Feb 03 2009

What will become of the Chinese worker?

FT.com / China / Economy & Trade – China’s 20m unemployed raise risk of unrest

The days of full-employment in China appear to be over. For decades under communism, the unemployment rate in China stood at an official level of 0%. Of course, being guaranteed work by a state-owned farm or steel factory didn’t exactly mean that all adult Chinese were “working”, rather that they were “employed”. The “iron rice bowl” of communism disappeared in the decades following Mao’s death during the period of “reform and opening” begun under Deng Xiaoping in 1979.

Upon its opening to the world markets, China embarked on three decades of transition from command to market economic principles, characterized by near double digit growth. The demand for workers in its export sector, centered mostly in the Eastern cities from Shenzhen in the south to Shanghai and Beijing in the north, led to the largest rural to urban migration in human history, as nearly 300 million Chinese left the countryside to seek employment in the country’s massive export sector.

Today, the very engine of China’s growth is sputtering to a halt. The demand for Chinese exports is falling as unemployment rises and incomes fall among its trading partners in Asia and the West. Subsequently, the flow of labor from the countryside to the city has reversed, and for the first time in its long history, China is experiencing urban to rural migration:

More than 20m rural migrant workers in China have lost their jobs and returned home as a result of the global economic crisis according to government figures, raising the spectre of widespread unrest in the authoritarian country.

By the start of the Chinese New Year Spring Festival on 25 January, 15.3 per cent of China’s 130m migrant workers had lost their jobs and returned from manufacturing centres in the south and east of the country to their home villages or towns, according to Chen Xiwen, Director of the Office of Central Rural Work Leading Group, who was quoting a survey from the Ministry of Agriculture.

What does the new demographic trend mean for the world’s most populous nation? Bad news, most likely. The hope of work in the city dwindles with demand for Chinese products, but the agricultural sector, which is the main source of employment in the countryside, shows little promise of employment for the millions returning home.

China’s farming industry has become less, not more, labor intensive over the decades since “reform and opening”. The acquisition of capital has supplanted the need for human labor in rural farming, which is one of the “push factors” that led to the massive internal migrations to cities in the first place. The “pull factor” leading the masses to the coastal metropolises, of course, was employment in a factory producing goods to be exported to foreign markets.

Today China’s workers find themselves in the worst possible situation. There is now a “push factor” of 15-20% unemployment, combined with the high cost of living and the struggle of living as an outside in a big city creating an incentive for Chinese workers to return to their familial homes in the countryside. But once they’ve returned home, they find the same lack of opportunity that caused them to leave in the first place. Urban unemployment may shrink as a result of the reverse migration of workers, but rural unemployment will rise.

For the first time in decades, China is faced with a problem that only a year ago (when growth reached 11%!) most would have thought it unlikely to ever face: catastrophic unemployment. Economic theory would suggest, therefore, that China is facing a situation where falling demand for its output has led to rising unemployment due to the downwardly inflexible nature of workers’ wages. According to the Keynesian AD/AS model above, if demand for Chinese output is not restored on its own (which seems unlikely as the West enters deep recession), then the government must take an active approach to stimulating demand through expansionary fiscal and monetary policies.

Keynesian theory, formulated during the Great Depression of the 1930’s, says that in times of recession, spending in the economy is unlikely to increase on its own due to the huge increases in unemployment and corresponding lack in consumer and investor confidence. An active role of government, therefore, is needed to supplant the fall in private spending, and create new income, spending, and economic growth.

In contrast to this “demand-side” theory of macroeconomics, the neo-classical economist would argue that China’s government would do best by letting the economy “self-correct” in times of economic slowdowns. The graph below shows that as demand for China’s output falls in the short-run, unemployment will rise and the price level will fall as firms find it hard to sell their output. Because millions are out of work, and because prices are lower, labor will be willing to accept lower wages, encouraging firms to increase their employment of labor, shifting aggregate supply outward and ultimately restoring full-employment at a new, lower price level than before the downturn began. This classical laissez faire theory of “self-correction” has by most account been proven FALSE, as most major recessions, most notably the Great Depression itself, were ended only after massive intervention by the national government.

The most promising solution to the looming social and economic nightmare it faces is for the Chinese government to push forward massive fiscal stimulus plans aimed at putting the tens of millions recently jobless back to work. This may sound like a return to communism at first, but government money can be spent to create jobs in private enterprise, producing goods, services, and infrastructure that leads to real long-run economic growth fueled by domestic, not foreign, demand for Chinese output.

For too long China has depended on demand from the rest of the world to grow its economy. Faced with the largest economic crisis of the modern era, the Chinese Communist Party should take it upon itself to reduce the nation’s dependency on foreign demand, stimulate growth through new public spending on infrastructure, education, health care and social security for the hundreds of millions of Chinese who are left to fend for themselves once they’ve reached retirement age. Meaningful fiscal stimulus aimed at improving the lives of the common citizen, of whom so many have been adversely affected by China’s over-dependence on export-oriented growth, will may be the best response to the most dire social and economic turmoil the country has faced since the end of the Mao era over 30 years ago.

Discussion questions:

  1. What is China’s most worrying macroeconomic problem currently? Inflation? Recession? Unemployment? Deflation? Trade imbalance? Income distribution? Which of these does falling demand for China’s exports affect most?
  2. What are the social and economic costs of rising unemployment and why is it so important for a government to combat it?
  3. Discuss the differences in the Keynesian and the Classical models in their explanation of what will happen to unemployment after a fall in Aggregate Demand.

About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

271 responses so far

271 Responses to “What will become of the Chinese worker?”

  1. rkangon 16 Apr 2013 at 4:58 am

    #cameron7
    I forgot to mention that China will be suffering a drop in exports due to their very high unemployment rate. And because China receives most of its income through exports to various countries like America, it is a huge detriment to their economy. I think the chinese government should look to intervene and raise the unemployment rates. It may be very costly during the short run but during the long run, it may be all worth it. You have done a good job of explaining how unemployment might be one of the largest macroeconomic problems.

  2. jshinon 16 Apr 2013 at 5:32 am

    What is China’s most worrying macroeconomic problem currently? Inflation? Recession? Unemployment? Deflation? Trade imbalance? Income distribution? Which of these does falling demand for China’s exports affect most?
    • I think that China’s most worrying macroeconomic problem is unemployment. China has a population of 1,344,130,000. If 15-20% of these people don’t have jobs, which means 201,619,500-268,826,000 people in China are unemployed. That is almost the amount of people living in the United States. If there are less people being employed, there is less income being earned and that will lead to a lower nation GDP.
    What are the social and economic costs of rising unemployment and why is it so important for a government to combat it?
    • The economic cost for rising unemployment would be the decrease in national income and the nation GDP will drop. The social cost of employment would be that many families would not have a steady income and they may not be able to provide for their family. Also, unemployment may lead to desperate acts such as stealing so crime rates will shoot up and there will be increased gang activity.
    Discuss the differences in the Keynesian and the Classical models in their explanation of what will happen to unemployment after a fall in Aggregate Demand.
    • The Keynesian Model says that government intervention is necessary in order for an economy to stabilize and recover. However, the Classical model says that the economy will recover by itself if you give it some time. It says that government intervention is not necessary to recover an economy.

