This document provides an overview of business cycles, unemployment, and inflation in the United States. It discusses how GDP and the economy fluctuate in cycles, with alternating periods of expansion and recession. Unemployment rates and types of unemployment, including frictional, structural, cyclical, and seasonal, are also examined. Key labor market indicators like the unemployment rate and labor force participation rate are defined. The concept of potential GDP and the natural rate of unemployment are introduced.
(1) Economic growth is the expansion of an economy's production capabilities over time, as measured by the increase in potential GDP. Growth occurs through increases in population, productivity, capital, technology and other factors.
(2) The US has experienced steady economic growth since the 1950s, driven primarily by productivity gains. Labor productivity has increased on average 1.5-2.8% annually due to advances in technology, education, capital investment and other factors.
(3) While economic growth has lifted living standards in the US, growth has slowed recently and the country lags others in math/science skills. Sustained growth requires continued productivity improvements through education, innovation and efficient resource allocation.
The document outlines the Heckscher-Ohlin model of international trade. The model assumes two countries, two goods, and two factors of production (labor and land). It is assumed that each country has a relative abundance in one of the two factors. The labor-abundant country will export and specialize in the good that uses its abundant factor intensively. Free trade equalizes factor prices between the countries and benefits the owners of each country's abundant factor through increased productivity.
The document discusses aggregate supply curves, including short-run aggregate supply (SRAS) and long-run aggregate supply (LRAS) curves. The SRAS curve slopes upward as producers are willing to supply more output when prices are higher in the short-run before input prices adjust. The LRAS curve is vertical at the natural level of output, as prices and costs have fully adjusted in the long-run. The document also discusses factors that can cause shifts in the SRAS and LRAS curves such as changes in input prices, taxes, and economic growth.
GDP can be measured in three ways:
1) Expenditure approach measures total expenditures on final goods and services.
2) Income approach measures total income earned from production, including compensation, profits, and rents.
3) Production approach measures total value added at each stage of production.
Real GDP is used to measure economic growth by adjusting for inflation using GDP deflators or price indexes. However, GDP has limitations as a welfare measure since it excludes nonmarket activities and environmental factors.
Module 1 introduction to labour markets & labour market institution finalJinha
This document provides an introduction to labour markets and labour market institutions. It discusses the history of labour protection and labour movements. It also defines key concepts in labour economics like labour markets and labour market indicators. Furthermore, it outlines current debates on the relationship between labour market rigidity and unemployment. Specifically, it discusses whether labour market rigidity is truly to blame for high unemployment. Finally, it introduces the concept of "flexicurity," which aims to balance labour market flexibility with security for workers.
This document provides an overview of business cycles, unemployment, and inflation. It discusses the phases of the business cycle including expansion, recession, peaks and troughs. It also examines causes of business cycles and different types of unemployment including frictional, structural, cyclical, and seasonal unemployment. Key labor market indicators like the unemployment rate, labor force participation rate, and natural rate of unemployment are defined. The relationship between actual and potential GDP over the business cycle is also explored.
Assignment on labor force survey of bangladeshMohammad Alam
The labor force in Bangladesh has increased over the period from 1995-96 to 2001-03. Total labor force participation rates have also risen, though male rates declined initially. Most workers are employed in agriculture, though non-agriculture employment is growing. Unemployment rates increased in the first period but remained steady in the second period. While employment is increasing, underemployment may also be on the rise.
The document discusses unemployment and inflation as two major macroeconomic problems. It defines unemployment as people who are able and willing to work but unable to find jobs. There are different types of unemployment including frictional, cyclical, structural, and seasonal unemployment. Inflation is defined as a continuous rise in the general price level in an economy. The document discusses two main causes of inflation: demand-pull inflation which occurs when spending outpaces the economy's productive capacity, and cost-push inflation which results from increased costs of production being passed onto consumers. Effects of unemployment and inflation include impacts on individuals, society, and the overall economy.
(1) Economic growth is the expansion of an economy's production capabilities over time, as measured by the increase in potential GDP. Growth occurs through increases in population, productivity, capital, technology and other factors.
(2) The US has experienced steady economic growth since the 1950s, driven primarily by productivity gains. Labor productivity has increased on average 1.5-2.8% annually due to advances in technology, education, capital investment and other factors.
(3) While economic growth has lifted living standards in the US, growth has slowed recently and the country lags others in math/science skills. Sustained growth requires continued productivity improvements through education, innovation and efficient resource allocation.
The document outlines the Heckscher-Ohlin model of international trade. The model assumes two countries, two goods, and two factors of production (labor and land). It is assumed that each country has a relative abundance in one of the two factors. The labor-abundant country will export and specialize in the good that uses its abundant factor intensively. Free trade equalizes factor prices between the countries and benefits the owners of each country's abundant factor through increased productivity.
The document discusses aggregate supply curves, including short-run aggregate supply (SRAS) and long-run aggregate supply (LRAS) curves. The SRAS curve slopes upward as producers are willing to supply more output when prices are higher in the short-run before input prices adjust. The LRAS curve is vertical at the natural level of output, as prices and costs have fully adjusted in the long-run. The document also discusses factors that can cause shifts in the SRAS and LRAS curves such as changes in input prices, taxes, and economic growth.
GDP can be measured in three ways:
1) Expenditure approach measures total expenditures on final goods and services.
