Download Unemployment and Inflation

Unemployment and
Inflation
Macroeconomic Measurement,
cont.
Unemployment
The Labor Force:
All adults 16 and older who are
able and willing to work.
The Unemployed:
The percentage of the labor force
that is without a job.
Unemployment
Why unemployment figures you
hear may be misleading:



Unrealistic wage expectations
Discouraged workers (jobless)
are not counted
All part-time workers are
considered fully employed
Unemployment
Unemployment Insurance:



A government program
Your employer contributes on
your behalf
Acts as an income replacement
program for a limited time
should you become unemployed
through no fault of your own
Unemployment
Unemployment Figures:
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How unemployment rates are
calculated
Natural Rate of Unemployment
Average rate
Current rates
Highest recorded rate
Unemployment
Benefits of Unemployment:



Easier to match up workers with
jobs
Employers have better selection
Disciplinary benefits to firms
Unemployment
Costs of Unemployment:

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Loss of output and income
Decreased quality of human
capital if unemployment is
prolonged
Increased crime rate
Loss of self-esteem
Unemployment

Types of unemployment
Frictional
 Structural
 Cyclical
 Seasonal

See worksheet packet!
Inflation

A general rise in the level of
prices
Does not mean all prices are
rising at the same time
 Not the result of a one-time shock

Inflation

Deflation
A general decline in the level of
prices
 Rarely occurs
 Indicates a serious recession

Inflation

Disinflation
A decrease in the inflation rate
 Generally a sign of a healthy
economy

Inflation

Goal is to achieve price stability

Nominal vs. Real Income
Inflation

Types of Inflation

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Demand-Pull: Spending increases faster
than output can keep up with – “too
many dollars chasing too few goods”
Cost-Push: results from an increase in
costs that cause producers to produce
less
Expected Rate (1-2%): caused by rising
resource costs
Hyperinflation: extremely rapid rise in
prices, very rare
Inflation

Measuring Inflation

Allows you to tell if your real
income rose or fell in a given year

Price Index: a comparison of the
general level of prices in a given
year with the prices of an earlier
year
Inflation

Consumer Price Index (CPI)
The most widely reported
measure of inflation for cost of
living
 Measures a market basket of
about 300 goods and services
purchased by an urban family of
four

Inflation

Producer Price Index (PPI)
Reports on resource prices to
producers
 A leading indicator of consumer
prices

Inflation

Effects of Inflation

Who is hurt and who is helped?

See worksheet packet!
THE BUSINESS CYCLE
Putting GDP, Unemployment and
Inf lation together and creating a
picture of economic conditions.
Economic Growth
 Historically, we have experienced
tremendous growth
 Technological Progress
 Rapid increases in productive capacity
 Achieved the highest standard of living in
the world
Economic Growth
 Long-run growth has not been steady
 Interrupted and complicated
 Caused by unemployment and inflation
The Business Cycle Defined
The recurrent ups and downs in
the level of economic activity
that extends over several years.
The Phases of the Business Cycle
Vary greatly in duration and
intensity
The Phases of the Business Cycle
 Expansion (Recovery)
 Spending increases
 Output (GDP) increases
 Unemployment decreases
 Incomes increase
 Price level (inflation rate) increases
The Phases of the Business Cycle
 Peak (Prosperity)
 Spending and income at a temporary maximum
 Output (GDP) at full-employment
 Unemployment at the natural rate
 Price Level (inflation rate) high
The Phases of the Business Cycle
 Contraction (Recession)
 Spending decreases
 Output (GDP) decreases
 Unemployment increase
 Incomes decrease
 Price Level (inflation rate) decreases
The Phases of the Business Cycle
 Trough (only if very prolonged, becomes
depression)
 Spending and incomes bottom out
 Output (GDP) at lowest levels
 Unemployment at highest levels
 Price Level (inflation rate) at expected rate
What causes Business Cycles?
 External Causes
 Population changes
 Inventions/innovations
 Wars/political events
What causes Business Cycles?
 Internal Causes
 Consumer spending
 Investment spending
 Government spending
 Net exports (exports – imports)
GDP = C + I + G + Xn