Download Eco 200 – Principles of Macroeconomics

Chapter 4: Unemployment and
Inflation
Business cycle
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Pattern of rising and falling real GDP
Business cycle
Leading indicators
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Change before real GDP changes
Often provide false indicators of the
start of a recession
Coincident indicators
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Tend to change at the same time as
real GDP
Lagging indicators
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Tend to change after real GDP
Unemployment
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Unemployment =
# unemployed / labor force
Labor force = noninstitutionalized residents
16+ years of age who are:
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Working, or
Actively seeking work
Labor force (and unemployment statistic)
does not include those who are discouraged
and have stopped looking for work
Unemployment rate
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may understate the cost of
unemployment to society due to:
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underemployment, and
discouraged workers.
May overstate the cost of
unemployment due to:
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the underground economy
Types of unemployment
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Seasonal – recurring seasonal pattern of
unemployment (voluntary unemployment)
Frictional – short-term movement between
jobs and during first job search (search
unemployment) (voluntary unemployment)
Structural – due to technological change
and/or changing patterns of labor demand
(involuntary)
Cyclical – due to business cycle (involuntary)
Costs of unemployment

GDP gap = potential real GDP – actual
real GDP
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Potential real GDP = GDP that occurs if
unemployment rate = natural rate (no
cyclical unemployment)
Social and psychological costs
Unemployment statistics
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Unemployment rate is usually higher for
women
Teenagers have the highest
unemployment rates
Nonwhites have higher unemployment
rates
Inflation
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Sustained increase in the average level
of prices
Costs of inflation
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Arbitrary redistribution of income and wealth
Higher transaction costs
Creditors and debtors are affected by
unexpected changes in the inflation rate
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Real interest rate = nominal interest rate minus
inflation rate
Unexpected inflation harms creditors and benefits
debtors
Types of inflation
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Demand-pull inflation
Cost-push inflation
Structural inflation (wage-price spiral)
Hyperinflation
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Extremely high rate of inflation
Inflation
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The inflation rate is measured by changes in the
Consumer Price Index (CPI).
The CPI is an index that measures the quarterly
changes in the prices of a selected weighted
basket of consumer goods and services.
The basket includes a wide range of goods and
services purchased by households, such as food,
alcohol and tobacco, clothing and footwear,
housing, health, transport, communication,
recreation and education.
Inflation Rate = (CI-PI)/PI * 100
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What are the major causes of inflation in the
Australian economy?
Outline two factors that contributed to the
reduction in the inflation rate in the Australian
economy during the 1990s.
Why is the underlying rate of inflation seen by
economists as a better measure of inflation
than the headline inflation rate?
Describe two economic factors that could
determine the future level of inflation in the
economy.