  3. jshinon 16 Apr 2013 at 5:36 am

    @tlee also a social cost would be a rise in crime rate and gang activity. People will become more desperate and resort to stealing and such to provide for themselves. Also the government will have to spend more money on unemployment benefits.

  4. ABarrowon 16 Apr 2013 at 6:51 am

    [When dealing with China I speak only in hypotheticals, because after all…it’s China]

    Unemployment is obviously presented as the source of China’s most worrying macro-economic problem, as high unemployment unquestionably accompanies a waste of scarce resources (as the economy is operating within its production capacity) but alas, if the leaders of the PRC choose to stimulate the Chinese economy (Opa’ American style) to boost consumption, then this may have adverse effects on inflation (in the case that an intelligent mixture of monetary, fiscal and supply-side policies is not used) as the Chinese economy will likely be less competitive and destabilizing. This economic plummet will undoubtedly make China’s citizens (as living standards being to drastically fall) and firm’s (as investment dwindles) very unhappy, so unhappy that the unthinkable may happen, Tunisia inspired Chinese spring.

    As for part two of the question, I think the statement “The demand for Chinese exports is falling as unemployment rises and incomes fall among its trading partners in Asia and the West.” takes care of it.

    Some social costs of rising unemployment:
    – Economic desperation causing a rise in crime waves
    – Fall in living standards
    – Employee moral may suffer (job security and wages)
    On the bright side, the high pool of unemployed workers allows for a new, cheaper workforce…

    Some economic costs of rising unemployment:
    – Loss of national output
    – Loss of tax revenue
    – Increase in government expenditure (transfer payments)
    – Loss of profits (firms)

    Why is it important for a government to combat rising unemployment:
    In managing a country’s economy and remaining in power, a key aim of a government is to maintain high levels of employment. During times of recession, incomes fall (unless they are demand sticky) and the number of those unemployed and seeking government benefits increases. This causes a country’s GDP to contract due to a number of factors such as national output diminishing and the distribution of income to worsen that will likely make the country’s citizens very angry and in the mood for a change in leadership (especially in this day-and-age of revolution), however the true impact of unemployment on a government will depend on its rate and its duration.

    Ah yes, what discussion on unemployment would be complete without a back-and-forth between the opposing philosophical viewpoints of John Maynard Keynes and F. A. Hayak…I could write a whole rap on this subject…but for now, let’s keep it simple and to the point:

    Keynesians argue that the economy could settle at any equilibrium – even with high levels of unemployment, and still remain stable. Therefor after a fall in aggregate demand, the Keynesian model argues that the economy will not be able to recover without direct government stimulation in the form of fiscal, monetary and/or supply-side policies. Classical economists argue the economy will only properly recover by remaining laissez-faire, with little to no government intervention at all, therefor if there is unemployment in an economy, due to a fall in aggregate demand, then wages (being flexible to increasing or decreasing) will eventually fall, as lower wages is better than no wages at all, to restore full employment.

  5. ABarrowon 16 Apr 2013 at 6:59 am

    Dear Alee,

    Four words: circular argument and globalization

    “China is too dependent on the economies of its trading partners. The article states that China is now “faced with the largest economic crisis of the modern era” only because its exports have fallen.” Is a circular argument (logical fallacy) and in terms of globalization, China is irresolutely not too dependent on the economies of its trading. International trade has allowed national economies to grow at unprecedented height (America and the 1st and 2nd WWs). China’s economy, and all other nation’s economies, will likely only become more inter-connected as time goes by…

    Tally ho,

    Amadou L. Barrow

  6. DBharwanion 16 Apr 2013 at 9:50 am

    1. What is China’s most worrying macroeconomic problem currently? Inflation? Recession? Unemployment? Deflation? Trade imbalance? Income distribution? Which of these does falling demand for China’s exports affect most?
    The decrease in the foreign demand has caused a decrease in the Aggregate Demand. This decrease leads to a reduction in China’s production rate and therefore increases the unemployment rate.
    2. What are the social and economic costs of rising unemployment and why is it so important for a government to combat it?
    When unemployment increases, the demand for most products decrease. Most individuals reduce purchasing certain products because it becomes unaffordable. This causes a decrease in the aggregate demand.
    3. Discuss the differences in the Keynesian and the Classical models in their explanation of what will happen to unemployment after a fall in Aggregate Demand.
    The Keynesian theory states that the government intervention is necessary. If there is a decrease in the aggregate demand this will cause an increase in the unemployment and will result in an unstable economy.

  7. Malen Kon 16 Apr 2013 at 4:06 pm

    • What is China’s most worrying macroeconomic problem currently? Inflation? Recession? Unemployment? Deflation? Trade imbalance? Income distribution? Which of these does falling demand for China’s exports affect most?

    China’s most worrying macroeconomic problem currently is “catastrophic unemployment”. The demand for Chinese exports is decreasing as unemployment rises and incomes fall among its trading partners in Asia and the West. The opening of the world markets causes the demand for workers in China’s export sector to rise, resulting in almost 300 million Chinese migrating from rural to urban to find employment in the country’s huge export sector. Due to the global economic crisis, about 15.3% of China’s 130 million migrant workers were unemployed and has returned from urban manufacturing centers to the their home villages or towns. There is approximately 15-20% of unemployment in China, with high cost of living and the difficulties of living as an outsider in the big city causing Chinese workers to return to their homes in the countryside. The falling demand for China’s output has led to rising unemployment due to the downwardly inflexible nature of workers’ wages.

    • What are the social and economic costs of rising unemployment and why is it so important for a government to combat it?

    The social costs of rising unemployment are the lower standard of living, lesser chance of getting a job, lower wages, etc. The economic costs of rising unemployment are the lower GDP, loss of tax revenues, etc. It is important for a government to combat it because if the government did not combat it, the economy could eventually decline and result in disastrous events like the Great Depression. The government must interfere to stimulate demand through expansionary fiscal and monetary policies. However, as the blog has mentioned, the best approaches to the threatening social and economic nightmare it faces is for the Chinese government to push forward massive fiscal stimulus plans aimed at putting tens of millions recently unemployed people back to work. Government money can be used to create jobs in private enterprise, producing goods, services and infrastructure that lead to long run economic growth aided by domestic demand for Chinese output.

    • Discuss the differences in the Keynesian and the Classical models in their explanation of what will happen to unemployment after a fall in Aggregate Demand.

    The Keynesian model states that if the demand for Chinese output is not restored on its own, then the government needs to intervene to stimulate the demand through expansionary fiscal and monetary policies. Keynesian theory believe that spending in the economy is unlikely to rise on its own due to the great increases in unemployment accord with lack in consumer and business confidence. Therefore, the government is needed to replace the fall in private spending and create new income, spending and economic growth. In contrast, the classical model would argue that the China’s government should let the economy “self-correct” during the economic slowdowns. As the demand for China’s output falls in the short run, unemployment will rise and the price level will fall, as firms are unable to sell their output. Since prices are lower, labor will be more willing to accept lower wages, encouraging firms to increase its employment of workers, then eventually restoring the full employment.

  8. Malen Kon 16 Apr 2013 at 4:07 pm

    #ABarrow

    Great response! Your answers are detailed and concepts are well explained. Although I have a question, when you mentioned, “This causes a country’s GDP to contract due to a number of factors such as national output diminishing and the distribution of income to worsen that will likely make the country’s citizens very angry and in the mood for a change in leadership (especially in this day-and-age of revolution), however the true impact of unemployment on a government will depend on its rate and its duration.” What exactly do you mean by the true impact of unemployment on a government will depend on its rate and its duration?

