StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

The Current and Ongoing Recession in the Global Financial Markets and Economies - Essay Example

Cite this document
Summary
The paper "The Current and Ongoing Recession in the Global Financial Markets and Economies" proves that if the aggregate demand of an economy increases then the unemployment rate would eventually decrease. The reverse is also true, that is if an economy is witnessing a deficiency in aggregate demand then unemployment would increase drastically…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER93.8% of users find it useful
The Current and Ongoing Recession in the Global Financial Markets and Economies
Read Text Preview

Extract of sample "The Current and Ongoing Recession in the Global Financial Markets and Economies"

Running Head: Unemployment & Aggregate Demand Unemployment & Aggregate Demand [Institute’s Unemployment & Aggregate Demand Introduction Most of the macroeconomists agree that inflation level and employment level are the prime indicators of the performance of an economy. These variables provide a clear picture of the implementation of policies, and whether they are hitting the bull’s eye or not? Any economy would want the inflation to be as low as possible and would like to achieve a high rate of employment or in other terms the low rate of unemployment (Gilpatrick, pp. 256-278, 1966). There are arguments that both of these are not possible at the same time. For this purpose, the argument presented is that if an economy is witnessing high level of employment, which means that most of its labor force is employed and then if the producers want to increase the production level or the output, they will have to employ the rest of the labor on a higher wage. In this condition, the demand for labor would increase and supply would be deficient. This would lead to an overall increase in the wages of labor. Increase in wages would in turn increase the cost of production and the cost of production has a direct relation with the price charged for the product. In this way, the higher the employment level, the higher are the chances for inflation levels to increase and vice versa. This phenomenon is called the Philips curve, which was presented in the mid 21st century (Baily, pp. 325-381, 1982). However, this paper focuses on the relation between unemployment and Aggregate demand of an economy. The paper tries to prove that both of these enjoy an inverse relationship, which is if the Aggregate demand of an economy increases then the unemployment rate would eventually decrease. The reverse is also true, that is if an economy is witnessing a deficiency in aggregate demand then unemployment would increase drastically. This paper is an attempt to prove the same by comparing it with the current and ongoing recession in the global financial markets and economies. Unemployment It is important to pay attention for a while on the definition of unemployment before we proceed further. Economists seem to agree mostly on the definition of this term and they tend to define it as “The unavailability of work for an individual or a group, who are actively seeking work and are currently a part of the labor force” (Hughes, & Perlman, 1984) (Jackson, & McIver, pp. 354-365, 2007). In addition, employment rate is the percentage of the unemployed from the labor force. Economists also believe that unemployment can be voluntary and involuntary as well. This paper tries to focus on the involuntary type. There are different types of unemployment defined by the experts. Frictional, Cyclical, Structural and Classical are the most important of them (Eatwell, pp. 85-126, 1996). The discussion on these types is reserved for the later parts of the paper since they will help in proving the hypothesis. However, it is essential to mention that according to the statistics of November 2009, United States has currently about 10% of unemployment rate. In addition, United Kingdom is witnessing an unemployment rate of 7.8% according to the data until September 2009. Important to note is that both of these big countries in terms of economy are facing a serious recession. Aggregate Demand With any doubts, John Maynard Keynes deserves admiration and appreciation for bringing a revolution in the world of economics. Despite the facts that it has been more than five decades, that he has left the world but still is remembered amongst all the economists. His greatest achievement was providing the explanation of the great depression of 1930’s at a time when the economists were sitting helplessly and waiting for the “invisible hand” to come into action as described by the classical theory of economics. He provided a logical explanation of the depression and other economic variables and gave the concept of a demand side economy (Keynes, pp. 12-256, 2006). This was the point from where the produced the concept of Aggregate demand and explained what he thought are its determinants. This same Keynesian model is still taught in all universities of the