2) Income approach measures total income earned from production, including compensation, profits, and rents.
3) Production approach measures total value added at each stage of production.
Real GDP is used to measure economic growth by adjusting for inflation using GDP deflators or price indexes. However, GDP has limitations as a welfare measure since it excludes nonmarket activities and environmental factors.
Module 1 introduction to labour markets & labour market institution finalJinha
This document provides an introduction to labour markets and labour market institutions. It discusses the history of labour protection and labour movements. It also defines key concepts in labour economics like labour markets and labour market indicators. Furthermore, it outlines current debates on the relationship between labour market rigidity and unemployment. Specifically, it discusses whether labour market rigidity is truly to blame for high unemployment. Finally, it introduces the concept of "flexicurity," which aims to balance labour market flexibility with security for workers.
This document provides an overview of business cycles, unemployment, and inflation. It discusses the phases of the business cycle including expansion, recession, peaks and troughs. It also examines causes of business cycles and different types of unemployment including frictional, structural, cyclical, and seasonal unemployment. Key labor market indicators like the unemployment rate, labor force participation rate, and natural rate of unemployment are defined. The relationship between actual and potential GDP over the business cycle is also explored.
Assignment on labor force survey of bangladeshMohammad Alam
The labor force in Bangladesh has increased over the period from 1995-96 to 2001-03. Total labor force participation rates have also risen, though male rates declined initially. Most workers are employed in agriculture, though non-agriculture employment is growing. Unemployment rates increased in the first period but remained steady in the second period. While employment is increasing, underemployment may also be on the rise.
The document discusses unemployment and inflation as two major macroeconomic problems. It defines unemployment as people who are able and willing to work but unable to find jobs. There are different types of unemployment including frictional, cyclical, structural, and seasonal unemployment. Inflation is defined as a continuous rise in the general price level in an economy. The document discusses two main causes of inflation: demand-pull inflation which occurs when spending outpaces the economy's productive capacity, and cost-push inflation which results from increased costs of production being passed onto consumers. Effects of unemployment and inflation include impacts on individuals, society, and the overall economy.
The document discusses macroeconomic policies including fiscal and monetary policy, categories of government expenditures, sources of government revenue through taxes, and discretionary fiscal policy tools for expansion or contraction. It also examines national debt, sources for financing debt, and issues related to debt service and crowding out of private borrowing. In summary, the document provides an overview of fiscal systems, government budgets, and macroeconomic policies.
New growth theory posits that economic growth is driven by increasing knowledge through creativity rather than increasing labor or capital. It states that GDP per capita rises continuously as people make choices to gain profits from new knowledge. Additionally, the theory emphasizes that growth increases as knowledge accumulation accelerates and that creativity enables limitless expansion of the economy by generating new resources and improving productivity beyond physical constraints.
1. The document discusses endogenous growth models and their representation of economic growth processes.
2. It addresses issues with decreasing marginal returns in endogenous growth models and introduces the Jones critique of these models.
3. Semi-endogenous growth models and the Jones model are presented as alternatives that account for decreasing marginal returns to R&D over time.
The document discusses the concepts of public goods and private goods and the need for government intervention in economies. It defines public goods as indivisible goods like national defense and street lighting that cannot be priced or exclude users. Private goods are divisible and can be priced so users can be excluded. It also discusses the "free rider" problem where individuals may not voluntarily pay for public goods. The document argues that government intervention is needed to address issues like inequality, monopolies, unemployment, instability, and externalities in free market systems. It provides examples of fiscal, monetary, and supply management measures taken by the Indian government to stabilize the economy and reduce inequality.
The multiplier effect occurs when an initial change in aggregate demand, such as an increase in government spending, leads to a multiplied impact on real GDP through subsequent rounds of re-spending. The multiplier effect arises because the initial spending increases household incomes and business revenues, which are then spent again on new output, generating further income and demand. This multiplier process can continue, amplified at each round, resulting in an eventual increase in real GDP that is multiple times the size of the initial change in spending. The size of the multiplier depends on factors like the marginal propensity to consume, save, tax and import.
This document discusses various instruments of trade policy including non-tariff barriers and their effects on trade. It begins by describing how quotas, export subsidies, and other policies work. It then explains how each policy affects prices, trade flows, and welfare in both small and large countries. Specific examples are provided on the EU's agricultural subsidies, US sugar quotas, Japan's auto export restraint, and local content rules. Transportation costs are also covered along with their implications for trade patterns. The document closes by discussing arguments for and against free trade.
The document summarizes David Ricardo's theory of comparative advantage. It explains that according to Ricardo, countries can benefit from trade even if they do not have an absolute advantage in producing goods, as long as they have a comparative advantage in at least one good. This is illustrated using data showing that while England has higher absolute costs of production than Portugal for both wine and cloth, it has a lower relative production cost for cloth, giving it a comparative advantage. International trade allows both countries to specialize in the goods they have a comparative advantage in, increasing total world output.
This chapter discusses key macroeconomic concepts including:
1) The two major issues in macroeconomics are economic growth and business cycles which include unemployment and inflation.
2) Important measures used to evaluate macroeconomic performance are GDP, GDP per capita, unemployment rate, inflation rate, and potential GDP.
3) Macroeconomic policies implemented by governments include fiscal policy related to government spending and taxation and monetary policy which controls money supply and interest rates. These policies aim to promote growth, reduce unemployment, and lower inflation.
