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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: 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: 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 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