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Unemployment is a serious personal and social economic problem for two main problems...
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1) lost incomes and production
2) lost human capital
2) lost human capital
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Lost incomes and production is a result from...
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loss of a job
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Lost production means...
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lower consumption and lower investment in capital... which brings the living standard in both present and future down
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Lost Human capital
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after getting fired from a job, eventually gets another job but lower pay, thus can't compete with new MBA graduates. a lower pay than before results in a loss of human capital
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Working age population
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the total number of people aged 16 years and over who are not in jail, hospital or some other form of institutional care
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Population is divided to 2 broad groups:
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1) Working age population
2) Others who are too young or who live in institutions
2) Others who are too young or who live in institutions
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Working age population is divided into 2 groups:
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1) labor force
2) not in labor force
2) not in labor force
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Labor Force is divided into 2 groups:
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1) Employed
2) Unemployed
2) Unemployed
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Labor force is the sum of....
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employed and unemployed
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An unemployed person....
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wants work
has made specific efforts to find a job within the previous four weeks
is waiting to be called back to a job from which he or she has been laid off
is waiting to start a new job within 30 days
has made specific efforts to find a job within the previous four weeks
is waiting to be called back to a job from which he or she has been laid off
is waiting to start a new job within 30 days
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A person is not in the labor force if they are...
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in the working-age population but neither employed or unemployed
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3 Labor Market Indicators....
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unemployment rate
the employment-to-population ratio
the labor force participation rate
the employment-to-population ratio
the labor force participation rate
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Unemployment rate is....
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percentage of people in labor force who are unemployed
(the number of people unemployed/labor force) x 100
(the number of people unemployed/labor force) x 100
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Employment-to-population ratio
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(Number of people employed/working age population) x 100
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Labor force participation rate
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(labor force/working age population) x 100
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2 types of underemployed labor excluded from the official measure by the Bureau of Labor Statistics...
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marginally attached workers and part time workers who want full time jobs
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Marginally attached worker
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a person who currently is neither working nor looking for work but indicated that he or she wants and is available for a job and has looked for work sometime in the recent past
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A marginally attached worker who has stopped looking for a job because of repeated failure to find one is
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a discouraged worker
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The official unemployment measure excludes marginally attached workers because..
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they haven't made specific efforts to find a job within the past 4 weeks
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An increase in discouraged workers _____ the official unemployment rate and ______ U-4
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decrease; does not change
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Most costly unemployment is....
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long term unemployment that results from job loss
although all unemployment is costly
although all unemployment is costly
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Labor force increases if...
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working age people who are not currently in the labor force start to look for work and become unemployed or start a job and become employed
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Unemployment rate is suppose to measure ......... ;
it is an imperfect sense measure because...........
it is an imperfect sense measure because...........
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underutilized labor; it does not include marginally attached workers and part time workers who want full time jobs
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Frictional unemployment
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Unemployment that arises from normal labor turnovers - from people entering and leaving the labor force and from the ongoing creation and destruction of jobs
it is permanent and healthy phenomenon in a dynamic, growing economy
it is permanent and healthy phenomenon in a dynamic, growing economy
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Structural Unemployment
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arises when changes in technology or international competition changes the skills needed to perform the jobs or change the locations of jobs
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Structural unemployment lasts longer than frictional because...
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workers must retrain and possibly relocate to find a job
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Cyclical Unemployment
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higher than normal unemployment at a business cycle TROUGH and the lower than normal unemployment at a business cycle PEAK
ex. a worker is laid off because the economy is in recession and who gets rehired some months later when the expansion begins
ex. a worker is laid off because the economy is in recession and who gets rehired some months later when the expansion begins
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"Natural" unemployment
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arises from frictions and structural changes when there is no cyclical unemployment
as a percentage of the labor force --> natural unemployment rate
as a percentage of the labor force --> natural unemployment rate
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Full unemployment
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a situation in which the unemployment rate equals the natural unemployment rate
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What determines the natural unemployment rate?
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The age distribution of the population
the scale of structural change
the real wage rate
unemployment benefits
the scale of structural change
the real wage rate
unemployment benefits
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An economy with a young population has a large number of ------ every year and has a level of ------ unemployment
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new job seekers; frictional
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The scale of structural change on natural unemployment is...
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small
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Real wage rates that bring unemployment are a .....