National income accounting measures indicators of national output and income such as GDP and GNP. The circular flow diagram summarizes the transactions between households, firms, government, and foreigners. It shows households providing factors of production to firms in exchange for factor payments, and firms providing goods and services to households in exchange for revenue. GDP is the total market value of final goods and services produced within an economy in a given period, and can be measured through the expenditure, income, and value-added approaches.
The document discusses monetary policy and the tools used by central banks to control money supply and interest rates to achieve their goals of price stability, full employment, and economic growth. It explains how central banks like the Federal Reserve use tools like open market operations, the discount rate, and required reserve ratios to influence the money supply and the federal funds rate. It also discusses how monetary policy can be used expansionary to stimulate the economy during recessions or contractionary to curb inflation when the economy is overheating. The Taylor rule is presented as a proposed method for the Fed to systematically adjust interest rates based on deviations of inflation and unemployment from targets.
This document discusses various measures used to assess economic development. It defines Gross National Product (GNP) as the value of goods and services produced in a country plus those produced abroad. Gross Domestic Product (GDP) is defined as the value of all goods and services produced locally or by foreign companies within a country. The Human Development Index (HDI) measures life expectancy, education levels, and income to assess overall human development. The document also outlines characteristics of developed, newly industrialized, and least developed countries.
Adam Smith is considered the Father of Economics. In his seminal book, The Wealth of Nations, he argued that a country's wealth comes from the total value of goods and services produced, not just gold or agriculture. Smith identified two key drivers of economic growth: the division of labor and capital accumulation. The division of labor leads to specialization and higher productivity, while capital accumulation raises productivity by increasing capital per worker. This starts a virtuous cycle of growth, but eventually diminishing returns set in and growth slows, reaching a stationary state.
The document outlines topics that will be covered in lectures 1-6 of ECO-506: Macroeconomic Theory II, including: 1) Balance of Payments, 2) IS-LM-FB Model, 3) Effectiveness of Fiscal and Monetary Policies, 4) Exchange Rate Concepts, 5) Perfect and Imperfect Capital Mobility, and 6) Problems of Stabilization in Global Framework. Specific concepts that will be discussed are the current account balance, capital account, options for a country with a negative current account balance, exchange rate regimes, and purchasing power parity.
1) General equilibrium analysis studies when all markets in an economy are simultaneously in equilibrium. It looks at the interdependence between economic agents.
2) The model assumes two goods, two consumers, two factors of production (labor and capital), perfect competition, and profit/utility maximization.
3) Equilibrium in production occurs when firms maximize profits by equalizing marginal rates of technical substitution between goods. Equilibrium in exchange occurs when consumers maximize utility by equalizing marginal rates of substitution between goods with their budget constraints.
4) Overall general equilibrium is reached when rates of substitution are equal between consumers and firms, meaning the economy is using its resources efficiently at the tangency point between the production possibility frontier and indifference
There are 4 key factors that influence a country's economic growth and Gross Domestic Product: investment in human capital through education and training; investment in capital goods like factories, machinery and technology; natural resources available within the country; and entrepreneurship. Nations that invest in these areas will have a more productive workforce and be able to produce more goods and services, leading to higher GDP and economic growth.
All the three methods of national income accounting are explained with mathematical questions and answers. It is very helpful for the NCERT and SCERT plus two commerce and humanities students who have to learn these methods in the second chapter of macroeconomics.
This chapter discusses factor markets and income distribution. It covers the determinants of demand for factors of production like labor, land, capital and entrepreneurship. It also discusses the supply of factors in the market and how their prices are determined by supply and demand. The chapter concludes by covering different theories of income distribution including the marginal productivity theory and discussing the various sources of income like wages, rent, interest and profits.
The document discusses several macroeconomic problems including capital and labor misallocation, inflation, and business cycles. It defines inflation and its types. Moderate inflation can boost growth but high inflation is harmful. Measures to control inflation include monetary, fiscal and income policies. Business cycles consist of expansion, peak, recession, trough and recovery phases, though their timing and severity vary. No single measure can adequately curb inflation and both monetary and fiscal approaches are needed.
This document discusses unemployment, including how it is measured, its various costs, types of unemployment, and policies related to achieving full employment. Unemployment is measured as the number of people actively seeking work but unable to find a job. There are personal, economic, and social costs of unemployment. The main types of unemployment are frictional, structural, seasonal, and cyclical. Full employment is defined as the lowest unemployment rate compatible with price stability, around 4-6%. Policies aim to reduce unemployment through monetary policy, fiscal policy, education/training, and labor market flexibility.
The document discusses different types and measures of unemployment. It defines unemployment as when a person is able and willing to work but unable to find a job. There are three main types of unemployment: frictional unemployment due to voluntary job changes, cyclical unemployment that rises and falls with the economy, and structural unemployment due to changes in industry demand. The unemployment rate is calculated by dividing the number of unemployed by the total labor force, which excludes those not actively seeking work. Unemployment rates fluctuate over time and differ between demographic groups.
The document discusses macroeconomic policies including fiscal and monetary policy, categories of government expenditures, sources of government revenue through taxes, and discretionary fiscal policy tools for expansion or contraction. It also examines national debt, sources for financing debt, and issues related to debt service and crowding out of private borrowing. In summary, the document provides an overview of fiscal systems, government budgets, and macroeconomic policies.
