Chapter 5 Macroeconomics the Big Picture Hossain: MSMC

In class exercise  Compute CPI for 1995, 2000 and 2005  Note, you need to compute COB first Hossain: MSMC2 Price Data Goods and Services Market Basket (Fixed) Prices 1995 (Base Year)  Apple 10 pounds$4.00$5.00$5.50  Banana 15 pounds$0.30$0.50$.70  Chocolate 10 pack$0.75$1.00$1.50  Dog food 25 pounds$2.00$2.50$4.00  Eye Exam. 1 visit$75.00$80.00$100.00

In class exercise  Compute CPI for 1995, 2000 and 2005  Compute Inflation rate of 2000 compared to 1995  Compute Inflation rate of 2005 compared to 2000 Hossain: MSMC3 Price Data Goods and Services Market Basket (Fixed) Prices 1995 (Base Year)  Apple 10 pounds$4.00$5.00$5.50  Banana 15 pounds$0.30$0.50$.70  Chocolate 10 pack$0.75$1.00$1.50  Dog food 25 pounds$2.00$2.50$4.00  Eye Exam. 1 visit$75.00$80.00$100.00

Percentage Computation  All percentage computations, use the same formula: Hossain: MSMC4 NEWOLD X100

Implicit Price Deflator  Note, CPI is a narrow measure of price index  It tracks price changes of goods and services purchased by a typical family  A more broad price index is known as Implicit Price Deflator  This is a economy wide price index capturing the whole GDP  By definition, Implicit Price Deflator = x100 NGDP 5Hossain: MSMC RGDP

Real Value and Nominal Value Nominal Value  Value expressed in dollars of the current period  Does not correct for inflation Real Value  Value expressed in constant purchasing power  Real value adjusts for inflation  Allows us to compare prices across different time periods. 6Hossain: MSMC

Real Value and Nominal Value Assume that Tom made 60k in 2009 Tom’s dad, Harry made 45k in 1960 Who is better off in terms of purchasing power? Note, both incomes are Nominal Value To compare, we must convert them to Real Value By definition, Real Value at time t = x 100 7Hossain: MSMC Price Index at time t Nominal Value at time t

Real Value and Nominal Value Assume that Tom made 60k in 2009 Tom’s dad, Harry made 45k in 1960 Who is better off in terms of purchasing power? Assume, CPI 2009 = 212 and CPI 1960 = 130 Real Value at time t = x100 8Hossain: MSMC Price Index at time t Nominal Value at time t

Shortcomings of CPI  Components of market basket are fixed.  New goods are excluded.  Quality changes may not be accounted for.  Indexes do not account for changes consumers make in terms of where they shop. 9Hossain: MSMC

Unemployment Labor force  Total number of people (age 16 and over) working or unemployed  Labor Force = Employed + Unemployed Unemployment Rate  Percentage of the labor force that is unemployed  Unemployment Rate = x100 Unemployed Labor Force

Unemployment Is person working? Yes  Unemployment rate in August 2008 was 6.5 percent:  Unemployment rate = 10,080/(10, ,958) = = 6.5 percent Employed 144,958 Is person looking and available for work? Unemployed 10,080 Not in labor force 79,038 Not in labor force 79,038 No Yes No

Types of Unemployment Natural Level of Employment  Employment level at which the quantity of labor demanded equals the quantity supplied at the current wage  At this level labor market clears Natural Rate of Unemployment  Unemployment rate that exists with the natural level of employment

wewe LeLe S1S1 D1D1 The Natural Level of Employment Natural Level of Employment

Types of Unemployment Frictional unemployment occurs because it takes time for employers and workers to find each other. Structural unemployment results from a mismatch between worker qualifications and the characteristics employers require. Cyclical unemployment is the excess of the unemployment that exists at the natural level of employment.

Unemployment Rate,