Download inflation.

Unemployment
5,655,000
Unemployment Rate = Labor Force x 100; 4.0% = 140,863,000 x 100
[Employed + unemployed]
[135,208,000+5,655,000]
6%.
In Forney, 42 are unemployed & 658 are employed. The unemployment rate is __
5
One mil. are unemployed & 19 mil. are employed. The unemploy. rate is __%.
NS 41
41. If the total population is 280 million, and the civilian labor force
includes 129,558,000 with jobs & 6,739,000 unemployed but looking
4.9
for jobs, then the unemployment rate would be ____%.
[6,739,000/136,297,000 x 100 = 4.9%]
Negative/Positive GDP Gaps
Inflationary GDP Gap
AS
AD2
AD3
Recessionary GDP Gap
AD1
11% 6% 1%
YR
Y*F Yi
YA
YP YA
$9 T $10 T $11 T
“Natural Rate of Unemployment” [4-6%]
Three Types of Unemployment
Frictional – “temporary”, “transitional”, “short-term.”
(“between jobs” or “search” unemployment)
Examples:
1. People who get “fired” or “quit”
to look for a better one.
2. “Graduates” from high school or
college who are looking for a job.
3. “Seasonal” or weather-dependent jobs such as
“agricultural”, “construction”, “retail”, or “tourism”.
[lifeguards, resort workers, Santas, & migrant workers.]
Frictional unemployment signals that “new jobs” are available
and reflects “freedom of choice”.
These are qualified workers “transferable” skills.
2. Structural Unemployment
Structural – “technological” or “long term”.
There are basic changes in the “structure” of the labor
force which make certain “skills obsolete”.
Automation may result in job losses.
Consumer taste may make a good “obsolete”.
The auto reduced the need for carriage makers.
Farm machinery reduced the need for farm laborers.
“Creative destruction” means as jobs are created,
other jobs are lost. Jobs of the future destroy jobs of
today. Frictional and Structural make up the “natural
rate of unemployment”.
“These jobs do not come back.”
“Non-transferable skills” – choice is
prolonged unemployment or retraining.
3. Cyclical Unemployment
Cyclical – “economic downturns”
in the business cycle.
“Cyclical fluctuations” caused by “deficient AD”
“Durable goods jobs” are impacted the most.
These can be postponed because they can be repaired.
“Cyclical unemployment” is “real unemployment”.
“These jobs do come back.”
Survey on Unemployment
BLS calls 60,000 households every month.
They ask three questions:
1. Are you working? If the answer is no,
2. Did you work at all this month-even 1 day?
You are a member of the LF if “yes” on 1 or 2.
3. Did you look for work during the last month?
[agency, resume, interview] A “yes” counts you as
part of the LF. A “no” means you are not counted.
You are a “discouraged worker.” The labor force
consists of the employed and unemployed.
Unemployment Quiz
A. Frictional B. Structural C. Cyclical
1. A man working for Ford Motor Company is replaced by a robot.
2. A homebuilder loses his job during the recession because
houses are not selling.
3. A person who has worked his way through medical school (he has
now graduated) has quit his job as a cook at McDonald’s and
is interviewing to become a brain surgeon.
4. Automation has cost Alexandria. her office job.
5. Now that the economy has improved from a business contraction,
Rick is looking to get his old job back at Ford.
6. A California citrus picker is temporarily unemployed because of the weather.
7. A bank teller loses her job to an ATM machine.
8. Santa lost his job after Christmas.
9. A Lynch student graduates after 7 years in high school (had to
repeat econ 4 times) & is trying to get her first job at Arby’s.
10. Joel is fired at Wendy’s but is interviewing at McDonald’s.
1.
B
2.
C
3.
A
4.
B
5.
C
6.
A
7.
B
8.
A
9.
A
10.
A
NS 15-21
15. The business cycle is defined as the
upturns
downturns in business activity.
_______
and _______
A. EXPANSION
B
___
A
___
___
D
A
___
B
___
C
___
16.
17.
18.
19.
20.
21.
B. PEAK
C. CONTRACTION
D. TROUGH
High point of expansion
Period of growth (GDP increases)
“Bottoming out” of business activity
Laid off workers are called back.