New growth theory posits that economic growth is driven by increasing knowledge through creativity rather than increasing labor or capital. It states that GDP per capita rises continuously as people make choices to gain profits from new knowledge. Additionally, the theory emphasizes that growth increases as knowledge accumulation accelerates and that creativity enables limitless expansion of the economy by generating new resources and improving productivity beyond physical constraints.
1. The document discusses endogenous growth models and their representation of economic growth processes.
2. It addresses issues with decreasing marginal returns in endogenous growth models and introduces the Jones critique of these models.
3. Semi-endogenous growth models and the Jones model are presented as alternatives that account for decreasing marginal returns to R&D over time.
The document discusses the concepts of public goods and private goods and the need for government intervention in economies. It defines public goods as indivisible goods like national defense and street lighting that cannot be priced or exclude users. Private goods are divisible and can be priced so users can be excluded. It also discusses the "free rider" problem where individuals may not voluntarily pay for public goods. The document argues that government intervention is needed to address issues like inequality, monopolies, unemployment, instability, and externalities in free market systems. It provides examples of fiscal, monetary, and supply management measures taken by the Indian government to stabilize the economy and reduce inequality.
The multiplier effect occurs when an initial change in aggregate demand, such as an increase in government spending, leads to a multiplied impact on real GDP through subsequent rounds of re-spending. The multiplier effect arises because the initial spending increases household incomes and business revenues, which are then spent again on new output, generating further income and demand. This multiplier process can continue, amplified at each round, resulting in an eventual increase in real GDP that is multiple times the size of the initial change in spending. The size of the multiplier depends on factors like the marginal propensity to consume, save, tax and import.
This document discusses various instruments of trade policy including non-tariff barriers and their effects on trade. It begins by describing how quotas, export subsidies, and other policies work. It then explains how each policy affects prices, trade flows, and welfare in both small and large countries. Specific examples are provided on the EU's agricultural subsidies, US sugar quotas, Japan's auto export restraint, and local content rules. Transportation costs are also covered along with their implications for trade patterns. The document closes by discussing arguments for and against free trade.
The document summarizes David Ricardo's theory of comparative advantage. It explains that according to Ricardo, countries can benefit from trade even if they do not have an absolute advantage in producing goods, as long as they have a comparative advantage in at least one good. This is illustrated using data showing that while England has higher absolute costs of production than Portugal for both wine and cloth, it has a lower relative production cost for cloth, giving it a comparative advantage. International trade allows both countries to specialize in the goods they have a comparative advantage in, increasing total world output.
This chapter discusses key macroeconomic concepts including:
1) The two major issues in macroeconomics are economic growth and business cycles which include unemployment and inflation.
2) Important measures used to evaluate macroeconomic performance are GDP, GDP per capita, unemployment rate, inflation rate, and potential GDP.
3) Macroeconomic policies implemented by governments include fiscal policy related to government spending and taxation and monetary policy which controls money supply and interest rates. These policies aim to promote growth, reduce unemployment, and lower inflation.
National income accounting measures indicators of national output and income such as GDP and GNP. The circular flow diagram summarizes the transactions between households, firms, government, and foreigners. It shows households providing factors of production to firms in exchange for factor payments, and firms providing goods and services to households in exchange for revenue. GDP is the total market value of final goods and services produced within an economy in a given period, and can be measured through the expenditure, income, and value-added approaches.
The document discusses monetary policy and the tools used by central banks to control money supply and interest rates to achieve their goals of price stability, full employment, and economic growth. It explains how central banks like the Federal Reserve use tools like open market operations, the discount rate, and required reserve ratios to influence the money supply and the federal funds rate. It also discusses how monetary policy can be used expansionary to stimulate the economy during recessions or contractionary to curb inflation when the economy is overheating. The Taylor rule is presented as a proposed method for the Fed to systematically adjust interest rates based on deviations of inflation and unemployment from targets.
This document discusses various measures used to assess economic development. It defines Gross National Product (GNP) as the value of goods and services produced in a country plus those produced abroad. Gross Domestic Product (GDP) is defined as the value of all goods and services produced locally or by foreign companies within a country. The Human Development Index (HDI) measures life expectancy, education levels, and income to assess overall human development. The document also outlines characteristics of developed, newly industrialized, and least developed countries.
Adam Smith is considered the Father of Economics. In his seminal book, The Wealth of Nations, he argued that a country's wealth comes from the total value of goods and services produced, not just gold or agriculture. Smith identified two key drivers of economic growth: the division of labor and capital accumulation. The division of labor leads to specialization and higher productivity, while capital accumulation raises productivity by increasing capital per worker. This starts a virtuous cycle of growth, but eventually diminishing returns set in and growth slows, reaching a stationary state.
The document outlines topics that will be covered in lectures 1-6 of ECO-506: Macroeconomic Theory II, including: 1) Balance of Payments, 2) IS-LM-FB Model, 3) Effectiveness of Fiscal and Monetary Policies, 4) Exchange Rate Concepts, 5) Perfect and Imperfect Capital Mobility, and 6) Problems of Stabilization in Global Framework. Specific concepts that will be discussed are the current account balance, capital account, options for a country with a negative current account balance, exchange rate regimes, and purchasing power parity.
1) General equilibrium analysis studies when all markets in an economy are simultaneously in equilibrium. It looks at the interdependence between economic agents.
