Macroeconomic Concepts: Demand, Supply, Unemployment, and Inflation

Macroeconomic Fundamentals: Demand & Supply

Economic activity is defined by a set of variables that determine the price level, production, and employment. These variables can be grouped into two categories:

Aggregate Demand

Aggregate demand is the sum of expenditure by consumers, state enterprises, and the external sector. It refers to the total amount that different sectors of the economy are willing to spend during a specific period.

Aggregate Supply

Aggregate supply is the total amount of goods and services that a country's companies are willing to produce and sell in a given period. This amount helps determine the price, considering the cost of productive capacity and market conditions.

Understanding Unemployment Types

Unemployment can be categorized into several types, each with distinct causes:

• Cyclical Unemployment

  This occurs when workers and, in general, the factors of production are underutilized because the overall demand in the economy during certain periods throughout the business cycle is insufficient to employ all available resources.

• Seasonal Unemployment

  This type is caused by changes in labor demand at different times of the year, often due to seasonal industries like agriculture or tourism.

• Frictional Unemployment

  This arises when workers voluntarily leave their jobs to find a better one, or when new entrants to the labor force are searching for their first job. It is a temporary form of unemployment.

• Structural Unemployment

  The computerization and automation of certain activities can lead to many workers remaining unemployed for long periods, as their skills no longer match the available jobs. This is a more persistent form of unemployment.

Impacts of Unemployment

Unemployment has significant economic and social consequences. Among the economic effects, we note:

Economic Effects of Unemployment

• Decline in Real Production

  The existence of unemployment implies a misallocation of resources. When not all available resources are utilized, production falls below the economy's production possibilities frontier.

• Decrease in Aggregate Demand

  The income level of individuals decreases as they become unemployed. This reduction in income generates a subsequent fall in aggregate demand.

• Increase in Public Deficit

  If unemployment increases, the public sector must incur greater expenses (e.g., unemployment benefits), while labor tax revenues are reduced. This combination can significantly increase the public deficit.

Social Effects of Unemployment

• Negative Psychological Effects

  Work is not only a means to earn income for subsistence; it also provides social value. Unemployed individuals may feel undervalued socially. This feeling can even cause severe conditions like depression.

• Discriminatory Effects

  Unemployment does not affect all individuals equally. Discrimination based on sex, age, or ethnicity can exacerbate the problem, making it a particularly serious issue for women and people over 50 years old.

Types of Inflation

Inflation, a general increase in prices, can originate from different sides of the economy:

Demand-Pull Inflation

This type of inflation originates from the demand side of markets as a result of increased aggregate demand, causing an increase in real output and the general price level.

Cost-Push Inflation

When the overall price level changes, movement occurs along the aggregate supply curve. A perturbation to supply, which is any factor that alters the unit cost of businesses at any level of production, shifts the aggregate supply curve upward. This is cost-push inflation, which arises from the supply side of markets as a result of increased costs. In models of supply and aggregate demand, it is represented by an upward shift in the aggregate supply curve.