Near or at full employment (4-6%)
Have averaged 11 months since W.W.II.
NS 31-49
31. (Frictional/Structural/Cyclical) is “temporary”, “short-term” unemployment.
32. (Frictional/Structural/Cyclical) is technological, “long-term” unemployment.
33. (Frictional/Structural/Cyclical) is unemployment resulting from recessions.
A. FRICTIONAL
B. STRUCTURAL
C. CYCLICAL
___
C 34. Michael lost his job due to the recession [business cycle downturn].
___
F 35. College graduate is searching for his first job.
___
F 36. Amanda is quitting Wendy’s to work at McDonald’s.
___
C 37. There are job losses at Ford due to a decrease in AD.
___
F 38. Lifeguards in the winter and Santas during the spring.
___
S 39. The auto replaces carriage makers.
___
S 40. ATM machines replace bank tellers.
45. The cost of unemployment can be measured by the amount by which
(potential/actual) GDP exceeds (potential/actual) GDP.
46. If the unemployment rate is 8%, we can infer that the (potential/actual) GDP
is in excess of (potential/actual) GDP.
47. (Inflation/Disinflation/Deflation) is a general increase in prices.
48. (Inflation/Disinflation/Deflation) is a decline in prices.
49. (Inflation/Disinflation/Deflation) is a decrease in the rate of inflation.
AD/AS Primer - No Recessionary/Inflationary Gap
AS
AD
Unemployment
3%
E
1. Frictional
a. quit for better job
b. fired
c. graduated
d. seasonal
2. Structural
[“technological”]
replaced by
[Frictional+Struc.]machinery
Real GDP
FE GDP “Bull’s Eye”
6%
3. Cyclical
Y*F
downturn in
$10 tr.
business cycle
[“real”
unemployment]
E – No INFLATIONARY or RECESSIONARY GAP [Y*]
Potential output[$10 tr.] equals actual output[$10 tr.]
Actual unempl. rate[6%] equals potential unempl. rate[6%]
OKUN’S LAW
• For every one percentage point by which the actual
unemployment rate exceeds the "natural" rate of
unemployment, real gross domestic product is reduced
by 2% to 3%. That is, unemployment above the
inflation-threshold unemployment rate reduces GDP
below potential output, and for every 1% excess of the
natural unemployment rate, a 2% to 3% reduction in
GDP is predicted. The difference between actual and
potential GDP is called the GDP gap. It may be
expressed as a percentage or an absolute amount.
GDP Gap (Okun’s Law)
Unemployment Rate above 6% x 2
Okun’s Law
GDP Gap = Unemployment Rate over 6% x2
7.5% unemployment, so 1.5 x 2% = 3%.
[$3 bil. GDP Gap($100 Bil. nominal GDPx3%; or $100 B x .03 =$3 B.)
1. Unemployment is 7%; Nominal GDP is $200 billion.
1
2
4 B.
Real unemp. is __%.
The % gap is __%.
Y being forgone is $__
2. Unemployment is 8%; Nominal GDP is $500 billion.
2
4
20 B.
Real unemp. is __%.
The % gap is __%.
Y being forgone is $__
3. Unemployment is 10%; Nominal GDP is $100 billion.
8
8 B.
4
Real unemp. is __%.
The % gap is __%.
Y being forgone is $__
NS 43 & 44
43.Unemployment is 17%. Nominal GDP is $200 billion.
44
What % is the GDP gap? 22
__% What output is forgone? $___
44. Unemployment is 16%. Nominal GDP is $300 billion.
60
What % is the GDP gap? 20
__% What output is forgone? $___
Figuring Inflation
[Change/Original X 100 = inflation]
So, 3.3% increase in Social
Security benefits for 2007
(2006-later year)
(2005-earlier year)
Current year’s index – last year’s index
199.1 – 192.7 [6.4]
C.P.I. = Last year’s index(earlier year) x 100; 192.7
x100 = 3.3%
130.7-124.0(6.7)
116-120(-4)
333-300(33)
11%
124.0 x 100 = ____
300 x 100 = ____
-3.3%
5.4% 120 x 100 = ____
NS 50, 51, & 52
50.The CPI was 166.6 in 1999 and 172.2 in 2000.