2) The model assumes two goods, two consumers, two factors of production (labor and capital), perfect competition, and profit/utility maximization.
3) Equilibrium in production occurs when firms maximize profits by equalizing marginal rates of technical substitution between goods. Equilibrium in exchange occurs when consumers maximize utility by equalizing marginal rates of substitution between goods with their budget constraints.
4) Overall general equilibrium is reached when rates of substitution are equal between consumers and firms, meaning the economy is using its resources efficiently at the tangency point between the production possibility frontier and indifference
There are 4 key factors that influence a country's economic growth and Gross Domestic Product: investment in human capital through education and training; investment in capital goods like factories, machinery and technology; natural resources available within the country; and entrepreneurship. Nations that invest in these areas will have a more productive workforce and be able to produce more goods and services, leading to higher GDP and economic growth.
All the three methods of national income accounting are explained with mathematical questions and answers. It is very helpful for the NCERT and SCERT plus two commerce and humanities students who have to learn these methods in the second chapter of macroeconomics.
This chapter discusses factor markets and income distribution. It covers the determinants of demand for factors of production like labor, land, capital and entrepreneurship. It also discusses the supply of factors in the market and how their prices are determined by supply and demand. The chapter concludes by covering different theories of income distribution including the marginal productivity theory and discussing the various sources of income like wages, rent, interest and profits.
The document discusses several macroeconomic problems including capital and labor misallocation, inflation, and business cycles. It defines inflation and its types. Moderate inflation can boost growth but high inflation is harmful. Measures to control inflation include monetary, fiscal and income policies. Business cycles consist of expansion, peak, recession, trough and recovery phases, though their timing and severity vary. No single measure can adequately curb inflation and both monetary and fiscal approaches are needed.
This document discusses unemployment, including how it is measured, its various costs, types of unemployment, and policies related to achieving full employment. Unemployment is measured as the number of people actively seeking work but unable to find a job. There are personal, economic, and social costs of unemployment. The main types of unemployment are frictional, structural, seasonal, and cyclical. Full employment is defined as the lowest unemployment rate compatible with price stability, around 4-6%. Policies aim to reduce unemployment through monetary policy, fiscal policy, education/training, and labor market flexibility.
The document discusses different types and measures of unemployment. It defines unemployment as when a person is able and willing to work but unable to find a job. There are three main types of unemployment: frictional unemployment due to voluntary job changes, cyclical unemployment that rises and falls with the economy, and structural unemployment due to changes in industry demand. The unemployment rate is calculated by dividing the number of unemployed by the total labor force, which excludes those not actively seeking work. Unemployment rates fluctuate over time and differ between demographic groups.
The document summarizes key concepts related to business cycles, jobs, unemployment, and inflation measurement. It defines business cycles and recessions, explains how the unemployment rate, labor force participation rate, and employment-to-population ratio are calculated. It also describes how the Consumer Price Index is constructed and used to measure inflation. Charts and figures are included to illustrate trends in these economic indicators over time.
This document provides an outline for a lecture on unemployment and the labor market. It begins with definitions of key terms like employment, unemployment, and labor force participation. It then discusses how to interpret various labor market statistics and indicators, including broader measures of unemployment. Several types of unemployment are defined, like cyclical, frictional, and structural unemployment. An overview is given of unemployment and employment trends in Ireland compared to other countries. Gender differences in employment rates are also examined. The document contains charts and statistics to illustrate the concepts.
The document discusses unemployment and its measurement. It describes how the US Census Bureau conducts monthly surveys to determine the labor force status. There are three categories for unemployment: those without work but seeking in past 4 weeks, waiting to be recalled from layoff, or waiting to start a new job within 30 days. The unemployment rate is the percentage of the labor force that is unemployed, while the employment-population ratio is the percentage of the working age population with jobs. Unemployment can be frictional from job turnover, structural from skills/location changes, or cyclical from business cycle fluctuations.
This document discusses business cycles, unemployment, and inflation. It begins by describing the four phases of the business cycle: peak, recession, trough, and expansion. It then discusses different types of unemployment like frictional, structural, and cyclical unemployment. Finally, it explains the two types of inflation - demand-pull inflation caused by excess spending, and cost-push inflation caused by increases in input costs. It also discusses how inflation can redistribute incomes and outlines some of the economic costs of unemployment like reduced GDP and higher social costs.
The document provides an overview and analysis of the employment impacts of the Great Recession. Some key points:
- The Great Recession resulted in the loss of 8.8 million jobs and widespread unemployment across sectors. Job losses were structural rather than cyclical and many will not return.
- Current employment conditions show slow job growth of around 162,000 per month on average, barely enough to cover population growth. Unemployment rates remain elevated.
- Long-term trends suggest future jobs will require higher skills and specialized training, but there is a growing skills mismatch. If educational achievement does not increase, median wages will continue declining and structural unemployment rising.
- A full recovery of jobs lost during the
Change and Rigidity in Youth Employment Patterns in Malawi, 2004-2016IFPRIMaSSP
This document summarizes research on changes in youth employment patterns in Malawi between 2004-2016. The key findings are:
1) Agriculture remains the dominant sector, employing 88% of working Malawians. However, the share of older youth and non-youth working in services has increased slightly while industry employment has declined.
