HOW ELSE CAN YOU MEASURE AN ECONOMY’S HEALTH?
Unemployment and Inflation
Basic Laborious terms
Labor Force: # of people employed + # of people
unemployed Doesn’t include:
Students, kids, retired people, the homeless
Who’s “employed”?
≥ 16 years with a job
Must work 1 hour per week
≥ 16 years w/o a job
Actively searching for a job
EMPLOYED UNEMPLOYED
How do you calculate…
# unemployed
_______________________
# of people in the labor force
(unemployed + employed)
# people in labor force
__________________total population
Unemployment RateLabor Force Participation Rate
LABOR FORCE INDICATORS (2005)
4 TYPES OF UNEMPLOYMENT
Frictional Voluntarily between jobs
College graduates PBJ is healthy and natural!
Structural Mismatch of skills
Don’t have technologyskills
4 TYPES OF UNEMPLOYMENT
Cyclical Increases during a recession Decreases during an expansion
Seasonal Changes due to weather
Other workers…
Willing and able to work, but become so frustrated that they stop trying
Claim to be unemployed in order to receive unemployment benefits even when they don’t want job or receive money elsewhere.
Discouraged Workers Dishonest Workers
Unemployment and Recessions
The average unemployment rate was 5.9%
What do economists strive for?
Some unemployment is a good thing Frictional unemployment is expected
Too much unemployment is a bad thing OKUN’S LAW: for every one percentage
increase in unemployment rate, output (GDP) falls by 2-3 percentage points
FULL EMPLOYMENT
AKA
THE NATURAL RATE OF UNEMPLOYMENT
When there is no cyclical unemployment Full potential! 4-5%
THE NATURAL RATE
Cyclical unemployment is shown by the shaded regions.
Practice Problems over GPD/Unemployment
Which of the following are included in the calculation of GDP? Which category? A new stock purchased from Apple The money received from babysitting a
neighbor An IPOD purchased for your mom’s birthday The Ford’s leftover on a lot at the end of
the year The tire used to make your bike The government builds a new highway Clothing purchased from China
Calculating Unemployment
1. What is the formula for calculating the unemployment rate? Labor force participation rate?
2. If given the following circumstances, what is the unemployment rate? Labor force participation?
1000 people (the population) 475 civilians employed 200 full-time students 100 stay-at home parents 25 active job seekers
What is occurring in Bolivia in the 1980s?Why is this occurring?How does it affect its citizens?
The Causes and Effects
HOW DO YOU CALCULATE INFLATION?
The Consumer Price Index
Consumer Price Index
Measures the average price of goods that urban consumers buy 400 consumer goods and services Can be from abroad
http://www.bls.gov/cpi/tables.htm
What’s in the CPI?
Calculating CPI: Base Year Prices
Commodity Quantity 2005 per unit price
Total
Oranges 10 $1 $10
Haircuts 5 $8 $40
Total cost of Market Basket
---- ---- $50
1. Calculate the total market basket of one year by multiplying Quantity X 2005 per commodity
price, then adding both commodities together. 2005 MARKET BASKET/BASE YEAR
Calculating CPI: 2006
Commodity Quantity 2006 per unit price
Total
Oranges 10 $2 $20
Haircuts 5 $10 $50
Total cost of Market Basket
---- ---- $70
1. Calculate the total market basket of 2006 by multiplying Quantity X 2006 per commodity
price, then adding both commodities together. 2006 MARKET BASKET
How do we Calculate CPI?
Cost of CPI @ current priceCost of CPI basket @ base price
x 100
Commodity Quantity 2005 per unit price
Total
Oranges 10 $1 $10
Haircuts 5 $8 $40
Total cost of Market Basket
---- ---- $50
How do we Calculate Inflation?
CPI current CPI previous
CPI previous
x 100Inflation rate =
Inflation = 70-50 = 20 X 100 = 40%
50 50
What’s the Inflation Rate?
Commodity Quantity 1993 per unit price
1994 per unit price
Food 4 units $7 $5
Clothing 5 units $5 $8
Shelter 3 units $9 $20
1. What is the market basket total for 1993?2. What is the market basket total for 1994?3. What is the inflation rate between the two
years?4. How do you think this inflation would affect
people earning a fixed income?
Inflation is the gradual increase of prices (from CPI)
Inflation
CPI in current year CPI in previous year
CPI in previous year
x 100Inflation rate =
The Types and Causes of Inflation $$$
Demand Pull Inflation: Rightward shift of the demand curve Excess demand for products causing
shortages “Too much money chasing too few goods!”
Caused by printing too much money
Cost Push Inflation: Leftward shift of the supply curve
Caused by high input costs 1970s high price of oil
The effects of inflation…
If there is inflation… these people are affected in the following ways:
Hurt Unaffected Helped
•Fixed income receivers
•Savers
•Lenders
* Decrease in purchasing power
Flexible income receivers
Borrowers
To protect against inflation:
Lenders add an inflation premium:*Nominal interest rate (what we pay) = real
interest rate + expected inflation Firms add the COLA (Cost of Living
Adjustment) calculated from the CPI*Real income= nominal income/price index
What roles do interest rates play in the health of
economies? Interest Rates: the price of money
Interest rates can affect the way people behave A high nominal interest rate encourages people
to save more A low nominal interest rate encourages people
to take out more loans
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