  9. ahmadson 16 Apr 2013 at 4:26 pm

    What is China’s most worrying macroeconomic problem currently? Inflation? Recession? Unemployment? Deflation? Trade imbalance? Income distribution? Which of these does falling demand for China’s exports affect most?
    China’s biggest concern at this stage is the rise in unemployment rate. The western countries are facing a recession, during in which the demand for goods and services fall dramatically. And since China is one of the main exporters of goods on this planet, a drop in demand for goods mean people without jobs in China. The more demand decreases the more people who in factories will have to leave the cities and get back to their villages.

    What are the social and economic costs of rising unemployment and why is it so important for a government to combat it?
    Unemployment can have many negative effects on a nation as a whole. It will decrease the self-esteem of the worker the longer they are jobless. The overall economical impact would be that there will be less production of goods which means less indirect income tax for the government leading to a shrink in government’s total revenue.

    Discuss the differences in the Keynesian and the Classical models in their explanation of what will happen to unemployment after a fall in Aggregate Demand.
    According to the Keynesian models, the government must intervene in such situation and use the fiscal monetary policies and this was adopted during the 1930s great depression. But Hayek model would suggest that we leave the market forces to balance out the unemployment.

    Comment to #DBharwani, I felt like you wrote that post in just two minutes as it contained not even minimum economical analysis and you just swept through questions. You didn’t’ even bother to answer them. Perhaps its because you didn’t understand what the questions were asking because you know they say, “understanding the question is the 50% of the response”. I hope you will discuss your answer deeper next times. Best, Jawed

  10. Sebastian Changon 16 Apr 2013 at 5:08 pm

    What is China’s most worrying macroeconomic problem currently? Inflation? Recession? Unemployment? Deflation? Trade imbalance? Income distribution? Which of these does falling demand for China’s exports affect most?

    China’s most worrying macroeconomic problem currently is their unemployment, which is currently increasing at a rather drastic rate – to the extent that it is named as the “catastrophic unemployment”. As mentioned in the article, apart from the macroeconomic problem of unemployment, the export sector had led to the biggest rural to urban migration in human history – leading to the approximately the migration of 300 million Chinese workers moving from the countryside to the urban area to seek for employment in China’s massive export sector. This thereby caused the increase in unemployment rate in the urban area. Falling demand for China’s exports is likely to affect the unemployment the most.

    What are the social and economic costs of rising unemployment and why is it so important for a government to combat it?

    Although unemployment does not have any other direct cost except for the provision of unemployment benefits, unemployment does not really have any direct cost. However, there is some indirect cost from rising unemployment such as social and economic costs. For example, a rise in the unemployment rate would likely lead to a lower standard of living for the citizens in the nation, (a social cost), and people would likely to save more of their money due to their lack of income (an economic cost). Savings is considered as a withdrawal from the circular flow of income, thereby an increase in savings would likely lead to a decline in economic growth, thereby an economic cost.
    It is important for a government to combat the problem of rising unemployment as if the unemployment further rises, the standard of living (the social cost) and economic growth (the economic cost) is likely to worsen, hence it is necessary for the government to intervene in this issue in society.
    Furthermore, unemployment can lead to an increase in environmental problems such as vandalism or criminal activity because people may start to result in these activities as a result of not being able to find a job (their alternative or last resort of survival). This would thereby lead to an increase in crime and is considered as a threat to society – therefore government must intervene this as it may lead to chaos if it is not intervened.

    Discuss the differences in the Keynesian and the Classical models in their explanation of what will happen to unemployment after a fall in Aggregate Demand.

    The Keynesian model states that if the aggregate demand of labor is at disequilibrium due to a fall in aggregate demand, the government should intervene by stimulating the aggregate demand through expansionary fiscal and monetary policies in order to inject money into the circular flow of income into the economy (through governmental spending). This would thereby encourage spending and increase aggregate demand as a whole. On the contrary, the neo-classical model states that if the aggregate demand of labor is at disequilibrium due to a fall in aggregate demand, the government should not intervene as neo-classical model economists believe that it would be optimal for the economy to freely move towards its equilibrium in the long run (regardless of a rise in unemployment in the short run). They believe that because of unemployment, workers (or the labor force) would slowly start to accept lower wages, to which then encourages businesses to increase their employment of labor since they have to pay workers lesser. This would thereby lead to a right shift in the aggregate supply and, naturally, freely move towards its full employment level of labor.

    Comment on #Malen’s post

    Great response Malen! I believe that you miss the part of the last question to discussing the neo-classical model view towards the unemployment after a fall of aggregate demand. In your opinion, do which approach should China’s government take in order to resolve this issue of unemployment; in other words, do you think it would be more beneficial for China’s government to intervene or not intervene with this issue of unemployment?

  11. dtumanavarroon 16 Apr 2013 at 6:42 pm

    • What is China’s most worrying macroeconomic problem currently? Inflation? Recession? Unemployment? Deflation? Trade imbalance? Income distribution? Which of these does falling demand for China’s exports affect most?
    According to the article China’s most worrying macroeconomic problem is widespread growing unemployment. This is due to a global decrease in aggregate demand for Chinese goods. China has relied on western countries’ demand for far too long and will soon have to reach a more self-dependent market economy. For the first time in decades, urbanization has turned around; people are leaving the cities for agricultural jobs. Out of the factors stated in the above question, I believe that the recessions in western countries affect the falling demand in China the most.
    • What are the social and economic costs of rising unemployment and why is it so important for a government to combat it?
    The social costs of rising unemployment would be things like lower standards of living and a growing lower class instead of the previously rapidly growing middle class. There will be a loss of business confidence and a probable increase in population who will turn to black market type services.
    The economic costs of rising unemployment would be things like lower aggregate demand, and hence supply. Lowering government expenditure. Less public goods and services maybe due to a decrease in government revenue.
    • Discuss the differences in the Keynesian and the Classical models in their explanation of what will happen to unemployment after a fall in Aggregate Demand.
    According to the Keynesian model, unemployment will get worse and the situation will only get worse. Government intervention will be necessary to get aggregate demand and employment back up on its feet.
    According to the Hayek model, unemployment will eventually fix itself. A lowering aggregate demand will lead to lower prices and unemployment. The growing unemployed population will force the labor force to accept lower wages; therefore unemployment will start to decrease at lower price levels.

  12. dtumanavarroon 16 Apr 2013 at 7:17 pm

    @ahmads

    Hey ahmad 😉

    I agree with the overall message in each of your replies to the given questions. I liked how you introduced the fiscal policy and connected it to the great depression of the 1930s!

  13. msurninon 16 Apr 2013 at 8:43 pm

    • What is China’s most worrying macroeconomic problem currently? Inflation? Recession? Unemployment? Deflation? Trade imbalance? Income distribution? Which of these does falling demand for China’s exports affect most?

    In my opinion, China’s most worrying problem at the moment is unemployment, which is caused by trade imbalance. There is a decreasing foreign demand in China’s products, which leads to a fall in exports and a reduction in jobs (unemployment). Unemployment causes millions of people to return back to their homes in rural area, where the main production sector is agricultural, which is not very promising in terms of jobs and sufficient salaries.