2) Younger youth are more likely to be students than employed, while older youth's employment patterns are similar to non-youth. Education increases the likelihood of non-agricultural employment.
3) There is little evidence of structural transformation in employment away from agriculture. Maintaining education investments alongside private sector job creation and infrastructure development are needed to pull people out of farming
The document defines key terms related to labor force participation and unemployment. It discusses how the labor force includes those over 16 who are working or seeking work. The labor force participation rate is the percentage of the population in the labor force. As the labor force grows, the production possibilities curve shifts outward, allowing for increased output. Unemployment refers to those able and seeking work who are unable to find a job.
The document defines key terms related to labor force participation and unemployment. It discusses how the labor force includes those over 16 who are working or seeking work. The labor force participation rate is the percentage of the population in the labor force. As the labor force grows, the production possibilities curve shifts outward, allowing for increased output. Unemployment refers to those able and seeking work who are unable to find jobs.
Macroeconomic problems,theories, policies and viewsCRYSLER TUMALE
This document provides an overview of key macroeconomic concepts including the measurement of GDP and prices, unemployment, economic growth, and the business cycle. It discusses how macroeconomics examines problems, theories, policies, and views of the overall economy with a focus on the price level (P) and real GDP (Q). Specific topics covered include inflation, deflation, fiscal and monetary policy, and the various phases of the business cycle. Measurement of unemployment and different types of unemployment are also summarized.
This document provides an outline and overview of key labor market concepts for a university presentation on unemployment and the labor market. It defines important terms like employment, unemployment, labor force participation and different types of unemployment. It also discusses broader measures of unemployment, trends in long-term unemployment in Ireland, and concepts of structural and cyclical unemployment as well as the economic definition of "full employment".
Long‐term unemployment has reached historic highs in the United States in recent years. Currently, nearly 40 percent of unemployed workers have been out of work for six months or longer, compared to a high of 25 percent in the 1980s recession. Lengthy periods of joblessness profoundly affect the economic and social resilience of workers and their families. Long‐term unemployment erodes assets, diminishes reemployment possibilities and significantly reduces lifetime wages. Additionally, the longterm unemployed face higher rates of family instability, mental and physical health problems.
The document discusses different types of unemployment including voluntary, involuntary, seasonal, structural, cyclical, technological, disguised, and hidden unemployment. It explains how unemployment is measured by comparing the labor force to the number of employed individuals. The relationship between inflation and unemployment is also examined through the Phillips Curve model, which shows an inverse relationship where rising wages/inflation leads to lower unemployment. Factors like structural changes, cost-push inflation, and government transfers can impact the Phillips Curve relationship over time.
This document discusses various measures of unemployment and inflation. It defines key terms like the unemployment rate, labor force participation rate, discouraged workers, underemployed, and others. It then explains how the unemployment rate is calculated using data from the labor force. The document also discusses different types of unemployment like cyclical, frictional, and structural unemployment. Finally, it covers inflation measures like the consumer price index, GDP deflator, producer price index, and how to calculate inflation rates using index numbers.
This document discusses two major problems in macroeconomics: unemployment and poverty. It defines unemployment as people who are willing and able to work but cannot find jobs. Several types of unemployment are described, including frictional, cyclical, and structural unemployment. Unemployment rates are explained as well as how they are measured. Poverty is also defined and different types like absolute and relative poverty are outlined. Criteria for measuring both unemployment and poverty are provided.
The document discusses several key concepts related to unemployment:
1) It defines different types of unemployment including frictional unemployment from job searching, structural unemployment from skills mismatches, and cyclical unemployment from economic downturns.
2) Factors that contribute to natural unemployment are discussed, including the time needed to match workers and jobs (frictional) and minimum wages creating surpluses.
3) Unions are also examined as creating above-market wages for some workers which prices others out of jobs.
4) The concept of efficiency wages is introduced where higher pay can boost productivity and lower costs in the long-run.
Macroeconomics: measuring inflation and unemploymentGerry Aranzado
This document discusses macroeconomic concepts of unemployment and inflation. It defines unemployment rate as the percentage of the labor force that is unemployed and actively seeking jobs. There are different types of unemployment including frictional, cyclical, structural, and seasonal. Inflation is defined as a continuous increase in the general price level in an economy. Inflation can be caused by demand-pull factors like excess spending, or cost-push factors like increased input costs. The effects of inflation and unemployment on individuals, businesses, and the overall economy are also examined.
In this comprehensive chapter on unemployment, we embark on an explorative journey into the intricate dynamics of joblessness, aiming to dissect its multifaceted nature and illuminate pathways towards meaningful solutions.
We commence our inquiry by delineating the diverse manifestations of unemployment, discerning between frictional, structural, cyclical, and seasonal unemployment. Each form bears its distinct characteristics and implications, necessitating nuanced approaches for effective intervention.
Delving deeper, we unravel the underlying drivers of unemployment, which encompass a constellation of factors spanning technological innovation, globalization, mismatched skills, and economic fluctuations. Understanding these root causes is pivotal for devising targeted strategies that address the systemic barriers to employment.
Furthermore, we scrutinize the reverberating ripple effects of unemployment across individuals, families, and communities. From financial insecurity and diminished well-being to social disintegration and diminished human capital, the repercussions of joblessness permeate every facet of society, underscoring the urgency of concerted action.
