Realm of Macroeconomics

Where the telescope ends, the microscope begins.Which of the two has the grander view?VICTOR HUGO

EmploymentEmployment

# of unemployed# of unemployed

Unemployment rate = ------------------ Unemployment rate = ------------------ Total labor force Total labor force

total labor force total labor force

= # of employed + # of unemployed = # of employed + # of unemployed

Remarks on the definitionRemarks on the definitionof “unemployed”of “unemployed”

Those who have part-time jobs are Those who have part-time jobs are not qualifiednot qualified

Those who are not actively looking Those who are not actively looking for jobs are not qualifiedfor jobs are not qualified

So the “discouraged workers” are not So the “discouraged workers” are not qualified.qualified.

Out-of-labor-forceOut-of-labor-force

Types of unemploymentTypes of unemployment

1. Frictional 1. Frictional 2. Structural2. Structural 3. Cyclical3. Cyclical

Frictional unemployment Frictional unemployment

These are the people who are These are the people who are changing occupation or moving for changing occupation or moving for better offers or other reasons. better offers or other reasons.

They are just temporary between They are just temporary between jobs. jobs.

This type of unemployment cannot This type of unemployment cannot be reduced. be reduced.

It is a normal state.It is a normal state.

Structural unemployment Structural unemployment

It refers to workers who have lost It refers to workers who have lost jobs because their skills no longer in jobs because their skills no longer in demand due to the shift in economic demand due to the shift in economic structure.structure.

Coexistence of shortage and surplus Coexistence of shortage and surplus in the labor market in the labor market

Cyclical unemployment Cyclical unemployment

Caused by recessionCaused by recession Unemployment in all sectors, all Unemployment in all sectors, all

occupations occupations

Natural unemployment rate Natural unemployment rate

Unemployment rate cannot be Unemployment rate cannot be reduced to zeroreduced to zero

The Full employment stateThe Full employment state The unemployment rate in the full The unemployment rate in the full

employment stateemployment state Natural unemployment rateNatural unemployment rate

Unemployment rate in the recent Unemployment rate in the recent U.S. history U.S. history

0

5

10

15

20

25

30

1929

1950

1970

1974

1978

1982

1986

1990

1994

1998

2002

2006

2010

Recent U.S. unemployment rateRecent U.S. unemployment rate

Search Google: “unemployment rate” “

InflationInflation

Inflation rate Inflation rate is the percentage increase in the is the percentage increase in the general price levelgeneral price level

General Price Level (P)General Price Level (P)is measured by price indicesis measured by price indicesa. GDP Deflator (GDP Price a. GDP Deflator (GDP Price

Index)Index)b. Consumer Price Index (CPI) b. Consumer Price Index (CPI)

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

Selected U.S. Macroeconomic Data

IndexIndex

Why use indices to measure the Why use indices to measure the general price level?general price level?

because GDP is an aggregate because GDP is an aggregate product, which cannot be measured product, which cannot be measured by a physical unit.by a physical unit.

Index is an indicator that compares Index is an indicator that compares to a benchmark, which is set to 100. to a benchmark, which is set to 100.

Consumer Price Index (CPI)Consumer Price Index (CPI)

CPICPI

bureau of Labor Statistics bureau of Labor Statistics surveys surveys the average consumption the average consumption basket basket of urban residents.of urban residents.

Measuring the cost of living of a Measuring the cost of living of a typical urban householdtypical urban household

Calculating CPICalculating CPISuppose a typical urban household only consumes the following Suppose a typical urban household only consumes the following

items: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 CPICalculating CPI Compute the CPI in 1991 (1990=100)Compute the CPI in 1991 (1990=100)

0.85 X 30 + 4.50 X 1 + 0.25 X 160.85 X 30 + 4.50 X 1 + 0.25 X 16 3434

---------------------------------------- = ---------------------------------------------- = ------

0.80 X 30 + 4.00 X 1 + 0.25 X 160.80 X 30 + 4.00 X 1 + 0.25 X 16 3232

= 1.0625 = 1.0625

Conventionally, the index is multiplied by 100, soConventionally, the index is multiplied by 100, so

1.0625 X 100 = 106.251.0625 X 100 = 106.25

CPICPI

The CPI is used to calculate the real The CPI is used to calculate the real income so you can draw conclusion if income so you can draw conclusion if you have been better off during the you have been better off during the last several years.last several years.

Nominal Wage versus Real WageNominal Wage versus Real Wage Real wage is corrected for inflation.Real wage is corrected for inflation.

CaseCase

During 1980 to 1990, your income During 1980 to 1990, your income increased from 20,000 to 28,000 U.S. increased from 20,000 to 28,000 U.S. dollars. but prices also rose during dollars. but prices also rose during the period and eroded the the period and eroded the purchasing power of dollars. You purchasing power of dollars. You want to know if you are better off or want to know if you are better off or not during this period.not during this period.

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

Selected U.S. Macroeconomic Data

Derive Real Income by DeflatingDerive Real Income by Deflating

To do that, we deflate the nominal To do that, we deflate the nominal income to get real incomeincome to get real income

Deflating Deflating – is a process to convert nominal terms to is a process to convert nominal terms to

real terms. real terms.