world. According to Keynes and his followers, the Aggregate demand of an economy depends upon the factors of Consumption (C), Investment (I), Government Expenditure(G), and for an economy which is not isolate and is open to the outside world the factor of Net Exports (X) also comes into action. The sum of all these factors makes the aggregate demand for an economy (Keynes, pp. 12-256, 2006). This aggregate demand is also referred as the gross domestic product (GDP) of the economy and the output level as well under certain conditions. Discussion The relation of unemployment and aggregate demand is one of those concepts that were presented by John Maynard Keynes, at time of his presentation of his own macroeconomic model. Keynesian economics argue that there is always some level of unemployment within the economy in contrast with the classical claim that full level of employment can be achieved at the equilibrium point. Interestingly, Keynesian economics without any difficulties agrees with the claim or hypothesis of this (Keynes, pp. 12-256, 2006). For them the graph on which the Aggregate demand and Aggregate Supply intersect is the point from where the Price level is derived on the Y- axis and the Output is on the X-axis. In addition, the output level of an economy is also known as the employment level as well. This whole phenomenon is very evident in the graph presented below. The economy here witnesses 95 percent level of employment and the unemployment level is 5 percent. It is evident for even a nonprofessional to understand the relationship of unemployment and Aggregate demand from this graph. As this negatively sloped, aggregate demand would increase and shift towards the right side of the graph, it would ultimately increase the inflation and decrease the unemployment level in the economy. The reverse is true if the aggregate demand falls and moves towards the left side. In this condition, the employment level would decrease, unemployment would increase but the economy would witness a decrease in the inflation as well. This relationship between unemployment and inflation has been discussed in the initial part of the paper. Now this proves the claim made regarding the connection of aggregate demand and unemployment in graphical terms. Now, we divert our attention towards understanding this same concept in theoretical terms by discussing individually all four components of aggregate demand and their contribution towards enhancing this relationship between aggregate demand and unemployment. (Biz/Ed, 2009) Let us consider the element of consumption first. Personal consumption by individuals and households is the first determining element of the aggregate demand of an economy. As individuals would start consuming more, as they will increase their daily consumption levels, as they will add more and more elements in their shopping basket, as they will spend more on different products: by all this, they increase the demand for various goods consumed by them (Eatwell, pp. 85-126, 1996). Increased demand forces the producers to produce more in order to meet that demand. Increasing the production requires them to increase their resources which the use for production. These resources include machinery, technology, raw materials but above all these it is the labor, which is required and is critical in increasing the production. As the demand for labor increases, more and more people from the labor force who were previously unemployed now start getting jobs and this time on better wages (Hughes, & Perlman, 1984). In short, unemployment decreases as the consumption from households and individuals increases. Now, it is interesting to study the reverse of this process as well since this is what is happening now days around us. We are living in a serious recession period these days and it is very understandable that people tend to reduce their consumption levels in a recessionary period. This has put pressure on firms and industries to reduce their production since there are not enough buyers for the same level of production. This has made the employers to fire some of their labor force since they are not needed any more. Fired employees cannot find job else where as well since this is a phenomenon which is happening in almost all the industries. These people are eager to find jobs but cannot find one and according to the basic definition dictionary, they are unemployed. This is what is happening everywhere today. Because of our reduce consumption levels the unemployment is increasing (McConnell, & Brue, pp. 12-24, 2005). The lesser amount of products in the shopping baskets of people in United Kingdom and the United States explains this drastic increase in their unemployment levels as well. Now we move forward towards the next element and that is investment. It is very easy to understand that how investment is related to employment. In a period of market expansion, more and more investors jump into the market and invest their money. In this way, there are taking the money out of their saving