Macroeconomic Problems and Policies

Unemployment

$\text{Unemployment rate} = \frac{\text{number of unemployed}}{\text{labour force}} \times 100\%$

The labour force = employed + unemployed. People not working and not looking for work (full-time students, retirees, homemakers) are not in the labour force.

Underemployment rate = the number of underemployed (working involuntarily fewer hours) as a percentage of the labour force.

Type	Cause	Example
Frictional	Time spent searching between jobs	A graduate looking for a first job
Structural	Mismatch between workers' skills and the jobs available after the economy's structure changes	A bank teller replaced by online banking
Cyclical (demand-deficient)	Insufficient aggregate demand in a recession	Retail staff laid off as spending falls

Inflation and deflation

Inflation is a continuous rise in the general price level; deflation is a continuous fall. In Hong Kong the general price level is usually measured by the Composite Consumer Price Index (CCPI).

$\text{Inflation rate} = \frac{\text{CPI}_{t} - \text{CPI}_{t-1}}{\text{CPI}_{t-1}} \times 100\%$

Unexpected inflation redistributes wealth from lenders to borrowers and from people on fixed incomes.

The business cycle

Real GDP fluctuates around its long-term trend through expansion, peak, contraction (recession) and trough.

Taxation

• Direct tax: levied on income or profit; the burden cannot be shifted (e.g. salaries tax, profits tax).
• Indirect tax: levied on goods and services; the burden can be shifted (e.g. duty on tobacco).
• Progressive tax: the average tax rate rises as income rises (e.g. Hong Kong's salaries tax).
• Proportional tax: the average tax rate is constant.
• Regressive tax: the average tax rate falls as income rises.

Principles of a good tax include equity, certainty, convenience and economy.

Fiscal policy

Changing government expenditure and taxation to influence aggregate demand.

	Recession	Overheating
Policy	Expansionary: raise $G$, cut taxes	Contractionary: cut $G$, raise taxes
Effect on AD	↑	↓
Budget	towards a deficit	towards a surplus

Monetary policy in Hong Kong

Under the Linked Exchange Rate System, Hong Kong cannot run an independent monetary policy: Hong Kong interest rates must follow US interest rates, otherwise capital flows would push the exchange rate away from the link. So Hong Kong relies mainly on fiscal policy for stabilisation.