Presentation on theme: "Unemployment and Inflation"— Presentation transcript:
1 Unemployment and Inflation How to measure the unemployment rate?Labor force and the unemploymentHow to measure the inflation rate?Real GDP vs. nominal GDPReal interest rate vs. nominal interest rate
2 UnemploymentThe unemployed are those who are willing and able to work but do not have a job and are actively searching for a job.The Bureau of Labor Statistics (BLS) collects monthly survey data to compute the unemployment rate.
4 UnemploymentLabor force participation rate (LFPR)Unemployment rate =
5 Problems In Measuring Unemployment Treatment of involuntary part-time workersSome economists have suggested that involuntary part-time workers should be regarded as partially employed and partially unemployed.Treatment of discouraged workersIndividuals who would like to work but, because they feel little hope of finding a job, have given up searching.
6 Types of UnemploymentUnemployment can arise for a variety of reasons, each with its own policy implicationsEconomists have found it useful to classify unemployment into four different categoriesFrictional unemploymentSeasonal unemploymentStructural unemploymentCyclical unemployment
7 Frictional Unemployment Short-term joblessness (between jobs or new entrants)Good match between workers and jobsWith better suited jobs, works would be more productive.
8 Seasonal Unemployment Joblessness related to changes in weather, tourist patterns, or other seasonal factors.So, it is short-term and predictable.To prevent any misunderstandings, government usually reports the seasonally-adjusted rate of unemployment.
9 Structural Unemployment Joblessness arising from mismatches between workers’ skills and employers’ requirements.Coal miners, autoworkers, etc.Generally a stubborn, long-term problemOften lasting several years or more
10 Cyclical Unemployment Business cycle – fluctuations in real GDP around its long-run trend.When the economy goes into a recession and total output falls, the unemployment rate rises.Since it arises from conditions in the overall economy, cyclical unemployment is a problem for macroeconomic policy.
11 Full Employment A situation where there is no cyclical unemployment Natural rate of unemploymentFrictional+Seasonal+StructuralIn the U.S., it is between 4.5% and 5%.
12 Price Level and Inflation A measure of average prices of goods and services in the economyIndex numbersSeries of numbers used to track the change of a variable over time: crime index, air pollution indexMost measures of the price level are reported in the form of an indexDow Jones Index, S&P 500, Consumer Price Index
13 Index NumbersIn general, an index number for any measure is calculated as
14 Index Numbers Create index numbers Example: the number of traffic accidents in Youngstown, Ohio
15 The Consumer Price Index An index of the cost, through time, of a representative market basket of goods and services purchased by a typical urban family of four.The market basket does not include goods and services purchased by businesses, government, and foreigners, but include consumer goods and services currently produced in the U.S. as well as used goods and imported goods and services.An example in the textbook on page 625
16 From Price Index to Inflation Rate Changes in price indexInflation when price level is risingDeflation when price level is falling, or negative inflation
17 Inflation, Nominal and Real Values Purchasing power of money – amount of goods and servicesNominal values – measured at current year priceReal values – measured at the base year priceTranslate nominal values into real values using the formula
18 Inflation, Nominal and Real Values Suppose that from December 2004 to December 2005, your nominal wage rises from $15 to $20 per hourAre you better off?Real wage formula is as follows
20 Nominal and Real Interest Rate Interest rate – the cost of borrowing money, express as a percentage of the amount borrowed.Nominal vs. Real interest rate
21 Redistributive Effect of Inflation How does inflation redistribute real income?Inflation hurts those who receive a fixed amount of payment specified in nominal termsExample: salary specified in a contractInflation benefits those who make a fixed amount of payment specified in nominal termsExamples: mortgage payment, car loan monthly payment
22 Expected vs. Unexpected Inflation Over any period, percentage change in a real value (%Δ Real) is approximately equal to percentage change in associated nominal value (%Δ Nominal) minus the rate of inflation%ΔReal = %ΔNominal – Rate of InflationIf inflation is fully anticipated, and if both parties take it into account, then inflation will not redistribute purchasing powerWhen inflation is not correctly anticipated, however, inflation does shift purchasing power from one group to another.
23 Expected vs. Unexpected Inflation An example:Joe borrows $100 from Mike and promises to pay back the money plus interest in a year. Mike wants to charge a real return of 3%. Meanwhile, Mike expects the inflation rate to be 3% for the next year and Joe expects it to be 5%. So, Joe happily agrees to pay Mike 6% nominal interest rate. If the actual inflation rate is 4%, how will the purchasing power shift between Joe and Mike?