accounts and pockets and they are pumping this money into economy. Increased amount of money available in the economy creates new industries and firms and these firms want labor force. Therefore, this gives a chance for the unemployed in the labor force to change their status from unemployed to employed (Cornwall, pp. 22-94, 1994). The reverse is happening globally. This recession has created a dangerous situation for the investors to pump their money into the market, therefore, they have decided that it is safe for the time being to withdraw all their money from the market and put it in their savings account. Less investment means less employment opportunities and in turn high unemployment (McConnell, & Brue, pp. 12-24, 2005). This is also the reason why governments worldwide start paying a lot of attention towards the investment sector from public and private sector especially during a period of recession because the increased investment has the capability to decrease unemployment, increase the aggregate demand and bring back the economy from recession to an expansion. Government spending has been some thing, which has been very much debatable since it is something, which has to be clearly done by the governments. The basic Keynesian model argues that increased government spending in the right sectors can create new industries and new job opportunities for the unemployed thus decreasing the unemployment (Jackson, & McIver, pp. 354-365, 2007). This is what US president Obama felt and he announced a bail out package of more than 700 billion US dollars to get the economy out of recession by increasing the Aggregate demand and decreasing the unemployment level. Lastly, it is the net exports or the difference between the net exports and net imports of a country, which has the ability to affect the aggregate demand. Increased exports means increased production in industries in the country and increased production will increase the employment level very quickly as discussed in the former parts of this paper (MacLean, & Osberg, pp. 128-153, 1996). In the same way, if the exports decrease they will have a negative or reverse impact. Therefore, now we are in a very healthy position to conclude that recessions bring about a deficiency in the aggregate demand of the economy by decreasing the consumption levels of individuals, by increasing the savings and reducing the consumption, by affecting the government spending and net exports as well. In addition, this deficiency in turn brings the employment levels down to a critical level. Therefore, the roots of unemployment levels are in the aggregate demand of the economy and the factors associated with it. Conclusively, the paper has discussed some of the significant aspects of unemployment that has now become a significant outcome of the deficiency in the aggregate demand globally. It is an expectation that the paper will be beneficial for students, teachers, and professionals in better understanding of the topic. However, further studies related to this topic will facilitate researchers in acquiring a comprehensive and critical understanding that will allow a more concluding statement. References Baily, Martin Neil (1982). Workers, jobs, and inflation. Brookings Institution. Biz/Ed. (2009). Macro-Economics - Aggregate Demand, Inflation, Unemployment and Growth. (Retrieved December 16, 2009). http://www.bized.co.uk/current/mind/2003_4/220903.htm/ Cornwall. John. (1994). Economic breakdown & recovery: theory and policy. M.E. Sharpe. Eatwell, John (1996). Global unemployment: loss of jobs in the 90s. M.E. Sharpe. Gilpatrick, Eleanor G. (1966). Structural unemployment and aggregate demand: a study of employment and unemployment in the United States. Johns Hopkins Press. Hughes, James J., & Perlman, Richard. (1984). the economics of unemployment: a comparative analysis of Britain and the United States. Cambridge University Press. Jackson, John, & McIver, Ron. (2007). Macroeconomics. McGraw-Hill Australia. Keynes, John Maynard (2006). The General Theory of Employment, Interest and Money. Atlantic Publishers & Distributors. MacLean, Brian Kenneth., & Osberg, Lars. (1996). The Unemployment crisis: all for nought? McGill-Queens Press. McConnell, Campbell R., & Brue, Stanley L. (2005). Economics: Principles, problems, and policies. McGraw-Hill Professional. Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(The Current and Ongoing Recession in the Global Financial Markets and Essay, n.d.)
The Current and Ongoing Recession in the Global Financial Markets and Essay. Retrieved from https://studentshare.org/macro-microeconomics/1731410-business-environments
(The Current and Ongoing Recession in the Global Financial Markets and Essay)
The Current and Ongoing Recession in the Global Financial Markets and Essay. https://studentshare.org/macro-microeconomics/1731410-business-environments.
“The Current and Ongoing Recession in the Global Financial Markets and Essay”. https://studentshare.org/macro-microeconomics/1731410-business-environments.
  • Cited: 0 times

