Short description of PRICE and UNEMPLOYMENT chapter from Roger Arnold 11th Edition. CPI measurement, GDP Deflator, Employment & Unemoplyment rate are briefly discussed.

1. Chapter 6
Price & Unemployment
By Shadman Ameen

2. Difference between Price and Price level
• Price is the single product price
• Price level is the weighted average of prices of all goods and service
• Price index: A measurement of price level
CPI Measurement
• CPI represent the “market basket”  foods and beverage, housing,
apparel, transportation, medical care, recreation, education &
communication etc.
• Definition of CPI:
• Weighted average of prices of specific goods and services
• Purchased by typical households
• Which is widely cited index number of the price level

3. CPI Measurement
Base year
• The benchmark year
𝐶𝑃𝐼 =
𝑡𝑜𝑡𝑎𝑙 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒 𝑜𝑛 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑒𝑎𝑟
𝑡𝑜𝑡𝑎𝑙 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒 𝑜𝑛 𝑏𝑎𝑠𝑒 𝑦𝑒𝑎𝑟
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐶𝑃𝐼 =
𝐶𝑃𝐼𝑙𝑎𝑠𝑡 𝑦𝑒𝑎𝑟 − 𝐶𝑃𝐼𝑒𝑎𝑟𝑙𝑖𝑒𝑟 𝑦𝑒𝑎𝑟
𝐶𝑃𝐼𝑒𝑎𝑟𝑙𝑖𝑒𝑟 𝑦𝑒𝑎𝑟
Inflation:• Is an increase in price level measured on annual basis.
• Inflation is the positive “percentage change” in CPI
• By knowing the
inflation rate one
can find, whether
his income is
keeping up with
the inflation, not
keeping up or,
more than
keeping up with
inflation.
Real income:
𝑅𝑒𝑎𝑙 𝑖𝑛𝑐𝑜𝑚𝑒 =
𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐼𝑛𝑐𝑜𝑚𝑒
𝐶𝑃𝐼
• Nominal income adjusted for price change
• Nominal income is current amount of a person’s income
• Real income helps to identify 3 things:
𝑅𝑒𝑎𝑙 𝑖𝑛𝑐𝑜𝑚𝑒 = 𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 𝑅𝑒𝑎𝑙 𝑖𝑛𝑐𝑜𝑚𝑒 > 𝑖𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 𝑅𝑒𝑎𝑙 𝑖𝑛𝑐𝑜𝑚𝑒 < 𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒
𝐶𝑃𝐼 =
𝑃𝑐 𝑄 𝑏
𝑃𝑏 𝑄 𝑏

4. GDP Deflator 𝐺𝐷𝑃 𝐷𝑒𝑓𝑙𝑎𝑡𝑜𝑟 =
𝑃𝑐 𝑄 𝑐
𝑃𝑏 𝑄 𝑐
Who are Unemployed person?
Total
Population
• Person under age 16
• Person in army force
• Institutionalized personnel
Civilian non-
institutional
population
Not in the labor
force
(neither working nor,
looking for jobs) Retired,
housewife etc.
Civilian
labor force
Employed
Unemployed
• Ability to do job but don’t
find one; make effort to
find jobs or, actively looks
for jobs
• Temporarily laid off
employees
• Work in for-profit
organization
• Worked at least 15
hours in a family
enterprise (unpaid)
• Temporarily absent
from work because of
vacation, illness etc.

5. Unemployment Rate
• Percentage of civilian labor that is
unemployed
Employment Rate
• Percentage of civilian non-institutional
population that is employed
Labor force participation Rate
• Percentage of civilian non-institutional
population in the civilian labor force
𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡 𝑟𝑎𝑡𝑒 =
# 𝑜𝑓 𝑢𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 𝑝𝑒𝑟𝑠𝑜𝑛
𝑐𝑖𝑣𝑖𝑙𝑖𝑎𝑛 𝑙𝑎𝑏𝑜𝑟 𝑓𝑜𝑟𝑐𝑒
× 100
𝐸𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡 𝑟𝑎𝑡𝑒 =
# 𝑜𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 𝑝𝑒𝑟𝑠𝑜𝑛
𝑐𝑖𝑣𝑖𝑙𝑖𝑎𝑛 𝑛𝑜𝑛𝑖𝑛𝑠𝑡𝑖𝑡𝑢𝑡𝑖𝑜𝑛𝑎𝑙 𝑝𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛
× 100
𝐿𝑎𝑏𝑜𝑟 𝑝𝑎𝑟𝑡𝑖𝑐𝑖𝑝𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 =
𝑐𝑖𝑣𝑖𝑙𝑖𝑎𝑛 𝑙𝑎𝑏𝑜𝑟 𝑓𝑜𝑟𝑐𝑒
𝑐𝑖𝑣𝑖𝑙𝑖𝑎𝑛 𝑛𝑜𝑛𝑖𝑛𝑠𝑡𝑖𝑡𝑢𝑡𝑖𝑜𝑛𝑎𝑙 𝑝𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛
× 100

6. Why Unemployment (4 categories)
• Job loser: was employed in the civilian labor force but fired or, laid off.
• Job leaver: was in the civilian labor force but quit job.
• Reentrant: was in the CLF but hasn’t working for some time and want to re-
enter.
• New entrant: looking to enter into new job with fresh degree.
𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 𝑝𝑒𝑟𝑠𝑜𝑛 = 𝐽𝑜𝑏 𝑙𝑜𝑠𝑒𝑟 + 𝐽𝑜𝑏 𝐿𝑒𝑎𝑣𝑒𝑟 + 𝑅𝑒𝑒𝑛𝑡𝑟𝑎𝑛𝑡 + 𝑛𝑒𝑤 𝑒𝑛𝑡𝑟𝑎𝑛𝑡
Discouraged Worker
• This type of workers are not considered as Unemployed person.
• Because they are not actively looking for jobs.
• Omitting of discouraged worker from Unemployment rate calculation
causes downward biased.

7. • Skills that can be used in
different organizations
• Changing the job-time is
the unemployment time
 Cyclical Unemployment: (Unemployment rate - natural unemployment rate)
because unemployment rate is not always natural rate.
𝑁𝑎𝑡𝑢𝑟𝑎𝑙 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡 = 𝐹𝑟𝑖𝑐𝑡𝑖𝑜𝑛𝑎𝑙 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡 + 𝑆𝑡𝑟𝑎𝑐𝑡𝑢𝑟𝑎𝑙 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡
• Skills that can’t be used
in different
organizations due to
technology change
unemployment occurs.
𝐹𝑟𝑖𝑐𝑡𝑖𝑜𝑛𝑎𝑙 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡 𝑅𝑎𝑡𝑒 =
# 𝑜𝑓 𝑓𝑟𝑖𝑐𝑡𝑖𝑜𝑛𝑎𝑙 𝑢𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡
𝑠𝑖𝑧𝑒 𝑜𝑓 𝑙𝑎𝑏𝑜𝑟 𝑓𝑜𝑟𝑐𝑒
× 100
𝑆𝑡𝑟𝑢𝑐𝑡𝑢𝑟𝑎𝑙 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡 𝑅𝑎𝑡𝑒 =
# 𝑜𝑓 𝑠𝑡𝑟𝑢𝑐𝑡𝑢𝑟𝑎𝑙 𝑢𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡
𝑠𝑖𝑧𝑒 𝑜𝑓 𝑙𝑎𝑏𝑜𝑟 𝑓𝑜𝑟𝑐𝑒
× 100
Types of Unemployment
• Natural
Unemployment Rate
is between 5 to 6.5.
 Full Employment exists when economy is operating at its natural
unemployment rate