Transcript Prices And Unemployment

Chapter 5.
Prices And Unemployment
 Most macroeconomics discussions:
1.
2.
3.
4.
Macroeconomics problems.
Macroeconomic theories.
Macroeconomic policies.
Different views of how the economy
works.
 Macroeconomic problems, such as:
1.
2.
3.
4.
High inflation rate.
High unemployment rate.
High interest rate.
Low economic growth.
 Three macroeconomic organizational
categories:
1. P-Q category.
2. Self regulating economic instability
category.
3. Effective ineffective category.
The P-Q Category:
 Deal with many variables, two major variables are:
- price level.
- real GDP.
 The price level:
the weighted average of the prices of all goods and
services.
 Real GDP:
the value of the entire output produced annually
within a country’s borders, adjusted for price
changes.
The P-Q Category (continued):
 P = price level
 Q = real GDP
 GDP (gross domestic product):
P times Q
 Unemployment:
changes in unemployment are related to
changes in Q.
The P-Q Category (continued):
 Inflation:
a rising P
 Deflation:
a falling P
 Economic growth:
related to increasing Q
The P-Q Category (continued):
 Stagflation:
a rising P combined with rising unemployment.
 Business cycle:
recurrent swings up and down in Q
 Fiscal policy:
concerned with stabilizing P and increasing Q
 Monetary policy:
concerned with stabilizing P and increasing Q
The Effective Ineffective Category:
 Describe fiscal policy and monetary policy
 Fiscal policy:
changes in government expenditures and/or changes
in taxes to achieve particular macroeconomics goals.
 Monetary policy:
changes in the money supply, or the rate of growth of
the money supply, to achieve particular
macroeconomic goals.
Macroeconomic Measures:
Measuring Prices Using The CPI (Consumer Price Index)
 Economists measure the price level by
constructing a price index.
 One major price index is CPI.
 CPI:
{total expenditure on market basket in current year /
total expenditure on market basket in base year} x
100
Macroeconomic Measures:
Measuring Prices Using The CPI (Consumer Price Index)
(continued)
 Base year:
the year chosen as a point of reference or
basis of comparison for prices in other years;
benchmark year.
(1)
Market Basket
(2)
Current Year
Prices (per
item)
(3)
Current Year
Expenditures
{(1) x (2)}
(1A)
Market Basket
(2A)
Base Year
Prices (per
item)
(3A)
Base Year
Expenditures
{(1A) x (2A)}
10 pens
$ 0.70
$ 7.00
10 pens
$ 0.20
$ 2.00
5 shirts
$ 14.0
$ 70.00
5 shirts
$ 7.00
$ 35.00
3 pair of shoes
$ 30
$ 90.00
3 pairs of shoes
$ 10.0
$ 30.00
Total $ 167.0
Total $ 67.00
CPI = {(total expenditure on market basket in
current year) / (total expenditure on
market basket in base year)} x 100
CPI = { 167 / 67 } x 100
CPI = 249
CPI 1959-2006
Based 1982-1984
Year
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
CPI
29.1
29.6
29.9
30.2
30.6
31.0
31.5
32.4
33.4
34.8
36.7
More about base year:
- Base year is benchmark year that serves as a
basis of comparison for prices in other years.
- The CPI in the base year is 100.
 When we know the CPI for various years, we
can compute the percentage change in
prices:
Percentage change in prices:
[{(CPI later year) – (CPI earlier year)} / CPI earlier year] x 100
Example:
CPI in 1990 was 130.7
CPI in 2005 was 195.3
What was the percentage change in prices over
this period time?
It was 49.43%?
Inflation And CPI
 Inflation:
an increase in the price level.
 Real income:
nominal income adjusted for price changes.
 Nominal income:
the current dollar amount of person’s income.
Inflation And CPI (Continued)
 Real income:
{(nominal income) / (CPI)} x 100
Measuring Unemployment
Who are the unemployed?
Persons under 16
Persons in the armed forces
Not in labor force
Total Population
Employed
Civilian
Non institutional
Population
Civilian labor force
Unemployed
Civilian labor force:
Employed persons + unemployed persons
 Employed persons consist of:
- all persons who did any work for pay or
profit.
- all persons who were temporarily absent
from their regular jobs because of illness, vacation,
bad weather, industrial dispute, or various personal
reasons.
 Unemployed persons consist of:
- all persons who did not have jobs, made
specific active efforts to find a jobs, made
specific active efforts to find a job during
the prior four weeks, and were available for
work.
- all persons who were not working and were
waiting to be called back to a job from which
they had been temporarily laid off.
Unemployment Rate (U):
 The percentage of the civilian labor force that
is unemployed.
U = (number of unemployed persons) /
(civilian labor force)
Employment Rate (E):
 The percentage change of civilian non
institutional population that is employed.
E = (number of employed persons) / (civilian
non institutional population)
Labor Force Participation Rate (LFPR)
 The percentage of the civilian non institutional
population that is in the civilian labor force.
LFPR = (civilian labor force) / (civilian non
institutional population)
Reasons For Unemployment:
1. Job loser:
- was employed in the civilian labor force
and was either fired or laid off.
2. Job leaver:
- employed in the civilian labor force who
quits his or her job.
3. Reentrant:
- previously employed, has not worked for some
time, and is currently reentring the labor force
4. New entrant:
- has never held a full time job for two weeks or
longer, and is now looking for a job.
Types Of Unemployment:
1. Frictional unemployment (Uf):
unemployment due to the natural frictions of
the economy, which is caused by changing
market conditions and is represented by
qualified individuals with transferable skills
who change jobs.
Types Of Unemployment (continued):
2. Structural unemployment (Us):
- Unemployment due to structural changes in
the economy that eliminate some jobs and
create other jobs for which the unemployed
are unqualified.
Types Of Unemployment (continued):
3. Natural unemployment (Un):
- Unemployment caused by frictional and
structural factors in the economy.
Natural unemployment = Frictional
unemployment rate + Structural
unemployment rate
Un = Uf + Us
What Is Full Employment?
 The condition that exists when the
unemployment rate is equal to the natural
unemployment rate.
Homework:
1. Suppose there are 80 million people
employed, 15 million unemployed, and 5
million not in the labor force. What does the
civilian non institutional population equal?