Turning our gaze towards potential remedies, we embark on a quest to unearth pathways towards inclusive prosperity. We advocate for investments in education and skills development, fostering a dynamic workforce equipped to thrive in an ever-evolving labor market. Additionally, we champion the imperative of proactive labor market policies, including job creation initiatives, wage subsidies, and retraining programs tailored to the needs of vulnerable populations.
Moreover, we spotlight the catalytic role of entrepreneurship and innovation in engendering job growth and economic resilience. By cultivating an ecosystem conducive to enterprise, we nurture the seeds of innovation and empower individuals to chart their own pathways to prosperity.
Yet, our quest for solutions extends beyond policy prescriptions to encompass a broader ethos of social solidarity and collective responsibility. We underscore the imperative of forging partnerships across sectors, harnessing the collective ingenuity of government, business, civil society, and academia to forge a more equitable and inclusive future.
In sum, this chapter serves as a testament to the complexities of unemployment and the imperative of collective action. By embracing a holistic approach that addresses the structural roots of joblessness while fostering individual empowerment, we can aspire towards a future where every individual has the opportunity to realize their full potential and contribute meaningfully to society.
The document discusses monetary policy tools and their effects on economic variables. It describes the Federal Reserve's dual mandate of maximum employment and price stability. The four main tools of monetary policy are open market operations, the discount window, administered rates, and forward guidance. Expansionary monetary policy works to increase money supply and lower interest rates to boost aggregate demand and GDP during recessions. Contractionary policy has the opposite effects to curb inflation. Evaluation of monetary policy addresses its advantages over fiscal policy as well as limitations.
The document summarizes key concepts about money, the money supply, and monetary policy in the United States. It explains that the US dollar is issued by the Federal Reserve and backed by the US government. It describes how the Federal Reserve, made up of the Board of Governors and regional banks, implements monetary policy to control interest rates through managing the money supply. It also outlines how money serves important functions as a medium of exchange, unit of account, and store of value in the US economy.
This document provides an overview of key concepts in financial economics, including:
1) Financial investment involves purchasing financial or real assets with the goal of earning a profit. Popular investments include stocks, bonds, mutual funds, and real estate.
2) The time value of money recognizes that a dollar today is worth more than a dollar in the future due to interest earnings. Present and future value calculations allow comparison of cash flows over time.
3) Investments like stocks, bonds, and mutual funds offer return potential but also come with risk; diversification across multiple assets can help reduce risk. Generally, higher risk investments provide higher potential returns.
This document provides an overview of bond market analysis using the demand-supply framework. It discusses the three approaches to analyzing bond markets (bond market framework, loanable funds framework, and liquidity preference framework) and focuses on the bond market framework. This framework models the bond market as an interaction between the demand for bonds from savers/lenders and the supply of bonds from spenders/borrowers. The document outlines the key determinants of demand and supply, and how shifts in demand or supply curves affect the equilibrium price, quantity, and interest rate in the bond market. It also discusses how secondary bond markets and actions by the Federal Reserve can impact the demand curve.
Econ452 Learning unit 12 - part 2 - 2021 springsakanor
This document provides an overview of internal economies of scale and imperfect competition in international trade. It discusses how internal economies of scale allow some firms to gain cost advantages over others, concentrating production in better performing firms. This concentration improves overall industry efficiency. The document also describes how imperfect competition and product differentiation can lead to intra-industry trade between countries, even without comparative advantage differences. Firms benefit from access to larger integrated markets, while consumers enjoy more variety. Trade integration tends to improve industry performance as best firms expand and worst firms contract.
Econ452 Learning unit 12 - part 1 - 2021 springsakanor
1) The document discusses external economies of scale and how they can lead to increasing returns and changing patterns of international trade.
2) External economies occur when costs decrease as the size of an entire industry increases, rather than for individual firms. They arise from factors like specialized suppliers and labor pooling.
3) Models with external economies show countries specializing based on historical accidents rather than comparative advantage. Trade allows concentrating production where costs are lowest.
Econ452 Learning unit 11 - part 2 - 2021 springsakanor
This document provides an overview of various instruments of trade policy, including non-tariff barriers and their effects. It discusses how quotas, export subsidies, import quotas, and voluntary export restraints influence trade flows and impact welfare. Transportation costs are also examined as they can act as a non-tariff barrier by raising import prices. The impacts of these policies are evaluated in terms of how they affect producer and consumer surplus within countries.
Econ452 Learning unit 11 - part 1 - 2021 springsakanor
This document provides an overview of trade policy instruments like tariffs and their economic effects. It begins by outlining the objectives and introduction. It then defines trade policies and instruments like tariffs, quotas, and subsidies.
It explains how to analyze the effects of tariffs using partial equilibrium models and consumer/producer surplus concepts. Tariffs reduce consumer surplus but increase producer surplus and government revenue. However, they also create deadweight losses that reduce total welfare.
The document compares equilibrium and welfare under autarky, free trade, and a tariff for small and large countries. While a tariff benefits some domestic producers, it reduces total welfare due to higher domestic prices and lower imports/consumption.
This document provides an overview of international trade models and how they can be applied to analyze economic growth and international borrowing/lending. It discusses how balanced and biased economic growth can impact trade patterns and welfare. Biased growth that shifts production more towards a country's export good can lower its terms of trade and immiserize it. The standard trade model is modified to analyze intertemporal trade, where countries can borrow goods today in exchange for goods tomorrow. This allows specialization across time without sacrificing current consumption.
