France's Recent Economic Activity

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Global Business Context Assignment 2008
Part 1:
France’s economic performance over the last 40 years can be illustrated using three main macroeconomic variables; unemployment, inflation and GDP. When comparing them against each other, we can explain the relationships between each variable. (A table of the variables can be found in the appendix.)

This graph shows that although there appears to be no direct relationship between GDP and unemployment until after around 1986, a correlation begins after this point. As we would expect to see, GDP increases as the rate of unemployment falls and vice-versa. Unemployment has been increasing since 1970 and continued until around 1986, eventually peaking with very high rates of nearly 12% in 1994.

When analysing the French GDP, it is evident that although it fluctuates, it does not follow a predictable pattern between 1970 and 1986; all three variables seem to be unstable until around this time. It is worth noting that the economy seems to perform better from the time Jacques Chirac became president in 1995, which may have been due to new economic policies. Also, the substantial dip in GDP and sharp increase in inflation from the early 1970’s was probably attributable to the OPEC oil crisis of 1973 (and 1978) which would have affected both businesses and homes, resulting in less money to spend and less potential for output. (Zaleski, 1992)

This graph reveals French inflation taking on a surprising path, moving in the opposite direction to changes in GDP which we would not normally expect to happen. This, alongside an analysis of the inflation and unemployment graph indicates that France experienced cost-push inflation from 1970 until around 1985.

As the costs of production rose due to the inflation mainly caused by the OPEC oil crisis (an example of import push inflation), unemployment increased as companies could not afford to pay workers and thus reduced their output. The effect of this can be further demonstrated by an aggregate demand and aggregate supply model, figure 1:

The AS curve shows the amount of output that can be supplied at a price. When this shifts left, decreasing the supply of goods, the curve moves up along the AD curve, resulting in an increase in demand which allows for inflation to occur.

However, when cost-push inflation takes place, it cannot last as inflation results in less disposable income, eventually causing demand to fall. When this happens, as it did in France from 1986, the aggregate demand (AD) curve shifts left and down the aggregate supply (AS) curve so prices begin to fall. This lowers inflation and should also in theory have a positive effect on unemployment.

During the period of cost-push-inflation, it is likely that France was experiencing demand deficient unemployment as consumer demand fell (Sloman 2005). Although a type of equilibrium unemployment, French rates in 1986 were still very high compared with Germany (6.6%), Austria (3.3%) and Italy (8.9%) . This can again be explained using simple AS and AD models of the goods and labour markets:

The model shows that for any level of GDP (output) there is a corresponding level of employment because as demand for goods increases, so must the demand for labour to accommodate the required levels of supply. The inflation in France around this time was so high that it affected the unemployment rates substantially.

After this period, it could be argued that France began to experience frictional unemployment due to the strict labour laws. Although difficult to dismiss workers in France as we will soon discuss, companies had no choice during the times of cost-push inflation. However, due to the labour laws it is likely that after this period companies were not eager to take on new staff. Although jobs would have been available in France at this time, people could not obtain paid work and the country’s output, and therefore GDP, began to fall...
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