    • What are the social and economic costs of rising unemployment and why is it so important for a government to combat it?

    Increasing unemployment will affect China’s once expanding economy in a number of ways. First, the trade imbalance (a fall in exports) will have a detrimental effect on the country’s revenue from exports, which means that less money will be available in the budget. However, the government will need to assist the unemployed by increasing financial aid, healthcare and security, all of which requires money in the budget, of which there is not too much. This means that China’s government might have to borrow money to finance the short fall.

    • Discuss the differences in the Keynesian and the Classical models in their explanation of what will happen to unemployment after a fall in Aggregate Demand.

    One of the main differences between the Keynesian and the Neo-Classical models is the level of government involvement in each case. According to the Neo-Classical economy, over time, the economy will stabilize itself through its natural fluctuations; people will accept lower wages during the recession, which will pull the employment levels back up. Minimum government intervention is present in this case. On the other hand, Keynesians believe that the government intervention is absolutely essential in bringing the economy back up. The government can increase its spending, providing citizens with extra healthcare, security and financial aid, even more jobs, which will naturally decrease unemployment. Looking at China in specific, we can say that the government will adhere to the Keynesian model, and will increase spending in the economy. However, after thinking about it I realized that Chinese (especially those in rural areas) will accept lower wages, which should help more to solve the overall problem of unemployment in China.

  14. msurninon 16 Apr 2013 at 8:49 pm

    # dtumanavarro

    You said that there will be a decrease in government expenditure and I could see why you think so. China is making less revenue from its exports and therefore the country’s budget is decreasing. However, in order to bring the economy out of recession, the government will need to actually increase its spending. You may wonder where they will get the money from – the government can temporarily borrow money to finance the short fall by providing extra healthcare, security and even jobs themselves.

  15. bdesslegnon 16 Apr 2013 at 9:25 pm

    1. What is China’s most worrying macroeconomic problem currently? Inflation? Recession? Unemployment? Deflation? Trade imbalance? Income distribution? Which of these does falling demand for China’s exports affect most?
    Definitely unemployment, for both questions. It is the most worrying problem in China because there aren’t a great deal of ways to avert the problem. As the demand for China’s export falls, the manufacturing companies of China will cut costs by laying off employees. This had resulted in increased unemployment rates. It is also a problem for the country because since inflation rates are rising former employees found it best to immigrate back to the rural areas of China to be closer to their families. The rural area, however, has already surpassed its ability to employee any more persons. Technological advancements have discouraged the use for human labor in many aspects of the agriculture industry. Therefore, there is a pressing problem.
    2. What are the social and economic costs of rising unemployment and why is it so important for a government to combat it?
    Employment is a source of acquiring money. And without it there won’t be a source of money. People in order to survive need employment, there should always be a source of income. Government needs to combat unemployment because unemployment could potentially become a source of despair. Unemployed people can’t support their families and thus become a burden to society. And mostly, since self-worth is associated with a profession being unemployed reflects poorly of a person. The morale of an unemployed person will be significantly lower than one that is employed. Therefore, crime rates may increase significantly. Not just that, but the government will be forced to compensate to lack of income through unemployment benefits.

    3. Discuss the differences in the Keynesian and the Classical models in their explanation of what will happen to unemployment after a fall in Aggregate Demand.
    The differences with the two models about their explanation of what will happen to unemployment after a fall in AD, is the same as their explanation for other factors. Does correction need government interference or not? The Keynesian model argues that it does need government interference of fiscal and monetary stimulus plans within the economy. While the neo-classical model argues that the market will self-correct, however there will be seen a decrease in wage rate.

  16. bdesslegnon 16 Apr 2013 at 9:32 pm

    #dtumanavarro
    Good answer for the first question. However, I would have liked to see the social aspect mentioned in the second question, it seems you’ve only answered the economic effects. The details for question 3 are well noted.

  17. clundon 16 Apr 2013 at 10:23 pm

    According to the article Chinas most worrying macroeconomic problem is the unemployment there is to be found in the whole country –both in cities and on the countryside. This has been created because of a decrease in demand of export goods since those countries that used to have their goods produced in China are in recession.
    Examples of social cost could be higher percentage of homelessness, higher rate of crime and an increase of indebtedness of the unemployed. Economical cost could be loos of tax and a decrease in GDP, it could also higher government spending in forms of benefits to support the unemployed or as health care since unemployment often leads to a decrease in health. These are all undesired things for a country and if it has to work, these elements have to be eliminated.
    The Keynesians believes that the equilibrium will stay at the new equilibrium until the government will do something to move it back at the full employment rate, where as the classical economists think that the free economy will self-correct the equilibrium so it will once again be at the full employment level. They think this will happen because the unemployed are desperate to get a work, so they’ll accept a lower wage. This will then make employees hire more people and therefore more the aggregate supply curve to the right and into equilibrium at the full employment level at a lower price level.

  18. nwarneron 16 Apr 2013 at 10:28 pm

    • What is China’s most worrying macroeconomic problem currently? Inflation? Recession? Unemployment? Deflation? Trade imbalance? Income distribution? Which of these does falling demand for China’s exports affect most?

    The most worrying concern is the increasing levels of unemployment in China which is caused by the drop in demand from the West. This lack of jobs in the city as demand from the West is falling is reversing urbanization and causing people to move to rural areas for agricultural jobs. If China wants to continue its growth it must find a way to fix this problem and have more domestic demand so it is less reliant on foreign consumers for its demand.

    • What are the social and economic costs of rising unemployment and why is it so important for a government to combat it?

    Unemployment causes social problems such as increased violence and poverty rates as well as more gang activity it can also cause less aggregate demand in the total economy as these people have no money to spend on goods and services. This impacts the government as they collect tax off the aggregate demand so the government would want to control it. The final reasons why the government wants to control it is to prevent low living standards and to allow economic growth.

    • Discuss the differences in the Keynesian and the Classical models in their explanation of what will happen to unemployment after a fall in Aggregate Demand.

    The Classical model believes that the market will correct itself and the government should allow it to while the Keynesian believes that the government should put money into the economy as there will be an equilibrium below full employment.

  19. nwarneron 16 Apr 2013 at 10:28 pm

    # Sebastian Chang
    I like how detailed your answer is. I agree with your point that vandalism will start to occur. I especially like your answer to the third question it is very detailed and describes the concept well. You clearly have a very good understanding of macroeconomic concepts.

  20. clundon 16 Apr 2013 at 10:31 pm

    # DBharwani

    For question two it asks for economical costs and social cost, I think you might have misunderstood this. An example of social costs could be a lack of motivation of the unemployed and loss of skills.
    In question three it also askes about the classical view of what will happen to the unemployment after a fall in Aggregate Demand, and not only about the Keynesians -If you’re in doubt it’s explain quite simply in the blog that we read and is responding to.

