Download Chapter Twenty Three

Lecture Four
Macroeconomic Concerns:
Unemployment, Inflation,
and Growth
Macroeconomic Concerns
 Aggregate Price Level
 Aggregate Output
 Total Employment
 Rest of the World
Inflation and Prices
Price level: a measure of the
behavior of all prices in the economy
Price level is a yardstick -- a tool for
comparison of prices over time.
Inflation: the rate of change in the
price level
Percentage change in GDP deflator, 1959 - 1994
12.0
Inflation Rate
10.0
8.0
6.0
4.0
2.0
0.0
1959
1963
1967
1971
1975
Year
1979
1983
1987
1991
Measuring the Price Level:
Price Indexes
CPI: Consumer Price Index: a measure of
the price of a market basket of goods
purchased monthly by the typical urban
consumer.
GDP deflator: a measure of the prices of
all goods produced in GDP basket.
 PPI: Producer Price Index: a measure of
prices that producers receive for products at
all stages in the production process.
Production in Muletown
In Muletown, three goods are produced:
–Mule hides;
–Espresso;
–Sandals.
A market basket is 2 Mule hides, 5
Espressos, and 1 pair of sandals.
Production in Muletown
Mule hides
Espresso
Sandals
1997
Price Quantity
$3
10
$5
15
$7
20
1998
Price Quantity
$4
20
$4
10
$20
15
What is the price level in Muletown?
Calculating the CPI
Multiply the price of the good by the
quantity in the market basket and add
over all goods.
In 1997: $3(2) + $5(5) + $7(1) = $38
In 1998: $4(2) + $4(5) + $20(1) = $48
Rate of Inflation:
–($48 - $38)/$38 = 26%.
GDP Deflator
Nominal GDP: GDP measured in
current year prices
Real GDP: GDP measured in
constant prices (prices derived from
a base year)
GDP in Muletown
Nominal GDP
Real GDP
GDP deflator
1997
$245
1998
$245 = $3(10) + $5(15) + $7(20)
GDP in Muletown
Nominal GDP
Real GDP
GDP deflator
1997
$245
1998
$420
$420 = $4(20) + $4(10) + $20(15)
GDP in Muletown
Nominal GDP
Real GDP
GDP deflator
1997
$245
$245
1998
$420
$245 = $3(10) + $5(15) + $7(20)
GDP in Muletown
Nominal GDP
Real GDP
GDP deflator
1991
$245
$245
1992
$420
$215
$215 = $3(20) + $5(10) + $7(15)
Note that we have used 1991 prices.
GDP in Muletown
Nominal GDP
Real GDP
GDP deflator
1991
$245
$245
100
100 = 100 * $245/$245
1992
$420
$215
GDP in Muletown
Nominal GDP
Real GDP
GDP deflator
1991
$245
$245
100
195 = 100*$420/$215
1992
$420
$215
195
GDP in Muletown
Nominal GDP
Real GDP
GDP deflator
1991
$245
$245
100
1992
$420
$215
195
Rate of Inflation = (195 - 100)/100
= 95%
The Real/Nominal Relationship
Real Quantity =
Nominal Quantity
Price Level/100
Costs of Inflation
Changing distribution of income
– indexed income: income rises
with the rate of inflation
Lending distortions
Administrative costs and
inefficiencies
Aggregate Output (GDP)
Gross Domestic Product (GDP)
is the dollar value of all final
goods and services produced.
Final good: a product which is
ready to be used by consumers
Business Cycle
Periodic movements in output,
prices, and employment
Business cycles are not created
equal.
–Duration
–Severity
Business Cycle
GDP rises and falls over short
spans of time
At any point in time, it may be
above or below its long run trend
These fluctuations define the
business cycle
Parts of the Business Cycle
Aggregate
Output
Peak
Recession
Expansion
time
Trough
Recession-1
A recession is a period in which real
GDP declines for at least two consecutive
quarters.
Most recessions are marked by falling
output and rising unemployment.
