wage rate of US$11 per hour. The government has established a minimum
wage at US$15.
The imposition of $15 minimum wage has caused a movement up and to the left
along the demand for labour curve from Qe to Q1, as the quantity demanded for retail
workers has fallen. At the same time, more workers are drawn into the labour market
by the higher wage, shown by a movement upward along the supply of labour curve,
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from Qe to Q2. With retail businesses demanding fewer workers while more people
desire to work in retail, there emerges a disequilibrium in the labour market, resulting
in unemployment of Q2 – Q1.
Frictional unemployment is generally short term (three months or less) and is often
voluntary, meaning the unemployed person has chosen to seek employment in a
different location or industry. The key characteristic of the frictionally unemployed
is that they possess skills that are demanded by the nation’s employers, thus their
14
prospects for employment are generally positive. Another characteristic of frictional
unemployment is that it tends to decrease during recessions, when workers are fearful
of losing their current jobs, and tends to rise during economic expansions when job
prospects are better.
Workers who do seasonal labour (for example, golf course employees, migrant
farmers, ski-lift operators or summer-camp instructors) may be unemployed
between seasons. Seasonal unemployment is also considered a type of voluntary
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unemployment as many such workers choose their jobs for the freedom and other
benefits such employment offers.
Government policies that affect incentives among the labour force may increase or
decrease the level of frictional and seasonal unemployment. The longer unemployment
benefits can be collected, the less the incentive to rush the job search process and
take the first decent job offered. Additionally, if information about employment
opportunities around the country is readily available and systems exist to quickly
match frictionally unemployed workers with employers through job centres or online
employment services, then the duration of frictional unemployment and its prevalence
in the economy may be reduced.
Figure 15.9 shows the unemployment rates in ten US states in early April, 2020,
just one month after the US president declared the Covid-19 pandemic a ‘national
emergency’.
Considering what you have learned about unemployment in this chapter, answer
the following questions:
1 What is likely to account for the large variation in unemployment between the
states with the highest rates and the states with the lowest rates in the early
months of the Covid-19 pandemic?
2 Why might a state like Hawaii, where tourism makes up 21% of the economy,
have experienced the greatest unemployment effects of the coronavirus?
3 Is the high unemployment resulting from the Covid-19 pandemic structural,
frictional, seasonal or cyclical? Explain your answer.
4 This data is from just one month into the coronavirus outbreak in the United
States. What do you think most likely happened to the unemployment rates in
the states hardest hit at this stage versus those least affected in the months that
followed?
15
15 Macroeconomic objectives – low unemployment
18
16
14
Initial claims/labour force (%)
12
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10
0
Hawaii Michigan Rhode Pennsylvania Nevada Connecticut Florida West Colorado South
Island Virginia Dakota
States with the 5 highest ratios States with the 5 lowest ratios
The NRU varies widely from country to country. Its variance depends on several
factors, including factors that influence the levels of both structural and frictional
unemployment:
• low information about job vacancies and available talent
• labour immobility, the instance of qualified workers unable to relocate to available
positions
• mismatch of workers’ training/education and skills needed by employers
• hysteresis, or the fact that unemployed workers become less employable the longer
they are out of work
• labour laws that protect jobs that are no longer needed
• the level of unemployment benefits provided.
As countries try to manage their overall economies, the NRU is used as an important
guideline for the calibration of fiscal and monetary policy. Ceteris paribus, if a country’s
16
unemployment rate exceeds the NRU, some cyclical unemployment is occurring and Theory of knowledge
will require an expansionary response. Conversely, when unemployment drops below Using the concepts of ‘natural
the NRU, the labour market may be considered ‘tight’. In this case, the heated job rate’ of unemployment
market may indicate rising wages and future inflation. Policymakers may then choose and ‘full employment’, how
might the language we
contractionary policies to ‘cool off’ the potential inflation.
use to describe economic
circumstances affect our
perception of individuals in
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Video suggestions: You’ve capital-intensive organised production, can separate a labourer’s work from these
read about it, now you can relationships, and sever them from their traditional social web. China’s shift, over the
review what you’ve just last 40 years, to massive industrialisation, is an example of this on a grand scale.
learned by watching a few
videos by the author!
Simply click here in
What are the economic consequences
your eBook for videos of unemployment?
on ‘Factors that can cause
Downward pressure on wages for the employed
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The individual, social and economic consequences of unemployment are not limited
to those outlined above, but it should be clear that the costs of unemployment are
wide-ranging, thus making low unemployment a worthy and important goal for
macroeconomic policymakers.
18
Practice examination questions
Paper 1 questions
1a. Distinguish, using examples, between the causes of structural,
seasonal and demand deficient unemployment. (10 marks)
2a. Explain the difficulties in measuring unemployment. (10 marks)
3a. Explain, using a diagram, how labour market rigidities such as
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19
Published by Pearson Education Limited, 80 Strand, London, WC2R 0RL. Acknowledgements:
https://www.pearson.com/international-schools Images:
1 Shutterstock: ESB Professional. Shutterstock
Text © Pearson Education Limited 2020
Copy edited by Jeremy Toynbee Text Credits:
Proofread by Michael Hamilton 2 The International Labour Organization: Statement from United
Typeset by SPi Global Nations International Labour Organization; 3 Organisation for
Original illustrations © Pearson Education Limited 2020 Economic Co-operation and Development: Data from Organisation
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Illustrated by © SPi Global for Economic Co-operation and Development (OECD); 5 Organisation
Cover design © Pearson Education Limited 2020 for Economic Co-operation and Development: Data from
The right of Sean Maley and Jason Welker to be identified as the Organisation for Economic Co-operation and Development (OECD);
authors of this work has been asserted by them in accordance with the 7 World Bank Group: Data from World Bank; 11 Federal Reserve
Copyright, Designs and Patents Act 1988. Bank of St. Louis: U.S. Bureau of Labor Statistics, Unemployment Rate
[UNRATE], retrieved from FRED, Federal Reserve Bank of St. Louis;
First published 2020 https://fred.stlouisfed.org/series/UNRATE, August 3, 2020; 19 The
22 21 20 Brookings Institution: Aaronson, Stephanie, and Francisca Alba.
10 9 8 7 6 5 4 3 2 1 “The Unemployment Impacts of COVID-19: Lessons from the Great
Recession.” Brookings, Brookings, 15 Apr. 2020
ISBN 978 1 292 33757 9
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