Therefore, the rate of inflation for 2000 was
(2.7/3.4/4.2)% [5.6/166.6 x 100 = 3.4%]
51. If the CPI falls from 160 to 149 in a particular
year, the economy has experienced (inflation/deflation)
of (5/-4.9/-6.9)%. [-11/160 x 100 = -6.9%]
52. If CPI rises from 160.5 to 163.0 in a particular year,
the rate of inflation for that year is (1.6/2.0/4.0)%.
Consumers in this economy buy only two goods–hot dogs & hamburgers.
Step 1. Fix the basket. What percent of income is spent on each.
Consumers in this economy buy a basket of:
4 hot dogs and 2 hamburgers
Step 2. Find the prices of each good in each year.
Year
Price of Hot Dogs
Price of Hamburgers
2001
$1
$2
2002
$2
$3
Step 3. Compute the basket cost for each year.
2001 ($1 per hot dog x 4 = $4) + ($2 per hamburger x 2 = $4), so $8
2002 ($2 per hot dog x 4 = $8) + ($3 per hamburger x 2 = $6), so $14
Step 4. Choose one year as a base year (2001) and compute the CPI
2001 ($8/$8) x 100 = 100
2002 (14/$8) x 100 = 175
Step 5. Use the CPI to compute the inflation rate from previous year
2002 (175/100 x 100 = 175%) or to get actual % (175-100)/100 x 100 =75%
(42%) 18. Suppose that a typical consumer buys the following quantities of these
three commodities in 2000 and 2001.
Commodity
Food
Clothing
Shelter
Quantity
5 units
2 units
3 units
2000 per Unit Price
$6.00
$7.00
$12.00
2001 per Unit Price
$5.00
$9.00
$19.00
Which of the following can be concluded about the CPI for this individual from
2000 to 2001?
a. It remained unchanged.
c. it decreased by 20%
b. It decreased by 25%.
d. It increased by 20%
e. It increased by 25%.
(Answer)
Year 1 [2000]: [5 food x $6 = $30; 2 clothing x $7 = $14; 3 shelters x $12 = $36,
for dollar value of $80. CPI = 100 ($80/$80 x 100 = 100 for 2000)]
Year 2 [2001]: [5 food x $5 = $25; 2 clothing x $9 = $18; 3 shelters x $19 = $57,
for value of $100. CPI =125 ($100/$80 x 100 = 125% for 2001)]
So, the CPI increased by 25%.
“Rule of 70”
70
__________________________
“Rule of 70” = % annual rate of increase (3%) = 23 years
[Inflation (prices to double)]
70
70
70
[Investments to double]
8 years [GDP (standard of living) to double]
6 years 9 = _____
7 years 12 = _____
10 = ______
70
[Nominal income – inflation rate = Real Income]
16%
Nominal
Income
6%
Inflation
Premium
=
10%
Real
Income
“Real Income”
“Real Income” measures the amount of goods/services nominal income will buy.
[% change in real income = % change in nominal income - % change in PL.]
5%
10%
5%
Nominal income rose by 10%, PL increased by 4% - then real income rose by ___%.
6
15
Nominal income rose by 20%, PL increased by 5% - then real income rose by ___%.
“You will get a 10% raise”
Inflation Since 1954
Above about 3.0% inflation is
considered too much. [2.5% in 2006]
Up in 2004
Tomatoes 50%
Fuel Oil
40%
Butter
28%
Gasoline 26%
Home gas 16%
Chicken
8%
Col. Tuition 9%
Sausage
7%
Sports tickets 7%
Take some money
out of circulation
to make it more
valuable.
Down in 2004
Eggs
-20%
PCs
-14%
Photos -14%
TVs
-12%
Lettuce
-8%
Toys
-6%
Cars
-4%
Girls cloth -1%
47. Inflation – overall increase in prices
48. Deflation – decrease in prices (1954)
49. Disinflation – decrease in inflation(1980-83)
Demand-Pull Inflation
[“Good News” – more jobs; “Bad News” – higher prices]
AS
AD2
AD1
PL2
E2
“Bad News”
PL1
-higher prices
E1
“Good News”
- more jobs
Y*
YI
Disinflationary Recessions
[“Good News”–lower prices; “Bad News”–job losses]
AS
AD1
AD2
PL1
“Good news”
-lower prices
PL2
“Bad news”
- job losses
YR
Y*
Adverse Supply Shocks
[“bad news” – job losses; “bad news” – inflation]
AS2
AD
PL2[10%]
PL1
AS1
This economy is
Inflating
stagnating
but
inflating.