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minimum wage and an efficiency wage
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Efficiency wage
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wage set above the going market wage to enable firms to attract the most productive workers, get them to work hard and discourage them from quitting
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Unemployment benefits _______ the natural unemployment rate by _______ the opportunity cost of job search
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increase; lowering
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The quantity of real GDP at full employment is
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potential GDP
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Gap between real GDP and potential GDP
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output gap
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As the output gap fluctuates.... the unemployment rate...
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fluctuates around the natural unemployment rate
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When the economy is at full employment,.... the unemployment rate and real GDP ______ potential GDP
Also, there is no _______ unemployment when economy is at full employment
Also, there is no _______ unemployment when economy is at full employment
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equal
this makes the output gap 0
cyclical
this makes the output gap 0
cyclical
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If unemployment rate is LESS than the natural unemployment rate....
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real GDP is greater than potential GDP
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If unemployment rate is MORE than the natural unemployment rate....
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real GDP is less than potential GDP
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Extending the period over which the government is willing to pay unemployment benefits to 99 weeks _______ the cost of being unemployed and ________- the unemployment rate
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decreases; increases
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When cyclical unemployment increases and other things remain the same....
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the natural unemployment rate does not change
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Price level
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the average level of prices and the value of money
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Inflation
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persistently rising price level
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Deflation
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persistently falling price level
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The inflation rate is...
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the annual percentage change in the price level
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An unexpected inflation or deflation....
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redistributes income
redistributes wealth
lowers real GDP and employment
diverts resources from production
redistributes wealth
lowers real GDP and employment
diverts resources from production
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For income, an unexpected inflation....
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raises prices but doesn't raises wage;
bad for workers because their fixed wages buy less than they bargained for
good for employers because their profits rise
bad for workers because their fixed wages buy less than they bargained for
good for employers because their profits rise
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For income, an unexpected deflation...
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lowers price but doesn't lower wage:
fixed wage buys more than they bargained for
employers' profit falls
fixed wage buys more than they bargained for
employers' profit falls
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For wealth, inflation causes....
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the money that the borrower repays to the lender buys less than the money originally loaned....
the borrower win and the lender loses; interest paid on loan doesn't compensate the lender for the loss in the value of the money loaned
the borrower win and the lender loses; interest paid on loan doesn't compensate the lender for the loss in the value of the money loaned
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For wealth, deflation causes
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money that the borrower repays to the lender buys more than the money originally loaned...
the borrow loses and the lender wins
the borrow loses and the lender wins
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For real GDP and employment, inflation causes
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rise in investment and production and employment
reap GDP greater than potential GDP and unemployment rate falls below natural rate
ONLY TEMPORARY because profitable investment dries up eventually --> spending falls --> real GDP falls below potential GDP and unemployment rate rises
reap GDP greater than potential GDP and unemployment rate falls below natural rate
ONLY TEMPORARY because profitable investment dries up eventually --> spending falls --> real GDP falls below potential GDP and unemployment rate rises
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For real GDP and employment, deflation causes
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businesses and households earns less profit; cut their spending.. a fall in total spending brings a recession and rising unemployment
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For diverting resources from production, inflation or deflation causes the economy to turn into...
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a casino, it can become more profitable to forecast the inflation rate or deflation rate correctly than to invent a new product
just about everyone can make themselves better off by spending more of their time dabbling as amateur economists and inflation forecasters and managing their investments
just about everyone can make themselves better off by spending more of their time dabbling as amateur economists and inflation forecasters and managing their investments
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Wasting scare resources is a cost of...
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inflation
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Hyperinflation
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an inflation rate 50% a month or higher that grinds the economy to a halt and causes a society to collapse
it is rare
it is rare
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Consumer Price Index (CPI)
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a measure of the average of the prices paid by urban consumers for a fixed basket of consumer goods and services
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To calculate the CPI..... refer to pg. 117 - 118
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find the cost of the CPI at base period prices
find the cost of a CPI basket at current-period prices
calculate the CPI for the base period and the current period
(CPI at current prices/CPI at base period prices) x 100
find the cost of a CPI basket at current-period prices
calculate the CPI for the base period and the current period
(CPI at current prices/CPI at base period prices) x 100
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When a price level rises rapidly...
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inflation rate is high
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When a price level rises slowly...
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inflation rate is low
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A high price level means...
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there has been a sustained period of rising prices
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When a price level falls....
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the inflation rate is negative (deflation)
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Main sources of bias in the CPI are.....
