Chapter 5.Prices And Unemployment

Most macroeconomics discussions:

1. Macroeconomics problems.

2. Macroeconomic theories.

3. Macroeconomic policies.

4. Different views of how the economy

works.

Macroeconomic problems, such as:

1. High inflation rate.

2. High unemployment rate.

3. High interest rate.

4. Low economic growth.

Three macroeconomic organizational categories:

1. P-Q category.

2. Self regulating economic instability

category.

3. Effective ineffective category.

The P-Q Category:

Deal with many variables, two major variables are: - price level. - real GDP.

The price level: the weighted average of the prices of all goods and

services.

Real GDP: the value of the entire output produced annually

within a country’s borders, adjusted for price changes.

The P-Q Category (continued):

P = price level Q = real GDP

GDP (gross domestic product): P times Q

Unemployment: changes in unemployment are related to

changes in Q.

The P-Q Category (continued):

Inflation:

a rising P

Deflation:

a falling P

Economic growth:

related to increasing Q

The P-Q Category (continued):

Stagflation: a rising P combined with rising unemployment.

Business cycle: recurrent swings up and down in Q

Fiscal policy: concerned with stabilizing P and increasing Q

Monetary policy: concerned with stabilizing P and increasing Q

The Effective Ineffective Category:

Describe fiscal policy and monetary policy

Fiscal policy:

changes in government expenditures and/or changes in taxes to achieve particular macroeconomics goals.

Monetary policy:

changes in the money supply, or the rate of growth of the money supply, to achieve particular macroeconomic goals.

Macroeconomic Measures:Measuring Prices Using The CPI (Consumer Price Index)

Economists measure the price level by constructing a price index.

One major price index is CPI.

CPI:

{total expenditure on market basket in current year / total expenditure on market basket in base year} x 100

Macroeconomic Measures:Measuring Prices Using The CPI (Consumer Price Index) (continued)

Base year:

the year chosen as a point of reference or basis of comparison for prices in other years; benchmark year.

(1)

Market Basket

(2)

Current Year Prices (per

item)

(3)

Current Year Expenditures

{(1) x (2)}

(1A)

Market Basket

(2A)

Base Year Prices (per

item)

(3A)

Base Year Expenditures

{(1A) x (2A)}

10 pens $ 0.70 $ 7.00 10 pens $ 0.20 $ 2.00

5 shirts $ 14.0 $ 70.00 5 shirts $ 7.00 $ 35.00

3 pair of shoes $ 30 $ 90.00 3 pairs of shoes $ 10.0 $ 30.00

Total $ 167.0 Total $ 67.00

CPI = {(total expenditure on market basket in

current year) / (total expenditure on

market basket in base year)} x 100

CPI = { 167 / 67 } x 100

CPI = 249

CPI 1959-2006Based 1982-1984Year CPI1959 29.11960 29.61961 29.91962 30.21963 30.61964 31.01965 31.51966 32.41967 33.41968 34.81969 36.7

More about base year:

- Base year is benchmark year that serves as a

basis of comparison for prices in other years.

- The CPI in the base year is 100.

When we know the CPI for various years, we can compute the percentage change in prices:

Percentage change in prices: [{(CPI later year) – (CPI earlier year)} / CPI earlier year] x 100

Example:

CPI in 1990 was 130.7

CPI in 2005 was 195.3

What was the percentage change in prices over

this period time?

It was 49.43%?

Inflation And CPI

Inflation:

an increase in the price level.

Real income:

nominal income adjusted for price changes.

Nominal income:

the current dollar amount of person’s income.

Inflation And CPI (Continued)

Real income:

{(nominal income) / (CPI)} x 100

Measuring Unemployment

Who are the unemployed?

Total Population

Persons under 16

Persons in the armed forces

Civilian

Non institutional

Population

Not in labor force

Civilian labor force

Employed

Unemployed

Civilian labor force:

Employed persons + unemployed persons

Employed persons consist of:

- all persons who did any work for pay or

profit.

- all persons who were temporarily absent

from their regular jobs because of illness, vacation,

bad weather, industrial dispute, or various personal

reasons.

Unemployed persons consist of: - all persons who did not have jobs, made specific active efforts to find a jobs, made specific active efforts to find a job during the prior four weeks, and were available for work. - all persons who were not working and were waiting to be called back to a job from which they had been temporarily laid off.

Unemployment Rate (U):

The percentage of the civilian labor force that is unemployed.

U = (number of unemployed persons) /

(civilian labor force)

Employment Rate (E):

The percentage change of civilian non institutional population that is employed.

E = (number of employed persons) / (civilian non institutional population)

Labor Force Participation Rate (LFPR)

The percentage of the civilian non institutional population that is in the civilian labor force.

LFPR = (civilian labor force) / (civilian non

institutional population)

Reasons For Unemployment:

1. Job loser: - was employed in the civilian labor force and was either fired or laid off.2. Job leaver: - employed in the civilian labor force who quits his or her job.3. Reentrant: - previously employed, has not worked for some time, and is currently reentring the labor force4. New entrant: - has never held a full time job for two weeks or longer, and is now looking for a job.

Types Of Unemployment:

1. Frictional unemployment (Uf):

unemployment due to the natural frictions of the economy, which is caused by changing market conditions and is represented by qualified individuals with transferable skills who change jobs.

Types Of Unemployment (continued):

2. Structural unemployment (Us):

- Unemployment due to structural changes in

the economy that eliminate some jobs and

create other jobs for which the unemployed

are unqualified.

Types Of Unemployment (continued):

3. Natural unemployment (Un): - Unemployment caused by frictional and structural factors in the economy.

Natural unemployment = Frictional unemployment rate + Structural unemployment rate

Un = Uf + Us

What Is Full Employment?

The condition that exists when the unemployment rate is equal to the natural unemployment rate.

Homework:

1. Suppose there are 80 million people

employed, 15 million unemployed, and 5 million not in the labor force. What does the civilian non institutional population equal?