Transcript Unemployment and Inflation

Unemployment and Inflation
The evil twins of the
Macroeconomy
GDP, Unemployment & Inflation
• As GDP changes it also changes the level of
employment and the prices we pay for goods
and services.
• The problem for government is trying to cure
both evils at one time.
If GDP increases, people earn more and spend more
(good) and price level (inflation) increases (bad).
GDP increases and so does employment and inflation.
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EMPLOYMENT
If GDP decreases, people earn less and spend less
(bad) and price levels (inflation) decreases (good).
GDP decreases and so does employment and inflation.
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EMPLOYMENT
Employment: You are considered
employed if
• You are at least 16 years or older and:
• You worked at least 1 hour for pay within
the last week
• You worked 15 hours or more at a family
business without pay
• You held a job but did not work due to
illness, vacation, labor dispute or bad
weather
Unemployment
• Unemployed - to be without work and
to be actively seeking employment
• Unemployment rate – number of
unemployed divided by number in civilian labor
force x 100
• Unemployment rate is the measure of
joblessness in the U.S.
UNEMPLOYMENT
Measurement of Unemployment, 2000
Total
Population
275,400,000
Under 16
and/or
institutionalized
65,800,000
Not in
labor
force
68,800,000
135,200,000
Employed
Unemployed
Civilian
Labor
force
140,800,000
5,600,000
Problems with Unemployment Rate
• Those who have become so frustrated
and stop looking are no longer
considered unemployed - discouraged
workers.
• Many people are underemployed.
Those who work minimally (a least
one hour) are considered employed.
Also many people take jobs below
their skill level.
Who’s Employed and Who’s Not
Classify each of the following individuals as
EMPLOYED, UNEMPLOYED or NOT IN THE LABOR FORCE
• Steve worked forty hours last week in a
music supply store.
• Last week, Elizabeth worked 10 hours as a
computer programmer for the National
Video Company and attended night classes
at the local college. She would prefer a
full-time job.
Classify each of the following individuals as
EMPLOYED, UNEMPLOYED or NOT IN THE
LABOR FORCE
• Roger lost his job at the R-Gone Manufacturing
Company. Since then he has been trying to find a
job at other local factories.
• Linda is a homemaker. Last week she was
occupied with her normal household chores. She
neither held a job nor looked for a job.
• Linda’s father is unable to work.
Types of Unemployment
• Frictional unemployment - people who are
temporarily between jobs. Their skills are in
demand (ex: recent graduates, those who have relocated)
– Seasonal unemployment - workers who due to
weather or other variations are not working presently
• Structural unemployment - involves mismatches
between job seekers and job openings. People
lack skills needed.
• Cyclical unemployment - caused by recessions.
People aren’t buying goods so workers are laid
off.
Full Employment Rate
a.k.a. Natural Rate of Unemployment
• It is the lowest possible unemployment rate
with the economy growing (maximum
potential employment) .
• It takes into account unavoidable
unemployment such as structural, frictional
and seasonal, but not cyclical.
• The full employment rate is considered to
be about 5% unemployed.
Inflation
• Inflation is a general rise in the
price level
• Inflation reduces the value or
purchasing power of your money
• The inflation rate is the
percentage change in prices over
time.
Causes of inflation
• Demand Pull Theory – demand
for goods & services exceeds
existing supply (Demand shifts
right).
• Quantity Theory of Money – too much
money causes price levels to rise.
• Cost Push Theory - producers
raise prices in order to meet
increased costs (Supply shifts left).
Cost-push
Demand-pull
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Consequences of inflation
• Purchasing power eroded - the
dollar buys less
• Income reduced if it is a fixed
income.
• Savers lose money - Interest Rates
may not keep up with inflation.
(You’re saving at a 5% interest rate but
inflation is 7% so your real return is a -2%
Some people are helped by inflation
• Borrowers - the money you are
paying back is worth less than the
money you borrowed. (Fixed
payer)
• Flexible income earners – if you
are a store owner or you have a
cost of living adjustment built into
your wage your income rises with
Some people are hurt by inflation
• Lenders - the money you are
receiving back is worth less than
the money you loaned. (Fixed
income earner)
• Flexible payer – if your costs rise
as inflation rises you are hurt by
inflation.
Price Indexes
• Because GDP is a dollar measure, inflation
can distort it. Price indexes help
economists measure real changes in output
over time.
• A price index is a measurement of how the
average price of a standard group of goods
changes over time.
Price Indexes
• The most famous index is the
Consumer Price Index (CPI).
• The CPI is determined by using a
constant priced “market basket”.
• This market basket is a group of goods
bought by the “typical urban”
consumer.
What’s in the CPI’s Basket?
5%
6%
6% 5% 5%
Housing
Food/Beverages
Transportation
40%
17%
16%
Medical Care
Apparel
Recreation
Other
Education and
communication
Calculating the CPI
• Current price / base period price x 100
$400/$200 x 100 = 200
This would tell us that prices doubled
over the past year.
Calculating the Inflation Rate
Start With CPI for current year
Minus
- CPI for previous year
Divided by
/ CPI for previous year
Multiplied by
x 100
For example: If the CPI for 1999 was 166 and the CPI for
1998 was 163
Then,
166 -163 = 3
3/163 = .018
.018 X 100 = 1.8 % is the inflation rate for 1999
(current CPI – previous CPI) / previous x 100