Macroeconomics: measuring inflation and unemployment

1. MACROECONOMICS:
Measuring Unemployment
and Inflation
SURVEY ECONOMICS
1ST SEMESTER, S.Y. 2019-2020
GERRY C. ARANZADO
MSBA

2. Topics Covered
 Macroeconomics
a. Macroeconomic Goals
b. Macroeconomic Problems
 Unemployment
a. Types of Unemployment
b. Unemployment Rate
 Inflation
a. Types of Inflation
b. Causes of Inflation
c. Effects of Inflation
d. Inflation Rate

3. MACROECONOMICS
 A study of the operation of the economy as a whole

4. 6 Major Macroeconomics goals:
1. Low unemployment
2. Low and stable inflation
3. High economic growth, broad - based development
4. Minimal domestic economic fluctuations
5. Minimal international economic fluctuations
6. Wise economic policy, governmental and nongovernmental
efforts to influence the economy toward the macroeconomic
goals.

5. 2 Major Macroeconomic Problems:
•Unemployment
•Inflation

7. UNEMPLOYMENT
 UNEMPLOYMENT
 UNEMPLOYMENT RATE
 LABOUR FORCE
 DISCOURAGED WORKER
 UNDEREMPLOYMENT
 FULL EMPLOYMENT

8.  UNEMPLOYMENT - labour force participants being available and willing to work but
unable to find jobs. In other words, the available human resources for production are
not being used/ underutilized.
 UNEMPLOYMENT RATE - percentage of the labor force that is unemployed and
actively seeking jobs.
 LABOUR FORCE - people from the total population above the 18 years of age, not in
any institutions and who are either employed or unemployed but actively seeking for
jobs.
 DISCOURAGED WORKER - individual who wants to work but has been unsuccessful
for a long period in finding a job and has given up seeking jobs. Those who dropped
out from the labor force.
 UNDEREMPLOYMENT - individual who works part-time or who are in jobs below
their capability, but who are seeking full-time employment. In other words, human
resources are not used to their fullest productive capability.
 FULL EMPLOYMENT - situation in the economy where all available resources are
employed to produce goods and services.

9. Formula for Unemployment Rate:
Unemployment Rate = Number of Unemployed X 100
Labour Force

10. Sample Problems
1. If the population of a country is 220 million people, its labor force
consists of 115 million and 99 million people are employed, what is the
unemployment rate?
2. If the population of a country is 800,000 people, the number of
employed is 700,000 and the number of unemployed is 70,000, what is the
unemployment rate ?

12. Frictional Unemployment
•Occurs when people are out of work for a short period of time while searching for a
job. •Voluntarily, normal and temporary
Cyclical Unemployment
• Involuntary unemployment that results from a downswing in a business cycle, or
recession •Continues until the economy breaks out of the recession.
Structural Unemployment
•Involuntary unemployment that results when a worker’s job is no longer part of the
production structure of the economy. •Because of a mismatch between skills and jobs,
it continues indefinitely; no prospect for rehire.
Seasonal Unemployment
•Occurs when a person is able and willing to work but currently is without work • i.e.
amusement parks may experience seasonal unemployment during the winter due to
less people will visit the parks during this time.

14. Effects on Individuals and Society
Unemployment intensifies an individual’s struggle with scarcity
because spending habits and lifestyles are altered due to the
lack of employment.
Effects on the Economy
Unemployment intensifies the scarcity problem, and the loss to
society is the goods and services that might have been

15. UNEMPLOYMENT & FULL EMPLOYMENT
Full Employment
- All human resources available for production are fully utilized
- Goal of Full Employment does not mean 100% of the labor force is
working

16. Rate associated with full employment has changed due to:
• Changes in the composition of the work force
- affect gender, skills, demographic changes
• Duration and quantity of government assistance programs
- influence people’s decisions to remain out of work.
• Growth in temporary and part-time work
- jobs are plentiful and people are counted as employed.