  21. rparsonon 17 Apr 2013 at 2:24 am

    1. What is China’s most worrying macroeconomic problem currently? Inflation? Recession? Unemployment? Deflation? Trade imbalance? Income distribution? Which of these does falling demand for China’s exports affect most?
    The most worrying macroeconomic problem for China is currently its reliance upon exports to support its economy. While it may have been possible in the past for China to use its massive export surplus to boost aggregate demand, this means that any fall in exports will have dire consequences for the national economy. I think that in this case, the economy could self-correct in the long term, as a major reason why China will lose exports in the long run is the increasing wage level of its workers, eliminating its competitive advantage. A fall in aggregate demand, therefore, will lead to a corresponding drop in wages which will again lead to higher employment.
    2. What are the social and economic costs of rising unemployment and why is it so important for a government to combat it?
    The social costs of rising unemployment include the decrease in living standards which result from a lack of income, increased crime, worse services due to lack of tax revenue, and lack of personal fulfillment due to lack of work. The economic costs are, under the Keynesian model, the inevitable collapse of the economy. (Barring the contingency of a government intervention) Under this model, therefore, it is critical that the government intervenes before this point.
    3. Discuss the differences in the Keynesian and the Classical models in their explanation of what will happen to unemployment after a fall in Aggregate Demand.
    In the Keynesian model, a fall in aggregate demand will begin a downward spiral into recession, with increased unemployment until the government intervenes. In the classical model, a fall in aggregate demand will prompt a rebalancing of the economy, with goods being produced at a lower price and a return to full employment. These differ in that the Keynesian model requires immediate intervention on the part of the government in order to prevent an otherwise inevitable collapse, while the Classical model predicts no such collapse due to natural market forces.

  22. rparsonon 17 Apr 2013 at 2:27 am

    @nwarner,

    I agree with your sentiments that the lack of demand from the west is causing unemployment problems, and I think that the best way for China to combat this would be to grow their domestic economy.

  23. Btunceron 17 Apr 2013 at 5:51 am

    1) What is China’s most worrying macroeconomic problem currently? Inflation? Recession? Unemployment? Deflation? Trade imbalance? Income distribution? Which of these does falling demand for China’s exports affect most?

    China’s most worrying economic problem is the increasing unemployment rate caused by the lower demand for China’s exports. The decreased demand for China’s exports leads to Chinese companies making less profit which means they have to scale down, in order to do so the unemployment goes up. This leads to a decrease in AD in the Chinese economy and because they were already highly dependent on external economies, their domestic AD was already low which made the AD even lower.

    2) What are the social and economic costs of rising unemployment and why is it so important for a government to combat it?

    Social costs of rising unemployment are lower life quality, higher crime rates and most importantly, unhappy citizens. These are very important for the government to combat because these would result in instability which is what the governments are very afraid of and can be seen by the examples today that these instabilities can trigger a catastrophe.

    Economic costs are lower AD and because of the social costs, less productive (both quantity and quality wise) workforce. These are very important for the government to combat because of the lower efficiency which would result in a loss of trust (by other economies) and lower income. This can also lead to an economic crisis.

    3) Discuss the differences in the Keynesian and the Classical models in their explanation of what will happen to unemployment after a fall in Aggregate Demand.

    The main difference between the keynesian and neo-classical models for unemployment due to a fall in aggregate demand is the level of government intervention. Neo-classical economists believe that an intervention is not necessary and the economy will correct itself. Whereas the keynesian economists believe that the government should interfere and pump money into the economy to correct it.

  24. Btunceron 17 Apr 2013 at 5:57 am

    @rparson

    Good answers. I also do believe that China is heavily dependent on the foreign markets. This is because of the generally low wages for workers in China. When a good portion of the customer has very little income, then they can’t afford to buy some products that have higher technology such as electronics which they produce. I believe, if the wage rates were increased, the population would have money to spend and the AD would go up.

  25. doan hai vanon 17 Apr 2013 at 6:08 am

    China’s most worrying macroeconomic problem currently is rising unemployment rate. Falling demand for China’s exports affects the movement of labour force in this particular country: “The flow of labor from the countryside to the city has reversed, and for the first time in its long history, China is experiencing urban to rural migration”
    Firstly, government has to pay unemployment benefit to those who have been made unemployed. There is an opportunity cost as government has to give up spending for other purposes. Unemployed people will earn less income then they did before. This leads to more severe problems. Unemployed parents might not be able to afford their family’s life. They spend less on goods and services. Government faces a reduction in tax revenue collected from income tax and indirect tax. Rising unemployment rate means we cannot make best use of the available resource. Thus economic activity remains at low level and the potential output growth slows down. Other negative results from rising unemployment are high rate of crime, drinking alcohol and high rate of divorce. Government has to spend more the security efforts. If this condition continues in the long term, this could put bad effect on the younger generation.
    In Classical model, government allows the economy to correct itself. LRAS curve for goods and services is vertical, which means with any short-run shift in demand or supply, the market in the long run will turn back to equilibrium. Thus is a fall in aggregate demand leads to a fall in price but no fall in potential output. Thus the economy will always operate at the full level of employment. Since demand for labour is derived demand which highly depends on demand for goods and services. Thus the same analysis applies for market for labour. A fall in demand affect unemployment rate in the short-run, yet not in the long run. However, labour has to accept lower wage rate.
    In Keynes’ model, the economy doesn’t operate at full capacity at low level of economic activity. A fall in demand causes the potential output to reduce yet the price level remains unchanged. This has the same effect on the market for labour: wage level doesn’t alter yet unemployment rate increases. Thus government has to step in and spend more on goods and services in order to push up the aggregate demand.

  26. doan hai vanon 17 Apr 2013 at 6:17 am

    # masayaechlf09
    You have made a pretty good response. However, I disagree with you that rising unemployment rate discourage people from work. It might discourage people from spending yet not from work. Although high unemployment benefit make people less willing to work, rising unemployment rate doesn’t lead to higher benefit. It is the government who actively decides how much they spend on unemployment people.

  27. david.yooon 17 Apr 2013 at 10:17 am

    What is China’s most worrying macroeconomic problem currently? Inflation? Recession? Unemployment? Deflation? Trade imbalance? Income distribution? Which of these does falling demand for China’s exports affect most?

    -China is currently most concerned about increase rate in unemployment which affects the aggregate demand to shift to left as it is related to income of the people and it is decreasing among its trading parteners in Asia and the West. It is said that since there are millions of people in countryside are returning back home, agricultural sector is decreasing. This leads to decrease in standard of living at outside of the countryside

    What are the social and economic costs of rising unemployment and why is it so important for a government to combat it?

    The rising unemployment will lead to low wages which lowers the standard of living and less chance of getting another job in the future. Due to the lack of income, people will spend less on goods and services and will save their money. Unemployment not only affects the standard of living but also factors such as health and environments of the place. What I mean by health is that as people are getting no jobs, there will have no money to buy goods and even medicine when they are ill. Also, unemployment can cause the city brutal and violent as there will be more criminal activities due to the poor standard of living. Therefore, the government intervention is very important at this moment, such as increase the spending of the citizens or providing support, to increase the growth of the economy and the standard of living for the citizens.

    Discuss the differences in the Keynesian and the Classical models in their explanation of what will happen to unemployment after a fall in Aggregate Demand.

    The two different theories tell us a different view of unemployment. The Keynesian theory says that there should a government intervention to support the economy and lower the unemployment which eventually leads to increase in consumers’ confidence and their standard of living. However, on the other hand, the Classical theory says that economy of the country should “self-correct” and there shouldn’t be any government intervention. It is said that this will eventually encourages firms to increase their employment since they need profits to make.