Stagflation
$2.25
Stagnating
YR Y*
10%
Traditional Fiscal Policy [“G” & “T”]
will not work with Stagflation
AD1 AD2 AS2
15%
10%
4%
AD3
15% 10% Y*
Stagflation
Beneficial Supply Shocks
[“good news”–job gains; “good news”–disinflation]
AD
99 cents
AS1
AS2
PL1
PL2
Y* Y2
(Measures of Inflation PPI)
2003
PPI was 5.4 in 2005, highest since
1990. The “core PPI” [no volatile
food and energy] was only 1.7%.
Prices at the wholesale or
production level which are early
indicators of inflation. The 2,800
items include prices for raw
materials, intermediate goods,
and finished goods. The PPI
does not include services.
Consumer Price Index (CPI)
[CPI measures cost of living relative to a base year[100]
The CPI is a market basket of 364 items at 21,000
establishments in 91 cities that the typical
householder buys. It does not include exports
because we do not buy exports but does include
imports. About 55% of the CPI is services.
The
“Market
Basket”
What’s
in the CPI’s
Basket?
Recreation
Recreation
10.4%
10.4%
Clothing
6.6%
Alcohol
Household ClothingAlcohol
Household
Health
4.5% Health
6.6%
10.0%
10.0%
4.5% 4.3%
4.3%
Shelter
27.9%
Shelter
Food
Food
18.0%
18.0%
27.9%
Transportation
Transportation
18.3%
18.3%
PPI and CPI in March 2005
What was the most popular movie of all time?
[Mr. Index Goes To Hollywood]
Inflation-Adjusted Receipts
Box Office Receipts
Movie
Year Receipts(mil.)
Movie
Receipts (mil.)
1. Snow White
1937
$6,729
1. Avatar
$2,788
2. Titanic
2,186
3. Avengers
1,518
4. H. Potter(DH2)
1,341
5. Frozen
1,274
6. Iron Man 3
1,215
7. Transformers 3 1,123
8. LOTR ROTKing
1,119
9. Skyfall
1,108
10.Transformers 4 1,087
11.Dark Knight
1,084
12.Pirates: DMC
1,066
2. Gone With the Wind
3. Bambi
4. Titanic
5. Avatar
6. Star Wars
7. Sound of Music
8. The Exorcist
9. JAWS
10. ET
1939
1942
1997
2009
1977
1965
1973
1975
1982
6,588
3,827
3,169
3,018
2,978
2,114
2,111
2,036
1,912
History of Inflation, 1860-2004
$21
$7
2007
$1.50
$11
1962 Prices v. 2015 Prices
• Tuition at Harvard - $900
• Starting salary - $6,000 [college
graduate]
• FICA of 3.125 of $4,800
[$150
maximum]
• Top marginal tax rate of 91% of
incomes over $200,000.
• New house for $10-15,000 [2.5
times the income of a new
college graduate]
• Coke - 10 cents
• Movies - .50
• Gas, a gallon - $.29
• 1962 Chevy - $1,500
62 Corvette $2,995
• Tuition at Harvard - $58,607
• Starting salary - $48,700
[college graduate]
• FICA of 6.2 of $118,500
[$7,254 maximum]
• Top marginal tax rate of 39.6%
of incomes over $400,000
• New median house price is
$188,900 [3.88 times the income of
today’s college grads]
• Coke - $1.60
• Movies - $8.38
• Gas, a gallon - $2.31
• 2015 Chevy - $27,060
2015 Corvette $54,000
Unemployment 1900-1990
Unemployment, Inflation, & Business Cycles
Inflation – “too many dollars chasing
too few goods.”
Deflation – “too few dollars chasing
too many goods.”
Downturns in the Business Cycle
.
