Unemployment and Inflation Macroeconomic Measurement, cont.

Unemployment and Unemployment and InflationInflation

Macroeconomic Measurement, Macroeconomic Measurement, cont. cont.

UnemploymentUnemployment

The Labor Force:The Labor Force:

All adults 16 and older who are All adults 16 and older who are able and willing to work.able and willing to work.

The Unemployed:The Unemployed:

The percentage of the labor force The percentage of the labor force that is without a job.that is without a job.

UnemploymentUnemployment

Why unemployment figures you Why unemployment figures you hear may be misleading:hear may be misleading:

Unrealistic wage expectationsUnrealistic wage expectations Discouraged workers (jobless) Discouraged workers (jobless)

are not countedare not counted All part-time workers are All part-time workers are

considered fully employedconsidered fully employed

UnemploymentUnemployment

Unemployment Insurance:Unemployment Insurance:

A government programA government program Your employer contributes on Your employer contributes on

your behalfyour behalf Acts as an income replacement Acts as an income replacement

program for a limited time program for a limited time should you become unemployed should you become unemployed through no fault of your ownthrough no fault of your own

UnemploymentUnemployment

Unemployment Figures:Unemployment Figures:

How unemployment rates are How unemployment rates are calculatedcalculated

Natural Rate of UnemploymentNatural Rate of Unemployment Average rateAverage rate Current ratesCurrent rates Highest recorded rateHighest recorded rate

UnemploymentUnemployment

Benefits of Unemployment:Benefits of Unemployment:

Easier to match up workers with Easier to match up workers with jobsjobs

Employers have better selectionEmployers have better selection Disciplinary benefits to firmsDisciplinary benefits to firms

UnemploymentUnemployment

Costs of Unemployment:Costs of Unemployment:

Loss of output and incomeLoss of output and income Decreased quality of human Decreased quality of human

capital if unemployment is capital if unemployment is prolongedprolonged

Increased crime rateIncreased crime rate Loss of self-esteemLoss of self-esteem

UnemploymentUnemployment

Types of unemploymentTypes of unemployment

FrictionalFrictional StructuralStructural CyclicalCyclical SeasonalSeasonal

See worksheet packet!See worksheet packet!

InflationInflation

A general rise in the level of A general rise in the level of pricesprices

Does not mean all prices are Does not mean all prices are rising at the same timerising at the same time

Not the result of a one-time shockNot the result of a one-time shock

InflationInflation

DeflationDeflation

A general decline in the level of A general decline in the level of pricesprices

Rarely occursRarely occurs Indicates a serious recessionIndicates a serious recession

InflationInflation

DisinflationDisinflation

A decrease in the inflation rateA decrease in the inflation rate Generally a sign of a healthy Generally a sign of a healthy

economyeconomy

InflationInflation

Goal is to achieve price stabilityGoal is to achieve price stability

Nominal vs. Real IncomeNominal vs. Real Income

InflationInflation

Types of InflationTypes of Inflation

Demand-Pull:Demand-Pull: Spending increases faster Spending increases faster than output can keep up with – “than output can keep up with – “too too many dollars chasing too few goodsmany dollars chasing too few goods””

Cost-Push:Cost-Push: results from an increase in results from an increase in costs that cause producers to produce costs that cause producers to produce lessless

Expected Rate (1-2%):Expected Rate (1-2%): caused by rising caused by rising resource costsresource costs

Hyperinflation:Hyperinflation: extremely rapid rise in extremely rapid rise in prices, very rareprices, very rare

InflationInflation

Measuring InflationMeasuring Inflation

Allows you to tell if your real Allows you to tell if your real income rose or fell in a given yearincome rose or fell in a given year

Price Index: a comparison of the Price Index: a comparison of the general level of prices in a given general level of prices in a given year with the prices of an earlier year with the prices of an earlier yearyear

InflationInflation

Consumer Price Index (CPI)Consumer Price Index (CPI)

The most widely reported The most widely reported measure of inflation for cost of measure of inflation for cost of livingliving

Measures a market basket of Measures a market basket of about 300 goods and services about 300 goods and services purchased by an urban family of purchased by an urban family of fourfour

InflationInflation

Producer Price Index (PPI)Producer Price Index (PPI)

Reports on resource prices to Reports on resource prices to producersproducers

A leading indicator of consumer A leading indicator of consumer pricesprices

InflationInflation

Effects of InflationEffects of Inflation

Who is hurt and who is helped?Who is hurt and who is helped?

See worksheet packet!See worksheet packet!

Putting GDP, Unemployment and Inflation together and creating a picture of economic conditions.

THE BUSINESS CYCLE

Economic GrowthHistorically, we have experienced tremendous growthTechnological ProgressRapid increases in productive

capacityAchieved the highest standard of

living in the world

Economic GrowthLong-run growth has not been steadyInterrupted and complicatedCaused by unemployment and inflation

The Business Cycle Defined

The recurrent ups and downs in the level of economic activity that extends over several years.

The Phases of the Business Cycle

Vary greatly in duration and intensity

The Phases of the Business Cycle

Expansion (Recovery)Spending increasesOutput (GDP) increasesUnemployment decreasesIncomes increasePrice level (inflation rate) increases

The Phases of the Business Cycle

Peak (Prosperity)Spending and income at a temporary

maximumOutput (GDP) at full-employmentUnemployment at the natural ratePrice Level (inflation rate) high

The Phases of the Business Cycle

Contraction (Recession)Spending decreasesOutput (GDP) decreasesUnemployment increaseIncomes decreasePrice Level (inflation rate) decreases

The Phases of the Business Cycle

Trough (only if very prolonged, becomes depression)Spending and incomes bottom outOutput (GDP) at lowest levelsUnemployment at highest levelsPrice Level (inflation rate) at expected rate

What causes Business Cycles?

External Causes

Population changesInventions/innovationsWars/political events

What causes Business Cycles?

Internal Causes

Consumer spendingInvestment spendingGovernment spendingNet exports (exports – imports)

GDP = C + I + G + Xn