    # hteoh

    Good response, I agree with your point that unemployment will lead lower the standard of living and will eventually cause criminal activities. Hence, there should be a government intervention.

  28. Csabaon 17 Apr 2013 at 11:15 am

    1. China’s worst problem is the increase in unemployment rate causing the exports to decrease as well, which decreases the total revenue and decreases the aggregate demand.

    2. The criminal rate of China will increase since there is money that the unemployed people can spend, organized crime will become more popular because it is a way of getting money. Since people are unhappy it can lead to rash actions in terms of politic. Looking back in history Great depression was the best time period for Hitler to gain attention. This might be a bizarre example but it should not be neglected.

    3. The difference is that in classical economics is that they think that unemployment will regulate itself where as Keynesian think is has to be solved by the government.

  29. Csabaon 17 Apr 2013 at 11:25 am

    @DBharwani

    I agree with you answers but i think for question 2 you could have included aspects like increase in criminal rate or loss in their job skills, i think you didn’t understand the question since it asks for social standards as well.

  30. ghyafilon 17 Apr 2013 at 11:50 am

    1. China’s current biggest economic issue is unemployment. It decreases the exports and therefore reduces the countries total income.

    2. Unemployment can create different societal problems such as the increase in poverty in general. It can to a certain extent increase violence and crime. It especially increases jobs on the black market which do not benefit for the government. Also consumption decreases since the population is poorer. Slowing down the country’s economic activity.

    3. One of the major difference in these two models is that in the neo-classical theory the economy will fix itself in the long run meaning that new jobs would be created after a certain period of time and solve the unemployment problem. However the Keynesian theory states that the government is the only one capable of solving the unemployment problem

  31. m2keoon 17 Apr 2013 at 2:49 pm

    My Response:

    What is China’s most worrying macroeconomic problem currently? Inflation? Recession? Unemployment? Deflation? Trade imbalance? Income distribution? Which of these does falling demand for China’s exports affect most?

    China’s most worrying macroeconomic problem currently is the rise in the level of unemployment. The demand for China’s goods and services are falling and thus causing unemployment to rise, which also affect the incomes among its trading partners in Asia and the West. The opening of the world markets has originally made about 300 million Chinese to leave their home in the countryside to look for jobs in the country’s massive export sector. However, due to the fall in demand, the flow of labor from the countryside to the city has been reversed and for the first time ever in its history, China is actually experiencing urban to rural migration. While these people returned home, the agricultural sector is really the main source of employment but even this sector has shown only little promising of employment for the millions who are returning. And for the very first time in decades, China is left with no choice but to face a problem that many would have thought to be unlikely to happen and that is ‘catastrophic unemployment’.

    What are the social and economic costs of rising unemployment and why is it so important for a government to combat it?

    The rising of unemployment will obviously lead to many costs socially and economically. The social costs would include lower standard of living and lower wages/incomes, etc. The economic costs would include less economic growth, which means a fall in GDP and this further affects on other things such as government revenues, etc. Government needs to intervene and combat these problems to prevent something like the Great Depression to happen again. They will need to put the tens of millions who became recently jobless back to work by increasing their spending to create jobs in private enterprise, producing goods and services and infrastructure that can all lead to real long-run economic growth driven by domestic demand for Chinese output. As mentioned in the article, another possible way for the government to increase demand, which helps to decrease unemployment, is through expansionary fiscal and monetary policies.

    Discuss the differences in the Keynesian and the Classical models in their explanation of what will happen to unemployment after a fall in Aggregate Demand.

    The Keynesian model and the Classical model has two opposing view on what will happen to unemployment after a fall in aggregate demand. The Keynesian model states that if the aggregate demand for China’s output falls, then there is a need for government interventions to stimulate the demand through expansionary fiscal and monetary policies. Keynesian model’s view is that the spending in an economy is very unlikely to increase on its own and this is because of the unemployment rate that also affect consumers’ as well as businesses’ confidence. Thus government needs to intervene to eliminate the issues and increase economic growth through various ways. On the other hand, the Classical model’s perspective believes in ‘self-correct’ during the decline in economic growth. They believes that as demand falls, unemployment will rise and thus price will have to fall as well and when this happens, labor workers are willing to accept lower wages, which encourages firms to employ more labor and as this progresses, full employment will be restored by itself.

    My comment:

    # cameron7
    Personally, I really liked your response to the second question just because you’ve actually managed to touch on the different macroeconomic objectives such as the distribution of income. I agree with you on the loss of tax revenue and this could actually further cause opportunity costs for the government. Good response Cameron! ?

  32. sminarovicon 17 Apr 2013 at 6:18 pm

    What is China’s most worrying macroeconomic problem currently? Inflation? Recession? Unemployment? Deflation? Trade imbalance? Income distribution? Which of these does falling demand for China’s exports affect most?

    Currently it is unemployment due to the fact that urban unemployment has made people emigrate from the urban areas and immigrate back to rural areas which causes the rural unemployment to increase. The unemployment has caused people to stop looking for jobs in goods and service that China can export (the reason for which they immigrated to the urban areas in the first place) and so export decreases.

    What are the social and economic costs of rising unemployment and why is it so important for a government to combat it?

    Unemployment will cause more unsatisfied people due to their lack of income and ability to have a better lifestyle. This will cause a decrease in aggregate demand and economic growth in general. The government will also have to provide unemployment benefits for people who have lost their job.

    Discuss the differences in the Keynesian and the Classical models in their explanation of what will happen to unemployment after a fall in Aggregate Demand.

    In the Keynesian model the unemployment will increase after a decrease in aggregate demand and will have to be fixed by the government while in the neo-classical models, the unemployment will have be fixed by the free market.

    #Csaba
    That is a very extreme case with Hitler and Germany. Inflation was through the roof in that time caused by World War 1’s reparations and the Nazi Party didn’t have the majority of the popular vote. Although this unemployment will probably cause reform in China, I doubt that it will be this extreme.

  33. Tasa Grujicon 17 Apr 2013 at 8:19 pm

    1. What is China’s most worrying macroeconomic problem currently? Inflation? Recession? Unemployment? Deflation? Trade imbalance? Income distribution? Which of these does falling demand for China’s exports affect most?
    The most worrying macroeconomic problem China is facing is unemployment. China is the world’s biggest exporter of goods. Her biggest buyers were the western countries. But when the recession hit the western countries, there was a fall in aggregate demand. With the companies and firms not earning as before, their production costs increased in comparison to their profits, and workers had to be laid off. The unemployment grew from 0% to 15 to 20% in a couple of years. Therefore, the recession of the western countries affected China by increasing its unemployment and endangering it to fall in recession.
    2. What are the social and economic costs of rising unemployment and why is it so important for a government to combat it?
    The social costs of rising unemployment are the decrease in living standards, increase in crimes and violence and increase in poverty. People are stuck in this social disillusionment and are desperate and devastated. The economic costs of unemployment are lost output of goods and services, fiscal costs of the government (unemployment benefits) and deadweight loss of investment in human capital. With all of these “costs” the government has to improve the situation to improve the life of its people and decrease their expenditure towards the people and increase their full potential growth.
    3. Discuss the differences in the Keynesian and the Classical models in their explanation of what will happen to unemployment after a fall in Aggregate Demand.
    The Keynesian model states that the market is unable to recover itself and that it is only possible for the country’s government to fix the economy if it intervenes. The new classical model states that the market is able to fix itself and get back on track by itself. But in reality, the market was never fixed by itself, but rather the government had to interfere to boost their economy.

