WHAT ARE EFFECTS OF ECONOMIC GROWTH? Unemployment and Inflation
Jan 15, 2015
WHAT ARE EFFECTS OF ECONOMIC GROWTH?
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
% of working age population in labor force
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
Unemployment and Recessions
The average unemployment rate was 5.9%
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.
CPI and Inflation
How do we measure Prices?
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?
How do we Calculate CPI?
Cost of CPI @ current priceCost of CPI basket @ base
price
x 100
CPI (a) =50/50=
100
CPI(b)=
70/50x 100
= 140
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 =
$$$ Types of Inflation $$$
Demand Pull Inflation: Excess demand for products causing
shortages “Too much money chasin’ too few goods!”
Cost Push Inflation: Inward Supply Shifts
Caused by high input costs 1970s high price of oil
The effects of inflation…
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 = real interest rate +
expected inflation Firms add the COLA
Changes with inflation Real income = nominal income/ price index