Recession-2
 Growth rate of GDP falls
 Firms decrease production
 Unemployment rises
GDP
Unemployment
The Recession of 1980-1982
10
8
6
4
2
0
-2
-4
1979
Unemployment
GDP Growth
1980
1981
1982
Depression
 Depression: a prolonged and deep
recession
Great Depression: 1929-1933
The Great Depression was a period of severe
economic contraction and high
unemployment that began in 1929 and
continued throughout the 1930’s.
Great Depression
30
25
20
Unemployment
15
10
5
0
GDP Growth
-5
-10
-15
1929
1930
1931
1932
1933
Expansion
 GDP growth rate rises
 Firms increase production
 Unemployment falls
GDP
Unemployment
Real GDP in the U.S., 1959 - 1994
5,500.0
5,000.0
4,500.0
Real GDP
4,000.0
3,500.0
3,000.0
2,500.0
2,000.0
1,500.0
1959
1963
1967
1971
1975
Year
1979
1983
1987
1991 1994
Real GDP in the U.S., 1959 - 1994
5,500.0
5,000.0
4,500.0
Real GDP
4,000.0
3,500.0
3,000.0
Trend Line
2,500.0
2,000.0
1,500.0
1959
1963
1967
1971
1975
Year
1979
1983
1987
1991 1994
Unemployment
The unemployment rate refers to
the percentage of people in the
labor force who can’t find a job.
Labor Force: people
who are actively seeking
or are currently holding
a job
Unemployment Rate, 1959 - 1994
10.0
Unemployment Rate
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
1959
1963
1967
1971
1975
Year
1979
1983
1987
1991
Unemployment Rate in Selected
Countries
1929
25
1933
20
15
10
5
0
U.S.
Sweden
Canada
Defining Unemployment - 1
Employed: Any person 16 years old or older,
(1) who works for pay, either for someone else
or in their own business, for one or more
hours a week,
(2) who works without pay for 15 hours a week
in a family business, or
(3) who has a job but has been temporarily
absent, with or without pay.
Defining Unemployment - 2
Unemployed: A person 16 years or older who
is not working, is available for work, and has
made specific efforts to find work during the
previous four weeks.
Labor force: The number of people employed
plus the number of unemployed.
Defining Unemployment - 3
 Labor Force = Employed + Unemployed
 Population = Labor Force + Not in
Labor Force
Unemployed
 Unemployment Rate =
Labor Force
 Labor Force Participation Rate =
Labor Force
Population
Unemployment
Pool
Entrants
New Entrants: 11%
Re-entrants: 26%
Job Leavers: 12%
Job Losers: 63%
5% Unemployment
Job Finders
Discouraged
Workers
Labor Force
Leavers
Types of Unemployment
Cyclical
–due to business cycle movements in GDP
Frictional
–due to job search activities
Structural
–due to changes in economic institutions
–geographic displacement, technological
change, discrimination
Natural Rate of Unemployment
The natural rate of unemployment
refers to the unemployment that occurs
as a normal part of the functioning of
the economy. Sometimes taken as the
sum of frictional unemployment and
structural unemployment. (The rate of
unemployment that occurs at full
employment).
Costs of Unemployment
Personal costs
Societal costs
Economic costs
Government Policies for
Influencing the Macroeconomy
Fiscal Policy: Government policies
regarding taxes and expenditures
Monetary Policy: The tools used by the
Federal Reserve to control the money supply
Supply-side Policies: policies that focus on
aggregate supply and increasing production
Aggregate Demand
Aggregate demand represents
the total demand for goods and
services in an economy.
Aggregate Demand Curve
Price
Level
P1
AD
Y1
Aggregate Output
Aggregate Supply
Aggregate supply represents the
total supply of goods and
services in an economy.
Aggregate Supply Curve
Price
Level
AS
P1
Y1
Aggregate Output
Equilibrium
Aggregate equilibrium is a level
of prices and GDP such that the
quantity of goods and services
purchased equals the overall
quantity of goods and services
produced
Equilibrium
Price
Level
AS
Equilibrium
P*
AD
Y*
Aggregate Output