    @kedwards – You mention that the labor market is decreasing in size since people are deurbanizing. The labor market increases in size, because more people don’t have jobs but are willing to work. Even if they’re deurbanizing, doesn’t mean that they are not looking for jobs.

    @Jackson Truex – Nice post. I like how you emphasize that the aggregate demand of China depends on the aggregate demand of the Western countries.

  34. ykim3on 18 Apr 2013 at 2:46 am

    1. What is China’s most worrying macroeconomic problem currently? Inflation? Recession? Unemployment? Deflation? Trade imbalance? Income distribution? Which of these does falling demand for China’s exports affect most?
    – The problem that China faced is the high rate of unemployment. Since China is a huge exporting country, its economy depends on economies of western countries. Therefore, the unemployment rate can be largely different, especially in the recessions.
    2. What are the social and economic costs of rising unemployment and why is it so important for a government to combat it?
    – When the unemployment rises, the society has to have some responsibility and burdens to solve those problems. If the unemployment increases, it is very hard to overcome it without any helps from the government. Therefore, the government usually gives some helps by providing financial helps.
    3. Discuss the differences in the Keynesian and the Classical models in their explanation of what will happen to unemployment after a fall in Aggregate Demand.
    – In classical mode, the wage can be dropped theoretically. However, in the Keyensian, the stick part exists, so once they reach some point, it becomes impossible to get decreased.

  35. ykim3on 18 Apr 2013 at 2:48 am

    @ Tasa Grujic
    As you pointed out, China has struggled with unemployments because it is a huge country, and as I heard there are more people that are not counted as populations. Therefore, there might be possiblities that they take over some jobs.

  36. xhuanfon 18 Apr 2013 at 3:21 pm

    • What is China’s most worrying macroeconomic problem currently? Inflation? Recession? Unemployment? Deflation? Trade imbalance? Income distribution? Which of these does falling demand for China’s exports affect most?
    The most serious problem is unemployment. And the falling demand for China’s exports also affect unemployment the most. Export demand is a very large factor of aggregate demand of China. As the demand falls, output also falls, and firms need fewer workers. Combined with largest population of the world, unemployment is the most worrying problem.
    • What are the social and economic costs of rising unemployment and why is it so important for a government to combat it?
    Social: the high cost of living in the urban areas made workers unwilling to take low income jobs and intent to go back to rural areas. However, the technology advance in agriculture reduced the need for human labor. Low education level made workers inflexible for changing job. The population is also too high compared to the jobs available.
    Economic:
    The economic crisis is an important reason. The unemployment rise and income fall among the trading partners of China in Asia and western countries made the demand for export go down. China’s own demand for output is also decreasing. Due to the inflexibility of wage, firms can’t reduce the wage for workers, and as the result the firms will apply less workers.
    It is important for government to combat because the export demand is unlikely to restore on its own due to the global economic crisis and recession. Therefore, government need to take demand-side policies to increase demand.

    • Discuss the differences in the Keynesian and the Classical models in their explanation of what will happen to unemployment after a fall in Aggregate Demand.
    In Keynesian model, the unemployment is not going to cure by itself. Due to the fall in demand, unemployment increase. But as unemployment increase, demand keeps falling down, and the consumers and business confidence fall down , which again increase unemployment. Therefore it is necessary for government to take action, using demand side policy to increase demand.

    However, in new classical models, there is no necessity for government intervention. As the demand drop, the price will also drop, which will make workers willing to accept lower wages, which will make firms willing to employ more workers. So in this model the unemployment will always cure itself in the long run.

    To #ykim3:
    I really agree with your answer to question 1 and 3, especially question 1. As a Chinese, I understand how much our economy depend on export. For question 2, I think the biggest reason it is necessary for the government to react is the export demand is unlikely to restore on its own due to the global economic crisis. If the foreign demand could be restored by itself, then the output will increase again and firms will employ more workers, there would be no need or government intervention.

  37. jlamunoon 19 Apr 2013 at 4:57 pm

    What is China’s most worrying macroeconomic problem currently? Inflation? Recession? Unemployment? Deflation? Trade imbalance? Income distribution? Which of these does falling demand for China’s exports affect most?

    Unemployment. Falling demand for China’s exports means that the issue becomes even worse as time goes on, since workers would be put out of their job causing the unemployment rate to go up.

    What are the social and economic costs of rising unemployment and why is it so important for a government to combat it?

    Social cost of rising unemployment is angrier people, they can’t get their wants and in some cases not even their needs which causes demands among the public towards the government for unemployment benefits. Economically it costs a lot of money to keep those unemployed people fed, and if a lot of people aren’t working it means the country isn’t producing.

    Discuss the differences in the Keynesian and the Classical models in their explanation of what will happen to unemployment after a fall in Aggregate Demand.

    In Keynesian model, the unemployment has to be remedied by the government, causing higher demand for workers and thus fixing the problem. Otherwise demand would keep falling and falling, creating a positive feedback mechanism.

    Contrastingly in new classical models there is no necessity for government intervention. As demand drops, so does price which means there will be workers willing to work for less. This model basically states that the demand and supply will adapt to fit the needs of the other.

  38. jlamunoon 19 Apr 2013 at 4:59 pm

    @ xhuanf

    Very thorough response, I was having some questions about the two different models but your explanation really helped me get a good understanding of such. Really complicated issue, positive feedback all over with workers loosing jobs and companies wanting to save money.

  39. jduplessison 19 Apr 2013 at 5:36 pm

    • What is China’s most worrying macroeconomic problem currently? Inflation? Recession? Unemployment? Deflation? Trade imbalance? Income distribution? Which of these does falling demand for China’s exports affect most?
    In my opinion the most worrying problem is the Income distribution. With the cost of living being so high and the vast majority of Chinese nationals being paid low or no wages it can be difficult to survive. The falling demand of Chinese exports most directly affects unemployment.
    • What are the social and economic costs of rising unemployment and why is it so important for a government to combat it?
    A major problem is the cost of living in urban areas. This steers people towards going to the countryside where things are less expensive.
    Another cost of unemployment is that it weakens the domestic Chinese market. With all the people out of jobs they will not be consuming many goods.
    • Discuss the differences in the Keynesian and the Classical models in their explanation of what will happen to unemployment after a fall in Aggregate Demand.
    According to the Keynesian model everything will simply continue to regress unless the government steps in. However the Classical model is far more optimistic and believes that the situation will correct itself over time.

