Transcript 5 - Cloudfront.net

Ch 5: Macroeconomic
Measurements, Part I
Prices & Unemployment
Del Mar College
John Daly
©2003 South-Western Publishing, A Division of Thomson Learning
Measuring Prices
• To Measure Prices, we
use the Consumer
Price Index.
• The CPI is based on a
“market basket” of
typical household
goods & services.
Consumer Price Index
• We use a base year to calculate the CPI.
• The CPI is equal to the Total dollar
expenditure in the current year for the
market basket DIVIDED BY the Total
dollar expenditure in the base year for the
market basket.
• This Result is then multiplied by 100.
Consumer Price Index
180
160
140
CPI
120
100
80
60
40
20
0
1913-1999
Consumer Price Index
• Percentage difference in the CPI from one
year to any other year =
(CPI later year – CPI earlier year) X 100
__________________________________________________________________________________
CPI earlier year
• Inflation is an increase in the price level and
is usually measured over some time period.
Are You Beating (CPI) Inflation
or is Inflation Beating You?
• Nominal Income is the current-dollar
amount of a person’s income.
• The Real Income measurement is reached
by dividing Nominal Income by the
Consumer Price Index, the result multiplied
by 100
Real Income = [(Nominal Income)/CPI]x100
How Is The CPI Used?
• The CPI is used as
– An economic indicator
– To find the real value of an economic variable
– To adjust certain income payments
Substitute Bias in Fixed Weight
Measures
• A fixed weight price
assumes the same items
are bought
• A Substitute Bias is when
one good is substituted for
another: An example is
White Bread is Substituted
for Rye Bread.
• As a result of the
Substitution bias, fixed
weight measures can
overstate the “cost of
living”
Other Measures
• The Chain-Weighted
Price Index corrects
for the substitution
bias found in fixed
weight measures.
• The GDP deflator is
based on all goods and
services within an
economy.
Converting Dollars from One
Year to Another
• Take your price, income, or salary that you
want to compare. Choose the current year
and the year to compare to.
• Complete this formula:
(CPI current year / CPI earlier year) x Income
to discover the current level of income in an
earlier time’s dollars.
Q&A
• Explain how the CPI is calculated.
• If the CPI in one year is 132.5, and is 143.6
the following year, what is the inflation
rate?
• What is the difference between a fixedweighted price index and a chain-weighted
price index? Why is that difference
important?
UNEMPLOYMENT
• The Potentially Employed are defined as: older
than 16 years; not in the armed services; not
institutionalized. This is the “civilian noninstitutional population”.
• A person is considered Employed if: he did at
least one hour of paid work during the survey
week; worked in his or her own business or
profession; worked at least 15 hours per week as
an unpaid worker in a family-owned farm or
business; was temporarily absent from work due
to illness, vacation, strike, or bad weather.
Unemployment
• A person is unemployed if: he did not work during
the survey week, has actively looked for work
within the past 4 weeks and is available for work;
is waiting to be called back to a job from which he
or she has been laid off; is waiting to report to a
job within 30 days.
• The Unemployment rate is equal to the number of
people unemployed divided by the number of
people employed added to the number of people
unemployed.
Employment Rate
• The Employment rate is
equal to the number of
employed persons divided
by the Civilian Noninstitutionalized
Population.
• The labor force
participation rate is equal
to the Civilian Labor
Force divided by the
Civilian Noninstitutionalized
Population.
Classifying the Unemployed
• Job Loser: was employed in the civilian labor
force, was either fired or laid off.
• Job Leaver: was employed in the civilian labor
force, quit his or her job.
• Reentrant: A person who was employed, hasn’t
been for a period of time and is reentering the
labor force.
• New Entrant: A person who has never held a full
time job for two weeks or longer.
• Unemployed persons = Job Losers+ Job
Leavers +Reentrants + New Entrants
Discouraged Workers
• A person who gives up looking for a job,
for whatever reason, is no longer considered
part of the unemployment rate, because the
person has stopped looking for work.
• The unemployed worker gets counted and
the discouraged worker does not.
• Does this give us a good count of the “true
unemployment problem” today?
Types of Unemployment
• Frictional Unemployment: loss of employment is
due to the natural friction of the economy. This
includes changing market conditions, and those
people who change jobs.
• Structural Unemployment: loss of employment
due to elimination of jobs from the economy.
• Natural Unemployment Rate: Adding the
Frictional Unemployment Rate and the Structural
Unemployment Rate provides you the Natural
Unemployment Rate.
Full Employment?
• Full employment exists when
the economy is operating at
the Natural Unemployment
Rate.
• The Difference between the
Natural Unemployment Rate
and the Current
Unemployment Rate (if any)
is called the Cyclical
Unemployment Rate.
Q&A
• What is the major difference between a
person who is frictionally unemployed and
one who is structurally unemployed?
• If the Cyclical unemployment rate is
positive, what does this imply?
Job Search Theory
• Many job searchers do
not accept the first job
they are offered
because they cannot be
sure that a better job is
waiting around the
corner.
Job Search Theory
• The lowest wage a person will accept at any
time in the job search process is called the
person’s reservation wage.
Optimal Search Time
• During the period of 19981999, the mean duration of
unemployment was about 13
weeks.
• During the same time, the
median duration of
unemployment was about 6
weeks.
• As Optimal Search Time
increases, the Unemployment
Rate increases.
• As Optimal Search Time
decreases, the Unemployment
Rate decreases.
Q&A
• Suppose unemployment benefits increase.
How will this effect the Optimal Search
Time and the Unemployment Rate?
Explain your answer.
• A person says” I don’t think of the costs and
benefits of searching for a job, I simply
search for as long as it takes to get a job.”
Comment on this.