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new goods bias
quality change bias
commodity substitution bias
outlet substitution bias
quality change bias
commodity substitution bias
outlet substitution bias
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People are more likely to accept a real wage cut that arises from an increase in the price level than a cut in their normal wage rate because....
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inflation decreases the real wage rate gradually and a cut in the nominal wage decreases the real wage rate suddenly
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Once a month, the Bureau of _____ Statistics calculates the CPI, which is a measure of the ______ consumers for a fixed basket of consumer goods and services
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Labor; average of the prices paid by urban
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The CPI tells us.....
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the price level in a given period expressed as a percentage of the price level in the base period, which is by definition equal to 100
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In the United States, the CPI basket consists of items that ........
Thus, __________ has the greatest weight in the CPI basket
Thus, __________ has the greatest weight in the CPI basket
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an average urban household buys;
Household
Household
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The bias in the CPI is a problem because ________
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it distorts wage agreements linked to the CPI
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New Goods Bias
answer
if you want to compare the price level in 2014 with that in 1970, compare a computer with a typewriter in 1970 because
a PC is more expensive than a typewriter was... the arrival of the PC puts an upward bias into the CPI and its inflation rate
a PC is more expensive than a typewriter was... the arrival of the PC puts an upward bias into the CPI and its inflation rate
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Quality Change Bias
answer
Many goods get better every year, such as cars. part of that rise in the prices of these goods is a payment for improved quality and is NOT inflation
but the CPI counts the entire price rise as inflation and so overstates inflation
but the CPI counts the entire price rise as inflation and so overstates inflation
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Commodity Substitution Bias
answer
changes in relative prices lead consumers to change the items they buy
if price of beef rises, people will buy chicken more if prices of chicken remain unchanged
Price of meat has not changed, but because CPI ignores the substitution of chicken for beef, it says the price of meat has increases
if price of beef rises, people will buy chicken more if prices of chicken remain unchanged
Price of meat has not changed, but because CPI ignores the substitution of chicken for beef, it says the price of meat has increases
question
Outlet Substitution Bias
answer
people use discount stores more frequently and convenience stores less frequently
however, the CPI surveys do not monitor outlet and discount stores
however, the CPI surveys do not monitor outlet and discount stores
question
3 Alternative Price Indexes
answer
Chained CPI
Personal consumption expenditure deflator
GDP deflator
Personal consumption expenditure deflator
GDP deflator
question
Chained CPI
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price index that is calculated similarly to chained dollar real GDP
overcomes sources of bias in CPI because..... it incorporates substitutions and new goods bias by using current and previous period quantities rather than fixed quantities from an earlier period
measures a lower inflation rate than standard CPI
between 2000-2014, chained CPI is 1.7%
standard CPI is 2.4%
overcomes sources of bias in CPI because..... it incorporates substitutions and new goods bias by using current and previous period quantities rather than fixed quantities from an earlier period
measures a lower inflation rate than standard CPI
between 2000-2014, chained CPI is 1.7%
standard CPI is 2.4%
question
Personal Consumption Expenditure Deflator (PCE deflator)
answer
calculates real values of the real GDP's expenditure components:
- real consumption expenditure
- real investment
- real government expenditure
- real net exports
(Nominal C/Real C) x 100
where c is personal consumption expenditure
- real consumption expenditure
- real investment
- real government expenditure
- real net exports
(Nominal C/Real C) x 100
where c is personal consumption expenditure
question
GDP deflator
answer
index of prices of the items in consumption, investment, government expenditure, and net exports
(Nominal GDP/Real GDP) x 100
(Nominal GDP/Real GDP) x 100
question
Core inflation rate is the annual percentage change in the ________ price index that EXCLUDES .....
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PCE: food and fuel
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To determine the trend in the inflation rate....
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strip the raw numbers of their volatility
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A real interest is not a nominal interest rate divided by the price level. True or False
answer
True
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All the other real variables of macroeconomics are calculated by...
answer
dividing a nominal variable by the price level
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We can adjust any nominal quantity or price variable for inflation by ........
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deflating it; dividing it by the price level
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Real wage rate is...
answer
nominal wage divided by the GDP deflator
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Core Inflation Rate is a
answer
measure of the inflation rate that excludes volatile prices in an attempt to reveal the underlying inflation trend
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Headline inflation rate
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inflation rate that INCLUDES all prices
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Unemployment rate includes all underutilized labor. True or false?
answer
False
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