In the real world, labour markets are rarely perfectly competitive. This is because workers or firms usually have the power to set and influence wages and therefore wages may be set to levels different than anticipated by Marginal Revenue Product (MRP) theory. Imperfections in the labour market cause wages to differ from a competitive equilibrium. …
Transfer earnings are the minimum income a worker needs in order to supply their labour. Economic rent is the extra income a worker receives – above the minimum level they need in order to work. Diagram for Economic Rent and Transfer Earnings Definition of Economic Rent Economic Rent refers to income earned from a factor …
How can a change in the terms of trade affect the balance of payments ? How can a change in the balance of trade affect the terms of payments ? The terms of trade is the index of export prices divided by index of import prices (*100) The current account balance of payments is primarily …
Readers Question: What is the relationship between inflation & economic growth? If economic growth is caused by aggregate demand (AD) increasing faster than productive capacity (LRAS) – if economic growth is above the ‘long-run trend rate‘ then economic growth is likely to cause inflation. If economic growth is caused by increased productivity (LRAS), then the …
Demand deficient unemployment occurs when there is insufficient demand in the economy to maintain full employment. In a recession (a period of negative economic growth) consumers will be buying fewer goods and services. Selling fewer goods, firms sell less and so reduce production. If firms are producing less, this leads to lower demand for workers …
Demand for labour is a derived demand. This means it depends on demand for the product the worker is producing. If there is an increase in demand for visiting coffee shops, it will lead to an increase in demand for baristas (people who make coffee) The demand for labour will also depend on labour productivity, …
The main macroeconomic objectives of the government will include: low inflation, increasing the sustainable rate of economic growth full employment and balance of payments equilibrium. Full employment involves zero or very low unemployment. In practice, there will always be some frictional unemployment as people are looking for new jobs or leaving school. Economists suggest an …
A key factor in determining inflation is people’s expectations of future inflation. If firms and consumers expect future inflation then it can become a self-fulfilling prophecy. If workers expect future inflation, they are more likely to bargain for higher wages to compensate for the increased cost of living. If workers can successfully bargain for higher …