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Economic Models and Unemployment. Production Possibly Frontier (PPF). The PPF model can be used to illustrate changes in unemployment. Any point on the frontier represents full employment

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production possibly frontier ppf
Production Possibly Frontier (PPF)
  • The PPF model can be used to illustrate changes in unemployment

Any point on the frontier represents full employment

A movement from the frontier to a point inside the curve shows underutilisation of resources (workers) and thus represents unemployment

Increase in unemployment

Capital Goods

A

B

Consumer Goods

ppf and unemployment
PPF and unemployment

Decrease in Real Output/Income

As an economy experiences a downturn, real output falls.

As output falls the demand for labour falls, thus increasing unemployment levels.

Illustrated as a movement away from the frontier line.

A

B

ppf and unemployment1
PPF and Unemployment

Decrease in productive capacity

Less resources available to the economy, thus there is a decrease in potential output.

e.g. Emigration (people leaving) NZ

Showing by a shift inwards of the PPF.

ad as model revisited
AD/AS Model Revisited
  • AD/AS model shows the relationship between Price Levels (inflation) and real output.

The full employment line can be used to show the gap between the output that could be produced if we used all the resources (workers etc.) available to us and the output level we are currently producing.

AS

PL*

The gap between Y* and Yf demonstrates the underutilisation of resources (unemployment)

AD

YF

Y*

Unemployment

ad as model and unemployment
AD/AS Model and Unemployment
  • Decrease in AD – represents increased cyclical unemployment called – Demand deficient unemployment

AS

e.g. Household spending falls – they spend less on goods and services.

The demand for goods and services falls .

Shifts the AD curve left – Causes cyclical unemployment to occur

Fall in real output and increase in unemployment

PL*

PL1

AD

AD’

y1

YF

Y*

Unemployment

unemployment

ad as and unemployment
AD/AS and Unemployment
  • Increased cyclical unemployment may be caused by decreases in AS – called supply side unemployment

AS

AS

e.g. The cost of imported raw materials rises.

The rise of costs of production causes the AS curve to shift to the left.

This results in a fall in real output and an increase in unemployment (cyclical)

PL1

PL*

AD

y1

YF

Y*

Unemployment

Unemployment

ad