  40. jduplessison 19 Apr 2013 at 5:37 pm

    # klake2
    Tax revenue is a great example of another cost. It’s one that directly affects the government.

  41. jduplessison 19 Apr 2013 at 5:40 pm

    # tlee
    Definitely a great explanation of the costs involved during an increase in unemployment.

  42. hkimon 19 Apr 2013 at 11:37 pm

    1. What is China’s most worrying macroeconomic problem currently? Inflation? Recession? Unemployment? Deflation? Trade imbalance? Income distribution? Which of these does falling demand for China’s exports affect most?
    China’s most worrying macroeconomic current problem is unemployment. This would be relatively easier for China to have a high unemployment rate since their population is so high. Also because of the high unemployment rates that would cause an inflation leading in an increase in prices of goods.
    2. What are the social and economic costs of rising unemployment and why is it so important for a government to combat it?
    When unemployment rates increase it is pretty difficult for the government (especially in China because of the high population) to focus on individuals. If they are said to be unemployed but currently are looking for work, the government have to provide them with money each month but because the population is so big, the more the unemployed, the more the government would need to spend on the ‘unemployed.’ For the social costs, if these people are really looking for jobs, competition levels will rise making the job more difficult to get. This will increase stress and maybe suicide rates too.
    3. Discuss the differences in the Keynesian and the Classical models in their explanation of what will happen to unemployment after a fall in Aggregate Demand.
    For both the Keynesian and Neo-classical model, when Aggregate demand falls, the unemployment rates will increase but the Keynesian model will have to be set right by the government while the neo-classical model believes that the free market will set it right eventually.

  43. hkimon 19 Apr 2013 at 11:41 pm

    #sminarovic

    I thought your answer was easy to understand and that it had some good points to it.
    It was short and sweet! :)
    Maybe a clearer explanation in number two may have been better but that can be a thing just for me.

  44. bobby con 23 Apr 2013 at 1:37 am

    -What is China’s most worrying macroeconomic problem currently? Inflation? Recession? Unemployment? Deflation? Trade imbalance? Income distribution? Which of these does falling demand for China’s exports affect most?

    It seems that China’s unemployment is the biggest problem they are currently facing. The problem is that many citizens are moving to the cities so that they would be able to find proper work. But because China is so dependent of exporting their goods and the demand for these has dropped significantly, the unemployment in cities is rising. When these cizilians move back to their homes and villages to work agriculture, the same effect of decreased demand in happening so they are yet again left unemployed. This full circle unemployment is a worrying problem.

    Recession is definitely affecting other countries who usually buy China’s exports (United States being an example). Because the US is in a recession, they must lower the demand for exports as they simply cannot continue purchasing at the same rate. This is what really started the rise in unemployment in China’s cities.

    -What are the social and economic costs of rising unemployment and why is it so important for a government to combat it?

    With so many more people becoming unemployed, the government must be able to make sure these people are taken care of. Unemployment benefits would have to be given for them to continue to live and since the unemployment is rising, the costs will also rise. It is important for the government to combat this as the other option is to let the economy “self correct” itself, which almost never works out. It is usually fixed by the government stimulating the economy again.

    -Discuss the differences in the Keynesian and the Classical models in their explanation of what will happen to unemployment after a fall in Aggregate Demand.

    For the Keynesian model, a fall in aggregate demand would result in an increase of unemployment by firing workers, decrease of demand for a firm, and that aggregate demand would continue to fall.
    For the Classical model, a fall in aggregate demand would result in the economy being able to fix itself. The unemployment would increase while the demand decreases, so wages and price levels would also decrease. This would mean that the unemployed would be able to afford to purchase more. Also, dropping the wages would mean unemployed would be much more accepting of getting a job.

  45. bobby con 23 Apr 2013 at 1:45 am

    Reply to #sminarovic

    Great points! On your second point, I do think that because more and more people have become unemployed, they will become much less satisfied. A good worker is someone who is passionate about their work, so this general drop in satisfaction could cause these people to not be as enthusiastic if they got another job thus decreasing economic growth as you previously stated.

  46. alessiaayoubon 23 Apr 2013 at 7:39 pm

    MY RESPONSE TO QUESTIONS:
    1) Unemployment is the most worrying problem of China!! The reason of the overflow in unemployment rate is due to the fall in aggregate demand for China production after the global recession. ? The firms have been firing their workers (poor workers!) because they cannot find global consumers who demand Chinese exports and they need to reduce their production costs.
    2) GDP is going to fall after the increase in unemployment rate. Loss of tax revenue will be seen because the unemployed does not pay taxes. The government will increase its expenditures to support the unemployed. Living standards would fall because of it then lower demand will lead to a fall in productivity. All of that is NOT good. So the government wants to prevent the increase in unemployment rate to avoid those consequences.
    3) Keynesians believe in fixing unemployment. They believe that unemployment will cause vast amounts of problems, for example, people will not be able to afford necessity goods and that needs government intervention. Whereas in Classical models they believe that unemployment will resolve its problem on its own and government intervention is not needed as workers will get used to the fact that unemployment is part of everyone’s life and they will have to accept it (mean people!).

    COMMENT:
    # bobby c
    That is a very detailed response and very well written! Good job using the US as an example :)

  47. jaimejaime8on 30 Apr 2013 at 12:16 pm

    1. What is China’s most worrying macroeconomic problem currently? Inflation? Recession? Unemployment? Deflation? Trade imbalance? Income distribution? Which of these does falling demand for China’s exports affect most?

    China’s current biggest problem is, in my opinion, unemployment due to a highest demand for agricultural jobs rather than meeting the everyday growing demand for jobs in the inner cities. In addition the firms are causing unemployment by firing workers, this is due to the fall in consumer demand for China’s exported goods.

    2. What are the social and economic costs of rising unemployment and why is it so important for a government to combat it?

    The government has to take care of rising unemployment for two main reasons. Firstly because unemployed people have to be paid by the government, being a loss of money as they are not contributing to the economic flow greatly. In the other hand because if the most people possible would be employed, they’d all be contributing to a greater economic growth.

    3. Discuss the differences in the Keynesian and the Classical models in their explanation of what will happen to unemployment after a fall in Aggregate Demand.

    According to the Keynesian theory a fall in AD would result in a increase of firing employees, thus increasing unemployment along with a continuous fall in AD and in consumer demand. In the other hand, the classical model states that a fall in AD will lead to a self-fixed economy. This happens due to the fact that as unemployment increases and demand decreases, wages would decrease too thus decreasing price levels, making goods more affordable for everyone and easier job vacancies.

  48. mchastanet2on 10 May 2013 at 1:16 pm

    1. I believe that the unemployment is the most worrying macroeconomic problem currently in China. Unemployment creates fewer jobs, so less consumer spending, reducing China economic growth. The demand for Chinese good are falling as less output is being made.
    2. Rising unemployment affects at first families living them with less income, money to satisfy their needs. It will also cause the national GDP to decrease and less output will be made. Robberies, shadow economy will rise. Unemployment has to be fight by the government because it produces negative externalities on the population.
    3. The Neo Classical economistic believe that the economy will correct itself without the need of the government intervention to boost the demand. They believe it will work because workers will agree for small wages to have a job and the money spent will increase the demand.
    The Keynesian Model thinks that the government intervention is needed to boost the demand. That is because unemployment is rising and people are less able to buy goods and services

  49. mchastanet2on 10 May 2013 at 1:16 pm

    # Celine.ecslb.f09

    Hey i choose unemployment too as the most important problem in China. After reading your answer we can also understand that unemployment is a great problem. I liked on of your social cost of unemployment which is Chinese people moving back from urban to rural areas where life is usually cheaper.

  50. john lewis bathroom ceiling lightson 20 Apr 2016 at 9:15 pm

    john lewis bathroom ceiling lights

    What will become of the Chinese worker? | Economics in Plain English

Trackback URI | Comments RSS

Leave a Reply

You must be logged in to post a comment.