Presentation on theme: "The Macroeconomy: Unemployment, Inflation, and Deflation"— Presentation transcript:
1The Macroeconomy: Unemployment, Inflation, and Deflation ECON 151 – PRINCIPLES OF MACROECONOMICSChapter 7:The Macroeconomy: Unemployment, Inflation, and DeflationMaterials include content from Pearson Addison-Wesley which has been modified by the instructor and displayed with permission of the publisher. All rights reserved.
2Unemployment Unemployment Total number of adults (aged 16 years or older) willing and able to work and who are actively looking for work and have not found a job
3Unemployment (cont'd) Civilian Labor Force Individuals aged 16 years or older who either have jobs or who are looking and available for jobs; the number of employed plus the number of unemployed
4Employment & Unemployment Calculations Total Population (A)Less Institutionalized PopulationNon-Institutionalized PopulationLess Not in Work ForceTotal Workforce (B)Less MilitaryCivilian Workforce (C)Less EmployedUnemployed (D)Labor Force Participation Rate = (B) / (A)Unemployment Rate = (D) / (C)
5Unemployment (cont'd) Costs of unemployment Lost output During early 2000s, unemployment rate rose by 2 percentage pointsFactory output was 80% of potentialLost output was $200 billion of goods and services that could have been producedPersonal psychological impact
6Figure 7-1 More Than a Century of Unemployment Source: U.S. Department of Labor, Bureau of Labor Statistics
8Unemployment (cont'd)The unemployment rate is the percentage of the measured labor force that is unemployed.
9Unemployment (cont'd) Labor force = The employed + The unemployed 152.7* =UnemployedLabor forceUnemployment rate =x 100=x 100 = 4.8%7.3152.7*U.S., millions of people; as of 2007
10Unemployment (cont'd) Stock Flow The quantity of something, measured at a given point in time—for example, an inventory of goodsFlowA quantity measured over time, such as the income you make per year, or the number of individuals fired every month
11Unemployment (cont'd) Categories of individuals without work Job loser ReentrantJob leaverNew entrant
12Unemployment (cont'd) Job Loser An individual whose employment was involuntarily terminated or who was laid off40–60% of the unemployed
13Unemployment (cont'd) Reentrant An individual who has worked a full-time job before but left the labor force and has now reentered it looking for a job20–30% of the unemployed
14Unemployment (cont'd) Job Leaver An individual who voluntarily quit 10 to 15% of the unemployed
15Unemployment (cont'd) New Entrant An individual who has never worked a full- time job for two weeks or longer10 to 15% of the unemployed
16Unemployment (cont'd) Duration of unemployment More than a third of job seekers find work within one month.Approximately another third find employment within a second month.About a sixth are still unemployed after six months.Average duration is just over 15 weeks throughout the last 15 years.
17Unemployment (cont'd) Discouraged Workers Question Individuals who have stopped looking for a job because they are convinced they will not find a suitable one (no longer in work force)QuestionHow does the existence of discouraged workers bias the unemployment rate?
18Unemployment (cont'd) Unemployed Labor force x 100 QuestionHow does the existence of discouraged workers bias the unemployment rate?UnemployedLabor forceUnemployment rate =x 100=x 100 = 4.8%7.3152.7Assume that there are 3 million discouraged workers.=x 100 = 6.6%10.3155.7
19Unemployment (cont'd) Labor Force Participation Rate The proportion of non-institutionalized working-age individuals who are employed or seeking employment
20The Major Types of Unemployment FrictionalStructuralCyclicalSeasonal
21The Major Types of Unemployment (cont'd) Frictional UnemploymentResults from the fact that workers must search for appropriate job offersThis takes time, so they remain temporarily unemployed
22The Major Types of Unemployment (cont'd) Structural UnemploymentResults from a poor match of workers’ abilities and skills with current requirements of employers
23The Major Types of Unemployment (cont'd) Cyclical UnemploymentResults from business fluctuations that occur when aggregate (total) demand is not at a level that would result in full employmentCan be positive or negative
24The Major Types of Unemployment Seasonal UnemploymentResults from the seasonal pattern of work in specific industriesAdjustments are made to offset the effects of seasonal unemployment so that meaning comparisons can be made between different periods of the year. This adjustment is needed in order to assess the affects of the other types of unemployment.
25Full Employment and the Natural Rate of Unemployment (cont'd) An arbitrary level of unemployment that corresponds to “normal” friction in the labor market
26Full Employment and the Natural Rate of Unemployment (cont'd) The unemployment rate that is estimated to prevail in the long-run macroeconomic equilibriumShould not reflect cyclical unemploymentWhen seasonally adjusted, the natural rate should include only frictional and structural unemployment.
