how else can you measure an economy’s health? unemployment and inflation

HOW ELSE CAN YOU MEASURE AN ECONOMY’S HEALTH?

Unemployment and Inflation

Basic Laborious terms

Labor Force: # of people employed + # of people

unemployed Doesn’t include:

Students, kids, retired people, the homeless

Who’s “employed”?

≥ 16 years with a job

Must work 1 hour per week

≥ 16 years w/o a job

Actively searching for a job

EMPLOYED UNEMPLOYED

How do you calculate…

# unemployed

_______________________

# of people in the labor force

(unemployed + employed)

# people in labor force

__________________total population

Unemployment RateLabor Force Participation Rate

LABOR FORCE INDICATORS (2005)

4 TYPES OF UNEMPLOYMENT

Frictional Voluntarily between jobs

College graduates PBJ is healthy and natural!

Structural Mismatch of skills

Don’t have technologyskills

4 TYPES OF UNEMPLOYMENT

Cyclical Increases during a recession Decreases during an expansion

Seasonal Changes due to weather

Other workers…

Willing and able to work, but become so frustrated that they stop trying

Claim to be unemployed in order to receive unemployment benefits even when they don’t want job or receive money elsewhere.

Discouraged Workers Dishonest Workers

Unemployment and Recessions

The average unemployment rate was 5.9%

What do economists strive for?

Some unemployment is a good thing Frictional unemployment is expected

Too much unemployment is a bad thing OKUN’S LAW: for every one percentage

increase in unemployment rate, output (GDP) falls by 2-3 percentage points

FULL EMPLOYMENT

AKA

THE NATURAL RATE OF UNEMPLOYMENT

When there is no cyclical unemployment Full potential! 4-5%

THE NATURAL RATE

Cyclical unemployment is shown by the shaded regions.

Practice Problems over GPD/Unemployment

Which of the following are included in the calculation of GDP? Which category? A new stock purchased from Apple The money received from babysitting a

neighbor An IPOD purchased for your mom’s birthday The Ford’s leftover on a lot at the end of

the year The tire used to make your bike The government builds a new highway Clothing purchased from China

Calculating Unemployment

1. What is the formula for calculating the unemployment rate? Labor force participation rate?

2. If given the following circumstances, what is the unemployment rate? Labor force participation?

1000 people (the population) 475 civilians employed 200 full-time students 100 stay-at home parents 25 active job seekers

What is occurring in Bolivia in the 1980s?Why is this occurring?How does it affect its citizens?

The Causes and Effects

HOW DO YOU CALCULATE INFLATION?

The Consumer Price Index

Consumer Price Index

Measures the average price of goods that urban consumers buy 400 consumer goods and services Can be from abroad

http://www.bls.gov/cpi/tables.htm

What’s in the CPI?

Calculating CPI: Base Year Prices

Commodity Quantity 2005 per unit price

Total

Oranges 10 $1 $10

Haircuts 5 $8 $40

Total cost of Market Basket

---- ---- $50

1. Calculate the total market basket of one year by multiplying Quantity X 2005 per commodity

price, then adding both commodities together. 2005 MARKET BASKET/BASE YEAR

Calculating CPI: 2006

Commodity Quantity 2006 per unit price

Total

Oranges 10 $2 $20

Haircuts 5 $10 $50

Total cost of Market Basket

---- ---- $70

1. Calculate the total market basket of 2006 by multiplying Quantity X 2006 per commodity

price, then adding both commodities together. 2006 MARKET BASKET

How do we Calculate CPI?

Cost of CPI @ current priceCost of CPI basket @ base price

x 100

Commodity Quantity 2005 per unit price

Total

Oranges 10 $1 $10

Haircuts 5 $8 $40

Total cost of Market Basket

---- ---- $50

How do we Calculate Inflation?

CPI current CPI previous

CPI previous

x 100Inflation rate =

Inflation = 70-50 = 20 X 100 = 40%

50 50

What’s the Inflation Rate?

Commodity Quantity 1993 per unit price

1994 per unit price

Food 4 units $7 $5

Clothing 5 units $5 $8

Shelter 3 units $9 $20

1. What is the market basket total for 1993?2. What is the market basket total for 1994?3. What is the inflation rate between the two

years?4. How do you think this inflation would affect

people earning a fixed income?

Inflation is the gradual increase of prices (from CPI)

Inflation

CPI in current year CPI in previous year

CPI in previous year

x 100Inflation rate =

The Types and Causes of Inflation $$$

Demand Pull Inflation: Rightward shift of the demand curve Excess demand for products causing

shortages “Too much money chasing too few goods!”

Caused by printing too much money

Cost Push Inflation: Leftward shift of the supply curve

Caused by high input costs 1970s high price of oil

The effects of inflation…

If there is inflation… these people are affected in the following ways:

Hurt Unaffected Helped

•Fixed income receivers

•Savers

•Lenders

* Decrease in purchasing power

Flexible income receivers

Borrowers

To protect against inflation:

Lenders add an inflation premium:*Nominal interest rate (what we pay) = real

interest rate + expected inflation Firms add the COLA (Cost of Living

Adjustment) calculated from the CPI*Real income= nominal income/price index

What roles do interest rates play in the health of

economies? Interest Rates: the price of money

Interest rates can affect the way people behave A high nominal interest rate encourages people

to save more A low nominal interest rate encourages people

to take out more loans