Download Macro06

Realm of
Macroeconomics
Where the telescope ends,
the microscope begins.
Which of the two has the
grander view?
VICTOR HUGO
Employment
# of unemployed
Unemployment rate = -----------------Total labor force
total labor force
= # of employed + # of unemployed
Remarks on the definition
of “unemployed”
 Those
who have part-time jobs are
not qualified
 Those who are not actively looking
for jobs are not qualified
 So the “discouraged workers” are not
qualified.
 Out-of-labor-force
Types of unemployment
 1.
Frictional
 2. Structural
 3. Cyclical
Frictional unemployment
 These
are the people who are
changing occupation or moving for
better offers or other reasons.
 They are just temporary between
jobs.
 This type of unemployment cannot
be reduced.
 It is a normal state.
Structural unemployment
 It
refers to workers who have lost
jobs because their skills no longer in
demand due to the shift in economic
structure.
 Coexistence of shortage and surplus
in the labor market
Cyclical unemployment
 Caused
by recession
 Unemployment in all sectors, all
occupations
Natural unemployment rate
 Unemployment
rate cannot be
reduced to zero
 The Full employment state
 The unemployment rate in the full
employment state
 Natural unemployment rate
Unemployment rate in the recent
U.S. history
30
25
20
15
10
5
19
29
19
50
19
70
19
74
19
78
19
82
19
86
19
90
19
94
19
98
20
02
20
06
20
10
0
Recent U.S. unemployment rate
Search Google: “unemployment rate” “
Inflation
 Inflation
rate
is the percentage increase in the
general price level
 General Price Level (P)
is measured by price indices
a. GDP Deflator (GDP Price Index)
b. Consumer Price Index (CPI)
Selected U.S. Macroeconomic Data
Price Level
Year
GDP Price Index
(2000=100)
Consumer Price Index
(1982-1984 = 100)
1980
54.1
82.4
1982
62.7
96.5
1984
67.7
103.9
1985
69.7
107.6
1990
81.6
130.7
1995
92.1
152.4
2000
100.0
172.2
2003
106.4
184.0
2004
109.5
188.9
2005
113.0
195.3
2006
116.6
201.6
2007
119.7
207.3
Index
 Why
use indices to measure the
general price level?
 because GDP is an aggregate
product, which cannot be measured
by a physical unit.
 Index is an indicator that compares
to a benchmark, which is set to 100.
Consumer Price Index (CPI)
 CPI
bureau of Labor Statistics surveys
the average consumption basket
of urban residents.
 Measuring the cost of living of a
typical urban household
Calculating CPI
Suppose a typical urban household only consumes the
following items:
1990
1991
Item
Price
Quantity
Price
Quantity
Hog Dog
0.80
30
0.85
32
Pants
(pair)
4.00
1
4.50
1
Coke
(can)
0.25
16
0.25
17
Calculating CPI

Compute the CPI in 1991 (1990=100)
0.85 X 30 + 4.50 X 1 + 0.25 X 16
34
---------------------------------------- = -----0.80 X 30 + 4.00 X 1 + 0.25 X 16
32
= 1.0625

Conventionally, the index is multiplied by 100, so
1.0625 X 100 = 106.25
CPI
 The
CPI is used to calculate the real
income so you can draw conclusion if
you have been better off during the
last several years.
 Nominal Wage versus Real Wage
 Real wage is corrected for inflation.
Case
 During
1980 to 1990, your income
increased from 20,000 to 28,000
U.S. dollars. but prices also rose
during the period and eroded the
purchasing power of dollars. You
want to know if you are better off or
not during this period.
Selected U.S. Macroeconomic Data
Price Level
Year
GDP Price Index
(2000=100)
Consumer Price Index
(1982-1984 = 100)
1980
54.1
82.4
1982
62.7
96.5
1984
67.7
103.9
1985
69.7
107.6
1990
81.6
130.7
1995
92.1
152.4
2000
100.0
172.2
2003
106.4
184.0
2004
109.5
188.9
2005
113.0
195.3
2006
116.6
201.6
2007
119.7
207.3
Derive Real Income by Deflating
 To
do that, we deflate the nominal
income to get real income
 Deflating
– is a process to convert nominal terms to
real terms.
Nominal income
Real income = ----------------- X 100
CPI
Derive Real Income by Deflating
 Check
the table:
Real income in 1980
= (20,000 / 82.4) X 100 =
Real income in 1990
= (28,000 / 130.7) X 100 =
Derive Real Income by Deflating
 Check
the table:
Real income in 1980
= 20,000 / 82.4 X 100 = 24,271
Real income in 1990
= 28,000 / 130.7 X 100 =21,423
 You
are worse off.
GDP Deflator / GDP price index
 GDP
Deflator; or
 GDP Price Index
 Including the prices of ALL products
that are included in GDP
 GDP Deflator and CPI use different
baskets of the goods. CPI include
only those items consumed by a
typical urban household.
Case: Calculate Real GDP
 Calculate
Real GDP in 2003 at 2000
price.
 From the table in 2003
Nominal GDP = 11004
GDP Deflator (2000=100) = 106
Derive Real GDP by Deflating
Nominal GDP
Real GDP = ------------------- X 100
GDP Price Index
11004
Real GDP = --------- X 100 =10342
106.4
Calculating the inflation rate

Inflation Rate (p)
= percentage increase in the price
index
Pt - Pt-1
Pt
= --------- X 100% =( ---- -1) X 100%
Pt-1
Pt-1
Calculating the inflation rate
 Calculate
inflation rates between
1978-79
 by GDP Deflator
 by CPI


( 55.3 / 50.9 - 1 ) X 100% = 8.6%
( 72.6 / 65.2 - 1) X 100% = 11.3%
Exercise





Table 1
Year
2000
2001
2002
Real GDP
1000
1100
1320
Price Index
100.0
120.0
132.0

1. The inflation rate between 2002 in Table 1 was approximately equal to
_______ percent

2.The growth rate in 2002 in Table 1 is approximately _______ percent

Figure 6
The inflation rate in the United States since 1870
29
The U.S. CPI Inflation Rate
2000 --4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
-0.5
-1
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Inflation history in the U.S.






1968-69 inflation. Reasons: tax cut, defense
spending associated with the Viet Nam War
1972-74 inflation. Reasons: Poor harvest, oil
shock and loose monetary policy during the
Johnson period. Stagflation.
Inflation in 1979, second oil shock
1980s. Price stabilization. Reagan
administration. Monetary contraction and high
interest rate. Economic recession in 1982.
1990s. Low inflation as productivity rose.
2009 Deflation caused by recession
Dis- or De-flation
 Disinflation
-- Inflation decelerates
(The absolute price level
increases, but at a
diminishing rate)
 Deflation
-- Price falls
International comparison
CPI Inflation rates 2004
Country
Zimbabwe
Iraq
Russia
China
The U.S.
U.K.
Japan
Hong Kong
Inflation Rate
419.9
25.4
11.5
4.1
2.4
1.4
-0.1
-0.3
International comparison
CPI Inflation rates 2007
Data from CIA factbook
Cost of Inflation
 Purchasing
power erosion
 Run-away Inflation or Hyperinflation
– The case in Germany in 1923
– At an annul rate of > 100,000,000
– breakdown of the market system
 Inflation
cause uncertainty in the
interest rate, thus, impeding
investment and economic growth
Redistribution between borrowers
and lenders
 Actual
inflation rate =πACT
inflation rate =πe
 Nominal interest rate
 Expected
= real interest rate + πe
πACT > πe , then lenders lose.
 If πACT < πe , then borrowers lose.
 If
 This
discourage investment