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AP Macro
Week#6
Fall 2014
Economics 10/6/14
http://mrmilewski.com
• OBJECTIVE: Measurements of Economic Performance
AP Macro-I.E
• Language objective: SWBAT define essential vocabulary on the business
cycle, unemployment and inflation . In addition, swbat write notes on
performance and read and write answers to questions and problems
regarding the objective.
• I. Journal#20
-Do Now: Draw a graph of the Business Cycle and label the
four phases of it.
• II. Homework
-Questions #3-6, problems #2 and #3 on page 544-545.
The Unemployment Rate
• Once the BLS has determined
the number of people in the
labor force, they calculate the
percentage of the labor force
that is unemployed. This
statistic is one of the major
statistics economists use in
determining the health of the
economy. It is known as the
Unemployment Rate.
Types of Unemployment
• Frictional- Those who are
between jobs and looking
for work.
• Structural- Those who
have lost their job
because their skills have
become obsolete.
• Cyclical – Those who have
lost their job because of a
recession phase of the
business cycle.
Definition of Full Employment
• Since frictional and cyclical
unemployment is
unavoidable, having 100%
employment is not possible.
The Natural Rate of
Unemployment is
considered to be between
4% and 6%.
• It includes Frictional plus
Structural.
Economic Cost of Unemployment
• Excessive unemployment involves
great economic and social costs.
• The basic cost of unemployment is
lost output. Firms are not efficient
and operating within the PPC.
• Economists call this sacrifice of
output a GDP Gap.
• A positive GDP gap occurs when
actual GDP exceeds potential GDP. A
negative GDP gap occurs when actual
GDP falls short of potential GDP.
Okun’s Law
• Macroeconomist Arthur Okun
discovered the relationship
between the unemployment rate
and the GDP gap.
• For every point that the actual
unemployment rate increases
over the natural rate, a negative
GDP gap of about 2 percent
occurs.
Who Suffers Most From
Unemployment
• Unfortunately, unemployment’s
effect impacts some more than
others.
• Lower-skilled workers, teenagers,
African Americans and Hispanics,
and less educated workers bear a
disproportionate burden of
unemployment.
• Widespread joblessness increases
poverty, heightens racial and
ethnic tensions, and reduces hope
for material advancement.
Homework Tonight
Questions #3-6,
problems # 2 and
#3 on page 544545.
Economics 10/7/14
http://mrmilewski.com
• OBJECTIVE: Measurements of Economic Performance
AP Macro-II.B
• Language objective: SWBAT define essential vocabulary on the
business cycle, unemployment and inflation . In addition, swbat
write notes on performance and read and write answers to
questions and problems regarding the objective.
• I. Journal#21
– Do Now: If the natural rate of unemployment was 4% and the real
unemployment rate for the year was 10%, what would the GDP gap for
the year? What would be its impact on GDP if GDP for the year was
600 billion?
• II. Homework
-Questions #7-10, problems #4-7 on page 544-545.
Inflation
• Inflation is a rise in the
general level of prices.
• When inflation occurs,
each dollar of income
will buy fewer goods
and services than
before.
• It reduces “the
purchasing power” of
money.
Measuring Inflation
• To measure inflation, we use the
Consumer Price Index.
• The CPI uses a “market basket” of
300 consumer goods and services
purchased by the typical urban
consumer. This “market basket” is
updated every two years so that it
reflects the most recent pattern of
consumer tastes.
• The base year is 1982-1984 and is
set at 100.
Using the CPI
• To measure inflation from
one year to another, we
compare the CPI of each year
and times it by 100.
• Question: What is the
inflation rate if the CPI was
207.3 in 2007 and it was
201.6 in 2006?
• Answer: 2.8%
Rule of 70
• We have previously
learned how the rule of
70 can tell us how long
it will take a measure to
double.
• Question: If the annual
rate of inflation is 3%,
how many years will it
take to double?
• Answer: About 23 years
Types of Inflation
• Demand-Pull Inflation- Usually prices
increases are a result of spending
exceeding production, or demand is
higher than supply.
• This is generally a result of the Federal
Reserve over-issuing money.
• When resources are already fully
employed, firms cannot respond to
the excess demand by increasing
production.
• So the excess demand “pulls” up the
prices of goods and services.
Types of Inflation
• Cost-Push Inflation- Inflation can
also occur because of a supply
shock.
• When costs of resources suddenly
increase for producers, they will
produce less. This will force the
price of the good higher even
though demand remains
unchanged.
• The costs “push” the prices up of
goods and services.
Core Inflation
• Price flexible items within the CPI,
particularly food and energy prices,
can distort inflation.
• These goods can adjust their prices
very quickly. They are not “sticky”.
• To avoid being misled by a sudden
increase in inflation of these goods,
economists will strip these prices
from the CPI to better judge a
sudden increase in overall inflation
and just look at the core, or more
stable goods prices.
Nominal vs. Real Income
• Inflation redistributes real income. This
change in income helps some, hurts
others, and some are not effected.
• Nominal Income is the income earned
from wages, rents, interest and profit.
• Real Income is what your money can
really buy. It is adjusted for inflation.
• If your nominal income rose 6.2% and
inflation is 5.4%, how is your real
income effected?
How Does Inflation Affect People?
• Those Hurt by Inflation:
– People on a Fixed Income- When inflation occurs,
people on a fixed income have less purchasing
power.
– People who save- With inflation, the money they
have saved is not worth as much as it was when
they started saving it.
– Creditors- Lenders are hurt by inflation because
the money being paid back to them is not worth
as much as it was when they people borrowed it.
• Those who are unaffected or helped by
inflation:
– Flexible Income Receivers- Individuals who receive
Social Security payment. Union workers who
receive cost-of-living adjustments (COLA). These
peoples incomes are adjusted for inflation.
– Debtors- The money they originally borrowed is
worth more than the money they are paying back
to the creditor.
Real Interest Rate vs. Nominal Interest Rate
• To try and adjust for inflation,
lenders will anticipate inflation and
charge an inflation premium.
• The Real Interest rate is the original
amount charged to the borrower.
• The Inflation Premium is added to
the real interest rate.
• The nominal rate is the sum of the
two and that is what is charged to
the borrower.
Homework Tonight
• Questions #7-10,
problems #4-7 on page
544-545.
Economics 10/8/14
http://mrmilewski.com
• OBJECTIVE: Measurements of Economic Performance
AP Macro-II.B
• Language objective: SWBAT define essential vocabulary on
the business cycle, unemployment and inflation . In
addition, swbat write notes on performance and read and
write answers to questions and problems regarding the
objective.
• I. Film: Econ USA episode#7 Inflation
-answer questions about inflation
• II. Practice FRQ
-answer practice FRQ with a partner
• Homework: Review Chapters#23,24, & 26
Homework Tonight
• Review
Chapters#23,24,&26.