60. ECONOMICS, 5e Macroeconomic Measurements,
Roger Arnold
CHAPTER 5
Macroeconomic Measurements,
Part I: Prices and Unemployment

61. Exhibit 1 Three Major Economic Goals

62. MACROECONOMIC VARIABLES
Price Levels
The economy's price level refers to a weighted average of the prices of its goods and services

63. PRICE STABILITY
INFLATION is an increase in the general price level over time
DEFLATION is a decrease in the general price level over time

64. INFLATION AND PURCHASING POWER
If prices on average rise
a given income buys fewer goods and services.
inflation decreases the purchasing power of the dollar.

65. MEASURING THE PRICE LEVEL
Measures of the Price Level
The consumer price index measures the average nominal prices of goods and services that a typical family living in an urban area buys

66. Consumer Price Index
The CPI is calculated by the Bureau of Labor Statistics (BLS,
The representative group of goods chosen is called the Market Basket.
To calculate the CPI we need the total dollar expenditure in the current year and the base year.
The base year is a benchmark year that serves as that basis of comparison for prices in other years.

67. CPI’s Basket

68. Calculating the CPI CPI = (current expenditure/base expenditure) X 100
Current expenditure = the total dollar expenditure on market basket in current year
Base expenditure = the total dollar expenditure on market basket in base year

69. Exhibit 2 Computing the Consumer Price Index

70. Inflation rate = {CPI (t) - CPI (t-1) } x 100 CPI (t-1)
THE INFLATION RATE
Inflation rate =
{CPI (t) - CPI (t-1) } x 100
CPI (t-1)

71. US Inflation

72. COMPUTE THE INFLATION RATE USING THE FOLLOWING:
CPI 1997 = 159.1
CPI 1996 = 156.9
formula ({CPI 97 - CPI 96} / CPI 96) X 100
/ = 2.2/156.9 = .014
.014 X 100 = 1.4%

73. USING THE CPI: REAL vs. NOMINAL INCOME
NOMINAL INCOME - money income measured in current period dollars

74. USING THE CPI: REAL vs. NOMINAL INCOME
REAL INCOME - money income adjusted for changes in the price level
real Y = nominal Y x 100
CPI (t)

75. Are you keeping up with inflation?
Income in 2000 = $40,000
Income in 1999 = $35,000
CPI in 2000 = 120
CPI in 1999 = 100
Real income 1999 = 35,000/100 x 100 = $35,000
Real income 2000 = 40,000/120 x 100 = $33,334
Real income is falling $33,334 < $35,000

76. MEASURING THE PRICE LEVEL
Other Measures of the Price Level
The producer price index is a weighted average of the prices of inputs that producers buy to make final goods

77. MEASURING THE PRICE LEVEL

78. MACROECONOMIC VARIABLES
Price Levels
The GDP price deflator equals nominal GDP divided by real GDP
Nominal GDP measures the current dollar value of the economy
Real GDP measures output valued at constant prices
Nominal GDP = Real GDP X GDP price deflator
Real GDP = Nominal GDP / GDP price deflator

79. MEASURING THE PRICE LEVEL
Limitations of Price Indexes
Index and other measures are imperfect and have limitations
Ignores such things as changes in quality, technological advances, and other factors that alter results
People substitute other goods when prices rise

80. SUBSTITUTION BIAS
To avoid a potential bias created by ignoring consumer substitutions the US moved to a CHAIN-WEIGHTED index in Dec. 1995

81. Exhibit 5 Breakdown of the U.S. Population and the Labor Force
SOURCE: U.S. Department of Labor, Bureau of Labor Statistics.

82. EMPLOYED Worked at least 1 hour in a wage/salary paying position
Owned his/her own business
Worked 15 hrs. per week in family business or farm as “unpaid” worker
absent due to illness, strike, or vacation

83. UNDEREMPLOYMENT Workers are classified as employed
If they worked as little as one hour for pay during the survey week and
Even if they are over qualified for the work
The reported rate of unemployment may be understated due to underemployment

84. UNEMPLOYED
Did not work in the survey week but willing and able to work and actively looked within the last 4 weeks.
Laid off and waiting to be called back
Waiting to report to a job within 30 days

85. DISCOURAGED WORKERS people who have given up on the job search process
not considered unemployed because they are not actively searching for a job
Cause the reported unemployment rate to understate the true unemployment problem because they are not included in the labor force

86. Phantom Unemployed
Those who claim to be unemployment, when in fact they are not
May be due to qualify for unemployment benefits
Cause the reported unemployment rate to overstate the true unemployment problem because they are not actively seeking work

87. # people unemployed x 100 # people in labor force
THE UNEMPLOYMENT RATE
# people unemployed x 100
# people in labor force

88. FIND THE UNEMPLOYMENT RATE
population is 100 million
labor force is 50 million
45 million are employed

89. UNEMPLOYMENT RATE
U = 5m./50m. x 100 = 10%

90. Types of Unemployment
Frictional

91. FRICTIONAL UNEMPLOYMENT
people moving between jobs or into the labor force.

92. Types of Unemployment
Frictional
Structural

93. STRUCTURAL UNEMPLOYMENT
skills and/or location of workers does not match available jobs

94. Types of Unemployment
Frictional
Structural
Natural

95. NATURAL UNEMPLOYMENT
a certain level of frictional and structural unemployment that is considered natural in a changing economy (usually 4-6.5%)

96. U.S. Unemployment,
Figure 6-1 on p Source of data: U.S. Department of Labor, Bureau of Labor Statistics (via FRED, the Economic and Financial Database of the St. Louis Federal Reserve Bank.)
Point out to students that the actual unemployment rate fluctuates considerably over the short run. These fluctuations will be the focus of chapters 9-13 later this semester. For this chapter, though, our goal is to understand the red line: the so-called “natural rate of unemployment.”

97. FULL EMPLOYMENT
The full employment rate is when unemployment is at its natural rate (not zero).

98. Types of Unemployment
Frictional
Structural
Natural
Cyclical

99. CYCLICAL UNEMPLOYMENT
unemployment due to downturns in overall economic activity (recessions)
 The difference between the existing unemployment rate and the natural unemployment rate

100. U.S. Unemployment,
Figure 6-1 on p Source of data: U.S. Department of Labor, Bureau of Labor Statistics (via FRED, the Economic and Financial Database of the St. Louis Federal Reserve Bank.)
Point out to students that the actual unemployment rate fluctuates considerably over the short run. These fluctuations will be the focus of chapters 9-13 later this semester. For this chapter, though, our goal is to understand the red line: the so-called “natural rate of unemployment.”