17. Proper definition of full employment is critical. Economist focused on the
Natural Rate of Unemployment (NRU) rather than Full Employment to
reflect the definition of current employment condition.
Natural Rate of Unemployment (NRU)
- Concept of economic activity developed in particular by Milton Friedman
and Edmund Phelps in the 1960s
- Considered to be consistent with level of unemployment that includes
only frictional, seasonal and structural unemployment
- Is the equilibrium rate of unemployment - all those wanting to work have
found employment and it is assumed that there is no cyclical unemployment
.

19. INFLATION
1. Inflation - continuous increase in the general price level of
goods and services in the economy.
2. Hyperinflation - Extremely rapid increases in the general
price level (high rate of increase in price level).
3. Deflation - A decrease in the general price level of goods
and services in the economy.
4. Disinflation - Slowing of the inflation rate/reduction in
inflation rate.

21. Demand-Pull Inflation
• Pressure on prices from the buyers’ side of the market
• Tends to occur when spending is greater than the
productive capability of the economy
• This is when the economy is at full/nearly full employment,
capacity of producing is maximum, people have income and
spend, increasing demand.
• From business side, they will increase investment and spend
on new business plants.
• Spending pressure (demand pressure) will lead to the rise in
the price level .

22. Cost-Push Inflation
• Upward pressure on prices from the sellers’ side of the market
• Also known as supply-shocks inflation (shortage to the
availability of supply of goods and services)
• Occurs due to increased costs of inputs, borrowing, and even
attempts to increase profit.
• As price of factors of production increase, the seller’s cost
increase and this will be passed to the consumers.

23. ROLE OF EXPECTATION
Effect from the Role of Expectation towards inflation
1. Demand-pull side : fear of high price, current spending increase,
gives upward pressure to the current price
2. Cost-push side : firm expects cost will increase, will raise price in
anticipation of the future higher cost

24. EFFECTS OF INFLATION
Inflation & Income
 Inflation causes the real income to fall
Real Income - income measured in terms of the goods and services
that can be purchased with a particular amount of money income.
 People with fixed income (i.e. fixed salary, hold government bonds
etc..) are easily affected by inflation, and the standard of living as a
whole will decline.

25. COST OF LIVING ADJUSTMENT
 is a way to reduce the effects of inflation to those with fixed
income.
 Arrangement whereby an individual’s wages automatically
increase with inflation.
 Adjusts salaries based on changes in a cost-of-living index
(normally used the Consumer Price Index - CPI).

26. MEASURES OF INFLATION
Measures of Inflation - Price Index
- Measures changes in the price of an item or a group of items using a
percentage scale.
1. Consumer Price Index (CPI) measures changes in the price level of
consumer goods and services typically purchased by households
2. Producer Price Index (PPI) measures changes in the prices of goods
that businesses buy, for further processing or for sale to a consumer.
3. GDP Price Index measure the price changes for the entire economy.

27. INFLATION RATE

28. MEASURES OF INFLATION
The Consumer Price Index (CPI) reflects the prices of all goods and
services bought by consumers.
Constructing a Price Index uses base year which is the year against
which prices in other years are compared in a price index.

29. Example - Calculating the CPI and inflation rate
• Base Year is 2013
• Basket of goods in 2013 costs 1,200
• The same basket in 2014 costs 1,236
Solutions
• CPI = (1,236/1,200) x 100 = 103
• Inflation rate = [(1,236-1,200)/1,200] x 100 = .03
Prices increased 3% between 2013 and 2014.

30. EFFECTS OF INFLATION
 Savers and lenders will lose if the interest rate does not rise as much as
the rise of inflation rate.
 Borrowers will lose if the interest rate is higher than the inflation rate.
 Inflation will appreciate the assets, thus it will benefit those who have
assets and hurt those who just started to own wealth or those who
wants to purchase assets.

31. Thank you!

32. EFFECTS OF INFLATION
Inflation & Wealth
Wealth measures the value of what people own, i.e. stocks, real estate, cash,
precious metals etc., as opposed to income (what people earn) Inflation will
appreciate the assets, thus it will benefit those who have assets and hurt
those who just started to own wealth or those who wants to purchase assets.
Inflation & Political Environment
It will reflect the election campaign, changes in leadership, consequently
changes in the socio-political environment