1 Chapter 7: Unemployment, Inflation, and Deflation ECON 151 – PRINCIPLES OF MACROECONOMICS Materials include content from Pearson Addison-Wesley which has been modified by the instructor and displayed with permission of the publisher. All rights reserved.
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Chapter 7:
Unemployment, Inflation, and Deflation
ECON 151 – PRINCIPLES OF MACROECONOMICS
Materials include content from Pearson Addison-Wesley which has been modified by the instructor and displayed with permission of the publisher. All rights reserved.
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Explain how the U.S. government calculates the official unemployment rate
Discuss the types of unemployment Describe how price indexes are calculated
and review the key types of price indexes
Learning Objectives
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Distinguish between nominal and real interest rates
Evaluate who loses and who gains from inflation
Understand key features of business fluctuations
Learning Objectives
4
QuestionWho are the unemployed?
UnemploymentThe total number of adults (aged 16 years or
older) who are willing and able to work and who are actively looking for work but have not found a job
Unemployment
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Lost output Early 2000s unemployment rate rose by 2
percentage points Factory output was 80% of potential Lost output was $200 billion of goods and services
that could have been producedPersonal psychological impact
Costs of Unemployment
6Source: U.S. Department of Labor, Bureau of Labor Statistics
Figure 7-1
More than a Century of Unemployment
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The unemployment rate is the percentage of the measured labor force that is unemployed.
Unemployment
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Labor Force Individuals aged 16 years or older who either
have jobs or are looking and available for jobs
Unemployment
Labor force = the employed + the unemployed
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147.7* = 139.5 + 8.2
Unemployment
*U.S., millions of people; as of 2005
Labor force = the employed + the unemployed
Unemployment rate = x 100%unemployed
labor force
= x 100 % = 5.6%8.2
147.7
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StocksThe quantity of something (unemployed)
measured at a point in time Flow
A quantity measured over time (job leavers, job finders)
Protecting against inflationCost-of-living adjustments (COLAs)
Clauses in contracts that allow for increases in specified nominal values to account of changes in the cost of living
Inflation and Deflation
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The resource cost of inflationRepricing, or menu, cost of inflation
The cost associated with recalculating prices and printing new price lists when there is inflation
Inflation and Deflation
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Business FluctuationsThe ups and downs in overall business
economic activity National income Employment Price level
Changing Inflation and Unemployment: Business Fluctuations
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ExpansionA business fluctuation in which overall
business activity is rising at a more rapid rate than previously or at a more rapid rate than the overall historical trend for the nation
Changing Inflation and Unemployment: Business Fluctuations
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ContractionA business fluctuation during which the pace
of national economic activity is slowing down
Changing Inflation and Unemployment: Business Fluctuations
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RecessionA period of time during which the rate of
growth of business activity is consistently less than its long-term trend or is negative
DepressionAn extremely severe recession
Changing Inflation and Unemployment: Business Fluctuations
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The Idealized Course of Business Fluctuations
Figure 7-7Time
Lev
el o
f N
atio
nal
Bu
sin
ess
Act
ivit
y
Peak
Peak
Growth trend
Exp
ansi
on
Trough
Contraction
(recession)
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National Business Activity,1880–Present
Figure 7-8Source: American Business Activity from 1790 to Today, 67th Edition,
AmeriTrust Co., January 1996, plus author’s projections.
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Leading Indicators Events that typically occur before, or “lead” changes
in business activity Leading indicators can be used to identify external
shocks. Examples of recession indicators
Reduction in the average workweek Decrease in prices of raw materials Drop in the quantity of money circulating
Changing Inflation and Unemployment: Business Fluctuations
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The National Bureau of Economic Research publishes data on the length of all business contractions and expansions.
The cycle of business fluctuations has become longer over time, because the expansionary phase is now more prolonged.
Over the past half-century, the average expansion has lasted 57 months.
Issues and Applications: The Length of the Business Cycle
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How the U.S. government calculates the official unemployment rate Unemployment is the percentage of the labor force
that is looking for work and currently not working
Types of Unemployment Frictional Structural Cyclical Seasonal
Summary Discussion of Learning Objectives
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How price indexes are calculated and the key price indexes A price index is the cost of today’s market of goods
expressed as a percentage of the cost of the same markets basket during a base year
Key price indexes CPI PPI GDP Deflator
Summary Discussion of Learning Objectives
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Summary Discussion of Learning Objectives
The nominal versus the real interest rate Real interest rate = nominal interest rate - anticipated
rate of inflation
Those who lose from inflation and those who gain Losers are creditors Gainers are debtors
Key features of business fluctuations Contractions Expansions
Chapter 7:
Unemployment, Inflation, and Deflation
ECON 151 – PRINCIPLES OF MACROECONOMICS
Materials include content from Pearson Addison-Wesley which has been modified by the instructor and displayed with permission of the publisher. All rights reserved.