Full employment of labor

In principle, full employment is achieved when the economy is at the production possibility frontier.

Two types of unemployment:

  • Structural unemployment: happens when an industry is in decline
  • Frictional unemployment: concerns those who seek employment after a short-term job

Price stability

  • There is price stability when average prices remain constant
  • CPI, stands for Consumer Price Index
  • Inflation rate: percentage increase in average prices in the economy within a year

$$\Delta_{\%}=\frac{\text { Ending cost }-\text { Starting cost }}{\text { Starting cost }} \times 100$$

  • Be careful: Inflation only occurs if average price levels rise. Inflation is not about the rise in price of a single good.
  • Inflation weakens the market’s capacity to allocate resources. It can lead to confusion that devastate markets in the event of hyperinflation.
  • Governments benefit from inflation:
    • When they borrow
    • Fiscal drag: income tax revenues rise with inflation and stagnant tax rates

Sustainable economy growth

Fisher equation:

$$i \approx r+\pi$$

where:
$i$ is the nominal interest rate $r$ is the real interest rate
$\pi$ is the inflation rate

Balance of payments equilibrium

  • If exports > imports $\Rightarrow$ balance of payments surplus (trade surplus)
  • If exports < imports $\Leftarrow$ balance of payments deficit (trade deficit)

The distribution of income

  • The Lorenz curve

  • The Gini coefficient

$$\rm G=\frac{\text { area } A}{\operatorname{area}(A+B)}$$

  • $\rm G$ measures the inequality between values of a frequency distribution, mostly income levels. Gini coefficient is a measure of inequality of income or wealth within a country.
  • $\rm G$ is included between $0$ and $1$ and is expressed in percent.
  • Interpretation: the inequality is all the stronger as the Gini coefficient is high (close to $1$).