Higher level only (Honors): M ethods of measuring inflation Problems of the methods of measuring inflation Phillips curve ·short-run ·long-run Natural rate of unemployment (NRU) Non-Accelerating Inflation Rate of Unemployment (NAIRU)
Because of the circular flow, what happens in one part of the economy, tends to affect others
Cost-push inflation (STAGFLATION) is caused by an increase in firm’s costs due to rising input prices (wages, raw materials, energy) or supply shocks (natural disasters, diseases) Solutions : (SUPPLY SIDE POLICY) Legislation – cut unemployment benefits, increase retirement age, eliminate minimum wage Cut taxes on businesses or use subsidies Reduce income taxes Loosen laws for immigration, train labor
Demand-pull inflation is caused by &quot;too much demand chasing too few goods and services” Can occur due to too much money being available People want to spend, driving demand up Not enough supply leads to prices going up Can occur when the economy expands too rapidly (Look out China!)
Inflation and Unemployment C osts of inflation · Loss of purchasing power: · Loss of savings: · Higher interest rates for borrowers · Effect on international competitiveness: So…Inflation is always bad right?
D eflation Deflation: defined as a decrease in prices due to a decrease in the amount of money / credit in the economy or lack of spending Problems with this: · Unemployment – Businesses cant stay in business because the prices of their goods are too cheap · Delayed consumption: People start saving – causing a deflationary spiral. · Declining investment: Businesses don’t have money to invest. Banks stop lending in fear of businesses going under · Cost to borrowers: .
Would the following people be HELPED or HURT by inflation? - People living on fixed incomes. - Banks that have made long-term, fixed- rate loans. - A person who purchased a home with a bank loan. - A college graduate with loans to pay back.
Banks lose money Lent $ at one rate, but return comes back at different rate Less likely to make loans to businesses and consumers Businesses and consumers less likely to spend. People living off a fixed-income lose purchasing power and end up with lower standard of living . The entire economy must absorb new, higher costs (menu costs) If the inflation rate is greater than that of other countries, domestic products become less competitive on a global market Problems with unexpected inflation:
Create a “Market Basket” a number of goods that are representative of the economy cost of this basket is then compared over time Results in a “price index” % change in the price of the basket today vs at start of the year. US uses the CPI * Consumer Price Index (CPI) – Measures % change in price for the CONSUMER uses specific consumer goods and services About 80,000 different items tracked gasoline, food, clothing, refrigerators, automobiles, Dr. visits etc. Producer Price Index (PPI) Measurs % change in price for the SELLER Measuring Inflation: The CPI
You are employed if…. Did at least 1 hr of work last week as a paid employee Worked in your own business or profession Worked at least 15 hrs per week as an “unpaid” worker on a family owned farm or business Were temporarily absent from work due to illness, injury, weather, vacation or strike
Definition of Unemployment: Percentage of the labor force out of work. Those NOT employed fall into four categories of unemployment Frictional: Structural: Seasonal C yclical:
Unemployment that does not go away on its own even in the long run. It is the amount of unemployment that the economy normally experiences. AKA “Full Potential” Generally about 4 – 5% unemployment in the US
An auto assembly line worker is unemployed due to a sales slump. - What type of unemployment is this? - Draw a graph showing it. - Explain what the government can do to ameliorate (ease) this type of unemployment.
A snow plow driver during the summer. A record player repairman who has not learned the latest laser disk player repair technology. A computer programmer who quits her job to look for a job with better benefits A recent business school graduate looking for her first job A person who can’t find a job because companies are cutting back on labor due to an increase in the minimum wage.
Helps us to calculate the wealth of the country GDP = C+I+G+Ex-Im C onsumption business Investment G overnment purchases Ex ports Im ports
Final goods are goods ready for consumption . i.E it is sold to its final user Pants from Khols Used shirt from Salvation Army New Car Tires for car Salesman’s commission for selling car Which of these are final goods???
$1 $4 $7 $8 $1 $1 $1 $4 $4 $7 Value of Output($) $20 $12 $5 $1 Final Good Retail Pants W holesale Pants Cloth Cotton Value Added ($) Intermediate Good S um = $ 38 Cotton Farmer Textile Mill Pants Manufacturer 0 Retail Store $20 = sum 8 7 4 1 So, to avoid “multiple counting” , we count the $20 final price, not $38 . $20 Pair of Pants from Kohls
3. Purely Financial Transactions – stocks, bonds, CDs. There is no current production . Ex: If 100 shares of Dell stock is bought I’m not buying a Dell computer but part ownership of Dell. Exchanging one financial asset for another [swapping bits of paper] Buying stock is not buying a product but buying ownership of the firm . Buying bonds is making a loan . GDP - what is not counted [#3]
4. Public Transfer Payment s –welfare, unemployment, social security . [There is no contribution to final production ] GDP – what is not counted [#4]. Also, Private Transfer Payments , like your parents giving you $250 cash for Christmas , or - $100 for making an “A” in economics . [Just transferring funds from one private individual to another private individual] “ Now that I’ve gotten my welfare check, I can get an iPhone”
Unreported “legal” business activity does not count. This is two-thirds of the “underground economy.” Then he has LASIK but the surgeon doesn’t report $500 of his $3,400 bill? And what if this waitress doesn’t report all tips ? And what if the dentist doesn’t report $400 for teeth whitening ? Before LASIK Surgery 5. Unreported “Legal” Business Activity
Making money illegally (drug money) and making it look like it was legally earned (like buying a laundry mat or car wash that deal in cash ) and report it as legally earned. Illegal business activity, because it goes unreported, also does not count. Making up 1/3 of the “underground economy,” it includes murder for hire, gambling, drugs, prostitution, and money laundering. “ I’m getting $1,000 to kill you, Ziggy, but at least it will not count in GDP.” 6. Illegal business activity is also not counted. Money Laundering
Work in your own household or volunteer work in the community does not count because there was no payment. You need to do some of this housework. 7. Non-market Transactions Are Not Counted
If U. S. corporations produce goods overseas , it does not count in GDP, but would count in GNP. Remember, we are measuring production inside the U.S. Imports represent production outside of the U.S. GM in France Nike in Indonesia 8. U.S. Corporations Producing Goods Overseas