CHECK THESE SAMPLES OF The Current and Ongoing Recession in the Global Financial Markets and Economies

A Journal opinion article

China had been the global leader but trend changes in the year 2001 and favorable political, economical, and social factors that currently prevail in the United States could be the reason.... China had been the global leader but trend changes in the year 2001 and favorable political, economical, and social factors that currently prevail in the United States could be the reason.... Most of the European countries still from the euro zone crisis and the ongoing recession, from which United States has just recovered....
3 Pages (750 words) Essay

Macroeconomics

At present, the global economy cannot rely on the emerging countries to improve the world's economy.... This includes the emerging countries ability to maintain a stable growth, and whether the global economy can sustain the growth evident in emerging countries.... It is important to note that while emerging countries can maintain their stable growth, this growth cannot be accommodated by the global economy.... As time progresses, it is likely that the global supply of capital will not meet its demand in regard to capital, and the intended level related to the investment needs to finance various projects....
3 Pages (750 words) Assignment

The Current Citibank Status

Luxembourg's prime minister, Jean-Claude Juncker, who heads a coordinating body of countries that use the euro currency, said European countries had already spent enough to jumpstart their economies.... 3] Michael Shedlock, a registered Investment Adviser for SitkaPacific stated [paraphrased] "Citigroup is essentially telling investors to bet against thema whole slew of financial stocks have been smashed to smithereens.... Citi expands Homeowner Assistance Programinnovative initiative lowers mortgage payment to below-average cost of monthly rental while unemployed homeowners regain their footing. … Headlines found on the Citibank main web site in the midst of a global economic crises (and with a $45 billion government bailout in its own coffers), seem bold, except for the lower mortgage payments on home loans....
6 Pages (1500 words) Essay

Global Business and Multinational Firm Module

While the main benefactors thus far have been western countries that were not under the grip of Communism for e better part of the 21st Century, there are corporations developing in other countries that have begun to aggressively assert themselves in the global economy in an attempt to further their own monetary interests....
6 Pages (1500 words) Essay

Econ Assignment

Another important thing that has to be noted is the credit crunch-the recent downfall in the global economy has been due to the credit tightening activities which are not in sync with the infrastructure development and demand for energy and commodities-cause of the emerging markets success.... The notion of the independence of the global economies has been rapidly rising as a theory as a result of the rise in the other economies while the US faces recession.... If one was to analyze the global scenario, it could be seen that there are two economies which are primarily responsible for either producing or consuming most of the world's products and services....
4 Pages (1000 words) Essay

Comparing Growing and a Mature Product Markets

As economies take shape, the market emerges- growing at first, and when it achieves a higher level of equilibrium, we say that the market is a mature market.... Population grows at a faster rate than in mature markets.... Market penetration and development of upcountry markets requires ongoing infrastructural development, which again, is an essential feature of an emerging or growing market....
6 Pages (1500 words) Essay

Morris Capital: The Complex Interrelationships Of Different Market Segments

Thus, incremental growth in terms of organizational earnings invigorates the financial markets and makes them lucrative.... hellip; financial markets have evolved over the years and in the current economic scenario, they offer diverse prospects of investment.... financial markets are quite unpredictable and hence neither nature nor the course of the activities involved in such markets can be anticipated accurately.... It can be observed that financial markets have started showing signs of recovery which are reflected through an increase in market demand as well as organizational revenues....
8 Pages (2000 words) Essay

The Interest Rating to Develop a Theory of Liquidity Preference

hellip; Minsky has struggled to discover the answer to a frequently asked question that inquires about the reasons for the failure of markets and his response seems to reflect the realities.... The reporter states that Hyman Minsky is a little-known economist who has gained much popularity after the recent financial crises.... Moreover, it has so happened because Minsky has developed a hypothesis identifying the fundamental causes of the universal financial crises....
6 Pages (1500 words) Essay
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us