Answers may include:

Definitions

1. Unemployment: When people of working age (16-65) who are actively seeking and able to work, but are not employed.
2. Cyclical Unemployment: Cyclical unemployment occurs during economic downturns when demand for goods and services falls, leading to job losses.
3. Structural Unemployment: Structural unemployment happens when there is a mismatch between workers’ skills and available jobs.

Explanation

• Cyclical Unemployment:

  • Occurs during periods of economic recession or downturn.
  • Illustrated by a leftward shift in the AD curve in the AD-AS model.
  • As AD decreases, firms produce less, leading to a reduction in the demand for labor.
  • This results in higher unemployment as firms lay off workers.
  • Example: During a recession, consumer confidence falls, reducing consumption and investment, which decreases AD.

• Structural Unemployment:

  • Arises from changes in the economy that alter the demand for certain skills.
  • Can be illustrated using a labor market diagram where the supply of labor exceeds demand at the current wage rate.
  • Often caused by technological advancements or shifts in industries (e.g., decline of manufacturing jobs).
  • Workers need retraining or relocation to find new employment opportunities.
  • Example: Automation in manufacturing leads to a decline in demand for manual labor, increasing unemployment among workers with outdated skills.

• Frictional Unemployment:

  • Occurs when workers are temporarily unemployed while transitioning between jobs.

  • Considered a natural form of unemployment as it reflects the time taken for job search and matching.

  • Not typically illustrated with a diagram but is important to mention as part of the natural rate of unemployment.

  • Example: A recent graduate looking for their first job or a worker who voluntarily leaves a job to find a better one.

  • Seasonal Unemployment: Occurs when demand for labor fluctuates with the season (e.g., tourism, agriculture).

  • Classical Unemployment: Results from wages being above the equilibrium level, often due to minimum wage laws or union activities.

  • Natural Rate of Unemployment: The sum of frictional and structural unemployment, representing the unemployment rate when the economy is at full employment.

  • Policies to reduce unemployment may include demand-side policies (e.g., fiscal stimulus) for cyclical unemployment and supply-side policies (e.g., retraining programs) for structural unemployment.

Diagram

• AD-AS Model: The diagram should illustrate a leftward shift in Aggregate Demand (AD) leading to cyclical unemployment. It should show the initial equilibrium and the new equilibrium with lower output and higher unemployment.
• Labor Market Diagram: This can be used to show structural unemployment, where the supply of labor exceeds demand at the prevailing wage rate.

Answers may include:

Definitions

1. Poverty: The inability to meet standard consumption needs. These standards can be absolute or relative.
2. Economic Growth: An increase in a country's real output (real GDP) over a period time.
3. Economic Growth Potential: The maximum possible output an economy can achieve when all resources are fully and efficiently utilized.

Economic Theory

• Link between Poverty and Economic Growth Potential:
  • Human Capital: Poverty limits access to education and healthcare, reducing human capital development. Lower human capital diminishes labor productivity, which is crucial for economic growth.
  • Investment: High poverty levels can lead to lower savings and investment rates, as individuals prioritize immediate consumption over savings. This reduces capital accumulation, a key driver of economic growth.
  • Market Size: Poverty reduces the purchasing power of a significant portion of the population, limiting domestic market size and discouraging investment in production capacity.
  • Social Stability: High poverty can lead to social unrest, which can deter investment and disrupt economic activities, further hindering growth potential.

Diagram

• Production Possibility Curve (PPC):
• Include an inwards shift from PPC1 to PPC2, showing fewer quantities of Good X and Good Y produced.

Evaluation

• Stakeholders:

  • Government: Faces increased pressure to provide social welfare, which can strain public finances and reduce funds available for growth-enhancing investments.
  • Businesses: May experience reduced demand for goods and services, limiting their growth and profitability.
  • Individuals: Those in poverty face limited opportunities for upward mobility, perpetuating the cycle of poverty and limiting overall economic growth.

• Long-run vs. Short-run:

  • Short-run: Immediate effects of poverty may include reduced consumer spending and lower aggregate demand, leading to slower economic growth.
  • Long-run: Persistent poverty can lead to structural issues such as a poorly educated workforce and inadequate infrastructure, significantly reducing growth potential.

• Advantages vs. Disadvantages:

  • Advantages: Addressing poverty can lead to a more equitable distribution of resources, potentially increasing social cohesion and stability, which are conducive to growth.
  • Disadvantages: High levels of poverty can lead to increased crime and health issues, which can further strain economic resources and reduce growth potential.

• Prioritize:

  • While poverty is a significant factor affecting economic growth potential, other factors such as technological innovation, political stability, and global economic conditions also play crucial roles. Therefore, while addressing poverty is essential, it should be part of a broader strategy to enhance growth potential.

• Real-world Example:

  • India: Despite rapid economic growth, India faces significant poverty levels. According to the World Bank, over 20% of the population lives below the national poverty line. This has implications for India's growth potential, as seen in challenges related to education and healthcare access. Efforts to reduce poverty, such as the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), aim to improve income levels and, consequently, economic growth potential.

Conclusion

1. Poverty significantly impacts economic growth potential by limiting human capital development and investment.
2. Addressing poverty can enhance growth potential, but it should be part of a comprehensive strategy that includes other growth-enhancing measures.
3. Real-world examples, such as India, illustrate the complex relationship between poverty and economic growth potential, highlighting the need for targeted policy interventions.