Nominal incomeNominal income

Real income = ----------------- X 100Real income = ----------------- X 100

CPICPI

Derive Real Income by DeflatingDerive Real Income by Deflating

Check the table:Check the table:Real income in 1980 Real income in 1980 = (20,000 / 82.4) X 100 = = (20,000 / 82.4) X 100 =

Real income in 1990 Real income in 1990 = (28,000 / 130.7) X 100 == (28,000 / 130.7) X 100 =

Derive Real Income by DeflatingDerive Real Income by Deflating

Check the table:Check the table:Real income in 1980 Real income in 1980 = 20,000 / 82.4 X 100 = 24,271 = 20,000 / 82.4 X 100 = 24,271

Real income in 1990 Real income in 1990 = 28,000 / 130.7 X 100 =21,423= 28,000 / 130.7 X 100 =21,423

You are worse off.You are worse off.

GDP Deflator / GDP price indexGDP Deflator / GDP price index GDP Deflator; orGDP Deflator; or GDP Price IndexGDP Price Index Including the prices of ALL products Including the prices of ALL products

that are included in GDPthat are included in GDP GDP Deflator and CPI use different GDP Deflator and CPI use different

baskets of the goods. CPI include baskets of the goods. CPI include only those items consumed by a only those items consumed by a typical urban household.typical urban household.

Case: Calculate Real GDPCase: Calculate Real GDP

Calculate Real GDP in 2003 at 2000 Calculate Real GDP in 2003 at 2000 price.price.

From the table in 2003From the table in 2003

Nominal GDP = 11004Nominal GDP = 11004

GDP Deflator (2000=100) = 106GDP Deflator (2000=100) = 106

Derive Real GDP by DeflatingDerive Real GDP by Deflating

Nominal GDPNominal GDP

Real GDP = ------------------- X 100Real GDP = ------------------- X 100

GDP Price IndexGDP Price Index

1100411004

Real GDP = --------- X 100 =10342Real GDP = --------- X 100 =10342

106.4106.4

Calculating the inflation rateCalculating the inflation rate

Inflation Rate (p)Inflation Rate (p)

= percentage increase in the price = percentage increase in the price indexindex

PPtt - P - Pt-1t-1 PPtt

= --------- X 100% =( ---- -1) X 100%= --------- X 100% =( ---- -1) X 100%

PPt-1t-1 PPt-1t-1

Calculating the inflation rateCalculating the inflation rate

Calculate inflation rates between Calculate inflation rates between 1978-791978-79

by GDP Deflatorby GDP Deflator by CPIby CPI

( 55.3 / 50.9 - 1 ) X 100% = 8.6%( 55.3 / 50.9 - 1 ) X 100% = 8.6% ( 72.6 / 65.2 - 1) X 100% = 11.3%( 72.6 / 65.2 - 1) X 100% = 11.3%

Exercise Table 1 Year Real GDP Price Index 2000 1000 100.0 2001 1100 120.0 2002 1320 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

The inflation rate in the United States since 1870

Figure 6Figure 6

29

The U.S. CPI Inflation RateThe U.S. CPI Inflation Rate2000 ---2000 ---

-1

-0.5

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Inflation history in the U.S.Inflation history in the U.S. 1968-69 inflation. Reasons: tax cut, defense 1968-69 inflation. Reasons: tax cut, defense

spending associated with the Viet Nam Warspending associated with the Viet Nam War 1972-74 inflation. Reasons: Poor harvest, oil 1972-74 inflation. Reasons: Poor harvest, oil

shock and loose monetary policy during the shock and loose monetary policy during the Johnson period. Stagflation.Johnson period. Stagflation.

Inflation in 1979, second oil shock Inflation in 1979, second oil shock 1980s. Price stabilization. Reagan 1980s. Price stabilization. Reagan

administration. Monetary contraction and high administration. Monetary contraction and high interest rate. Economic recession in 1982.interest rate. Economic recession in 1982.

1990s. Low inflation as productivity rose.1990s. Low inflation as productivity rose. 2009 Deflation caused by recession2009 Deflation caused by recession

Dis- or De-flationDis- or De-flation

DisinflationDisinflation

-- Inflation decelerates-- Inflation decelerates

(The absolute price level (The absolute price level increases, but at a increases, but at a diminishing rate)diminishing rate)

DeflationDeflation

-- Price falls -- Price falls

International comparisonInternational comparisonCPI Inflation rates 2004CPI Inflation rates 2004CountryCountry Inflation RateInflation Rate

ZimbabweZimbabwe 419.9419.9

IraqIraq 25.425.4

RussiaRussia 11.511.5

ChinaChina 4.14.1

The U.S.The U.S. 2.42.4

U.K.U.K. 1.41.4

JapanJapan -0.1-0.1

Hong KongHong Kong -0.3-0.3

International comparisonInternational comparisonCPI Inflation rates 2007CPI Inflation rates 2007

Data from CIA factbook

Cost of InflationCost of Inflation

Purchasing power erosion Purchasing power erosion Run-away Inflation or Hyperinflation Run-away Inflation or Hyperinflation

– The case in Germany in 1923The case in Germany in 1923– At an annul rate of > 100,000,000At an annul rate of > 100,000,000– breakdown of the market systembreakdown of the market system

Inflation cause uncertainty in the Inflation cause uncertainty in the interest rate, thus, impeding interest rate, thus, impeding investment and economic growthinvestment and economic growth

Redistribution between borrowers Redistribution between borrowers and lendersand lenders

Actual inflation rate =Actual inflation rate =ππACTACT Expected inflation rate =Expected inflation rate =ππee

Nominal interest rate Nominal interest rate

= real interest rate + = real interest rate + ππee

If If ππACT ACT > > ππe e , then lenders lose., then lenders lose. If If ππACT ACT < < ππe e , then borrowers lose., then borrowers lose. This discourage investmentThis discourage investment