Hard/Soft Good Price/Production Drops
Indicators of the Business Cycle
[“The leading indicators have predicted
11 of the last 15 recessions”]
“Barometer
Of The Future”
[6-9 months]
“Where we are heading”
Leading Indicators
Ave. work week
Credit
New orders
New businesses
Stock prices
New orders
Had a recession in 2001
Building permits
Delivery times
A drop for three straight
Inventories
months usually indicates
Materials prices
a recession is coming.
Money supply
Unemployment claims
Indicators of the Business Cycle
“Where we are now”
Coincident Indicators
1.
2.
3.
4.
Personal income minus transfer payments
Nonagricultural payrolls
Industrial production
Manufacturing and trade sales
Indicators of the Business Cycle
“Where we have been”
Lagging Indicators
Labor cost, unemployment rate & duration, prime
rates, CPI for services, commercial loans, etc.
Full Employment = 4-6% unemployment
Wish I had
not dropped
out of school.
Will Work
For Food
Discouraged workers – those who have given up.
Unemployed workers - those who are actively looking.
Part-time workers – half employed, half unemployed,
but counted as fully employed.
Employed workers – those who work for even one hour
per week for wages or 15 hours a week if not getting paid.
We have full employment when cyclical unemployment is “0”.
In Europe, full employment is 8-10%.
22. During a recession, jobs relating to
NS 22-30
(durable/nondurable) goods are affected the most because they are
postponable and have monopoly power (few sellers).
23. (Leading/Coincident/Lagging) indicators – statistics that illustrate the
direction the economy is heading in 6-9 months.
24. (Leading/Coincident/Lagging) indicators – snapshot of the economy
“at this time”.
25. (Leading/Coincident/Lagging) indicators – statistics that tell where
the economy has been.
4-6 unemployment. The
26. Full employment occurs when we have ______%
current unemployment rate is ____%.
5
27. (Discouraged workers/Temporary unemployed workers) are those
who have given up looking for a job.
28. The presence of discouraged workers & counting part-time workers as
fully employed results in the official rate being (understated/overstated).
29. If 2 million out of 8 million unemployed workers become “discouraged”
& quit looking for work, the official rate would (incr/decr/be unchanged).
30. If 3 million part time workers switch to full time work, the official rate
will (fall/rise/remain unchanged).
Demand-Pull & Cost-Push Inflation
Demand-Pull Inflation – increase in AD.
[“Too many dollars chasing too few goods”]
Originates from “buyers side of the market”
D1 D2 S
P2
P1
“Demand-pull”
D S2
PL2
PL1
S1
Cost-Push Inflation – 3 things may
cause “cost-push” inflation.
“Cost-push”
1. Wage-push – strong labor unions
2. Profit-push – companies increase prices
when their costs increase.
“Wage-price”
3. Supply-side cost shocks – unanticipated
Spiral
increase in raw materials such as oil.
Who wins/loses with 20% Unanticipated Inflation?
[Creditors, Debtors, Savers]
The debtor wins with 20% unanticipated inflation.
(some examples)
1. In 1914, total German mortgage debt was $10
billion
marks.
In 1923, $10 billion marks was worth 1 cent. All debt was wiped out.
2. Signed union contracts agreeing to 3% raises for next 3 years.
(A $30,000 salary would increase to $32,782 but it would
take $51,840 to buy what $30,000 would buy 3 years before)
3. Signed union contracts agreeing to COLAs for next 3 years.
(So a $30,000 salary of 3 years ago would now pay $51,840
which would buy what $30,000 would buy 3 years ago.
4. Your Econ teacher buys a $300,000 CD from the 1st Econ Bank
which pays him 5% interest for the next 3 years. [Saver]
Mr. Econ would earn $47,288 in interest at 5%, however at
20%, he could earn $218,400.] So the saver looses here.
Inflation
• Who is Hurt by Inflation?
–Fixed-Income Receivers
–Savers
–Creditors
• Who is Unaffected by Inflation?
–Flexible-Income Receivers
• Cost-of-Living Adjustments
(COLAs)
–Debtors
NS 54-60
54. (Demand-pull/Cost-push) inflation results from an increase in
aggregate demand [AD].
55. (Demand-pull/Cost-push) inflation results from an increase in
production costs [wages or input cost].
56. The only group that benefits from inflation are
(creditors/debtors/fixed income pensioners).
The End