2 Production Possibly Frontier (PPF) The PPF model can be used to illustrate changes in unemploymentAny point on the frontier represents full employmentA movement from the frontier to a point inside the curve shows underutilisation of resources (workers) and thus represents unemploymentIncrease in unemploymentCapital GoodsABConsumer Goods
3 PPF and unemploymentDecrease in Real Output/IncomeAs an economy experiences a downturn, real output falls.As output falls the demand for labour falls, thus increasing unemployment levels.Illustrated as a movement away from the frontier line.AB
4 PPF and UnemploymentDecrease in productive capacityLess resources available to the economy, thus there is a decrease in potential output.e.g. Emigration (people leaving) NZShowing by a shift inwards of the PPF.
6 AD/AS Model RevisitedAD/AS model shows the relationship between Price Levels (inflation) and real output.The full employment line can be used to show the gap between the output that could be produced if we used all the resources (workers etc.) available to us and the output level we are currently producing.ASPL*The gap between Y* and Yf demonstrates the underutilisation of resources (unemployment)ADY*YFUnemployment
7 AD/AS Model and Unemployment Decrease in AD – represents increased cyclical unemployment called – Demand deficient unemploymentASe.g. Household spending falls – they spend less on goods and services.The demand for goods and services falls .Shifts the AD curve left – Causes cyclical unemployment to occurFall in real output and increase in unemploymentPL*PL1ADAD’y1Y*YFUnemploymentunemployment
8 AD/AS and Unemployment Increased cyclical unemployment may be caused by decreases in AS – called supply side unemploymentASASe.g. The cost of imported raw materials rises.The rise of costs of production causes the AS curve to shift to the left.This results in a fall in real output and an increase in unemployment (cyclical)PL1PL*ADy1Y*YFUnemploymentUnemployment