27Inflation and Deflation A sustained increase in the average of all prices of goods and services in an economyDeflationA sustained decrease in the average of all prices of goods and services in an economy
28Inflation and Deflation (cont'd) Purchasing PowerThe value of money for buying goods and servicesVaries with prices and income
29Inflation and Deflation (cont'd) Nominal valuePrice expressed in today’s dollarsReal valueValue expressed in purchasing power, adjusted for inflation
30Measuring the rate of inflation Price Index The cost of today’s market basket of goods expressed as a percentage of the cost of the same market basket during a base yearMarket Basket Representative bundle of goods and servicesBase Year The point of reference for comparison of prices in other yearsPrice index = 100Cost today of market basketCost of market basket in base year
31Table 7-1 Calculating a Price Index for a Two-Good Market Basket
32Inflation and Deflation (cont'd) Real-world price indexesConsumer Price Index (CPI)Producer Price Index (PPI)GDP deflatorPersonal Consumption Expenditure (PCE)
33Inflation and Deflation (cont'd) Consumer Price Index (CPI)A statistical measure of a weighted average of prices of a specified set of goods and services purchased by wage earners in urban areasMarket basket of goods and services of typical consumer
34Inflation and Deflation (cont'd) Producer Price Index (PPI)A statistical measure of a weighted average of prices of goods and services that firms produce and sellUsed as a short-run leading indicator (before CPI)PPIs forFoodstuffsIntermediate goodsFinished goods
35Inflation and Deflation (cont'd) GDP DeflatorA price index measuring the changes in prices of all new goods and services produced in the economyBroadest measure of prices; reflects both price changes and the public’s market responses to those price changes
36Inflation and Deflation (cont'd) Personal Consumption Expenditure (PCE) IndexA statistical measure of average price using annually updated weights based on consumer spendingPrimary inflation index used by the Federal Reserve
37Figure 7-4 Inflation and Deflation in U.S. History Source: U.S. Department of Labor, Bureau of Labor Statistics
38Anticipated versus Unanticipated Inflation To determine who is hurt by inflation we distinguish between the two types.The effects of inflation on individuals depend upon which type of inflation exists.
39Anticipated versus Unanticipated Inflation (cont'd) The inflation rate that we believe will occurUnanticipated InflationInflation at a rate that comes as a surprise
40Anticipated versus Unanticipated Inflation (cont'd) Inflation and interest ratesNominal Rate of InterestThe market rate of interest expressed in today’s dollarsReal Rate of InterestThe nominal rate of interest minus the anticipated rate of inflation
42Anticipated versus Unanticipated Inflation (cont'd) Inflation affects people differentlyUnanticipated inflationCreditors loseDebtors gain
43Anticipated versus Unanticipated Inflation (cont'd) Protecting against inflationCost-Of-Living Adjustments (COLAs)Clauses in contracts that allow for increases in specified nominal values to take account of changes in the cost of living
44Anticipated versus Unanticipated Inflation (cont'd) The resource cost of inflationRepricing or Menu Cost of InflationThe cost associated with recalculating prices and printing new price lists when there is inflation
45Changing Inflation and Unemployment: Business Fluctuations The ups and downs in business activity throughout the economy
46Changing Inflation and Unemployment: Business Fluctuations (cont'd) ExpansionA business fluctuation in which the pace of national economic activity is speeding upContractionA business fluctuation during which the pace of national economic activity is slowing down
47Changing Inflation and Unemployment: Business Fluctuations (cont'd) RecessionA period of time during which the rate of growth of business activity is consistently less than its long-term trend or is negativeDepressionAn extremely severe recession
48Figure 7-5 The Idealized Course of Business Fluctuations
49Figure 7-6 National Business Activity, 1880 to the Present
50Changing Inflation and Unemployment: Business Fluctuations (cont'd) Leading IndicatorsEvents that have been found to occur before changes in business activityEconomic downturns often followReduction in the average workweekRise in unemployment insurance claimsDecrease in prices of raw materialsDrop in the quantity of money circulating
51End of Chapter 7 Chapter 7: ECON 151 – PRINCIPLES OF MACROECONOMICSChapter 7:The Macroeconomy: Unemployment, Inflation, and DeflationMaterials include content from Pearson Addison-Wesley which has been modified by the instructor and displayed with permission of the publisher. All rights reserved.