The document summarizes key concepts in macroeconomics including:
- Short-run and long-run aggregate supply curves
- How economies automatically adjust toward full employment equilibrium over time
- Demand-pull and cost-push inflation
- The Phillips curve relationship between inflation and unemployment
- How supply shocks and monetary policy impact the Phillips curve relationship
- Supply-side economics and how fiscal policy can shift aggregate supply
- The Laffer curve relationship between tax rates and tax revenue
This document provides an overview of aggregate demand and aggregate supply models. It discusses the key components of aggregate demand and aggregate supply including:
1) Aggregate demand is determined by consumption, investment, government spending, and net exports and shown as a downward sloping curve. A decrease in aggregate demand can cause recession while an increase can cause inflation.
2) Aggregate supply is determined by costs of production and shown as an upward sloping curve in the short-run and vertical in the long-run. A decrease can cause both recession and inflation known as stagflation.
3) Equilibrium occurs where aggregate demand and supply intersect determining output and price levels. Changes in demand or supply can shift curves
Econ452 Learning Unit 11 - Part 2 - 2020 fallsakanor
This document discusses internal economies of scale and imperfect competition in international trade. It explains that internal economies of scale allow larger firms to have lower costs than smaller firms, leading industries to become imperfectly competitive. This causes some firms to thrive while others contract. The document also describes how imperfect competition can result in intra-industry trade of similar goods between countries. It provides examples of how economic integration through trade agreements has affected industries like automobiles.
Econ452 Learning Unit 11 - Part 1 - 2020 fallsakanor
1) The document discusses how external economies of scale can lead to international trade even when countries have identical production possibilities. With external economies, the production possibilities frontier becomes convex, allowing for gains from specialization and trade.
2) It explains that external economies occur when industry-wide costs decrease as industry size increases, due to factors like specialized suppliers. This can result in one country dominating production of a good globally due to lower costs.
3) The document notes that established industries, even if not the most efficient, may remain dominant due to network effects from their head start, illustrating path dependence in trade patterns from external economies.
Econ452 Learning Unit 10 - Part 2 - 2020 fallsakanor
This document discusses various non-tariff barriers (NTBs) to trade such as quotas, export subsidies, import quotas, and voluntary export restraints. It explains how each of these policies affect trade flows and impact producer surplus, consumer surplus, and national welfare in exporting and importing countries. Specifically, it analyzes the effects of the EU's agricultural export subsidies and the US sugar import quota. It also covers how transportation costs, local content requirements, and technological changes have impacted patterns of international trade over time.
Econ452 Learning Unit 10 - Part 1 - 2020 fallsakanor
This document provides an overview of tariffs as an instrument of trade policy. It discusses:
1. The objectives of understanding tariffs and their effects on trade patterns, welfare, and income distribution.
2. How tariffs work as a tax on imports, affecting supply and demand in domestic and world markets. Tariffs can create costs through deadweight loss.
3. Tools for analyzing the effects of tariffs, including partial equilibrium models and concepts of consumer surplus, producer surplus, and total surplus to measure costs and benefits. Tariffs typically reduce total welfare.
Econ452 Learning Unit 09 - Part 2 - 2020 fallsakanor
This document discusses the standard trade model and equilibrium trade. It covers:
1) The relationship between production possibility frontiers, relative supply curves, preferences, and relative demand curves.
2) How world equilibrium is determined by the intersection of world relative supply and demand.
3) How trade patterns are established based on relative prices and the gains from trade when prices change from the autarky level.
Econ452 Learning Unit 09 - Part 1 - 2020 fallsakanor
The standard trade model is used to determine optimal production and consumption under autarky. It shows that countries will produce more of the good where they have a comparative advantage based on differences in production possibility frontiers or preferences between countries. This leads to different equilibrium relative prices and combinations of goods produced and consumed under autarky in each country. Trade allows both countries to benefit by specializing in their comparative advantage good.
1. The document discusses the Heckscher-Ohlin model of international trade, which predicts that countries will export goods that intensively use their abundant factors of production.
2. The model shows that trade leads to specialization according to comparative advantage and a convergence of factor prices and relative prices between countries.
3. While trade creates overall gains, it also shifts income between factors of production - in labor abundant countries, labor gains and capital loses from trade, and vice versa in capital abundant countries.
This document provides an overview of resources and trade in the long run. It describes factor abundance and factor intensity, and how they relate to differences in resources across countries and production methods. Factor abundance is determined by comparing relative factor prices between countries, while factor intensity is determined by comparing input combinations among products. The document uses isoquant-isocost analysis to show how firms choose optimal input combinations given input prices, and how relative factor prices affect factor demand. It explains the Stolper-Samuelson theorem relating factor prices to good prices, and the Rybczynski theorem relating factor increases to output changes.
The document discusses how international trade affects income distribution through winners and losers both in the short-run and long-run due to changes in relative prices and industry demands for factors of production. While trade creates overall gains, certain groups such as owners of immobile factors in import-competing industries experience losses in real income. Government policies aim to assist negatively impacted groups through retraining programs and income support to ease the costs of trade-induced unemployment and distributional changes.
STREETONOMICS: Exploring the Uncharted Territories of Informal Markets throug...sameer shah
Delve into the world of STREETONOMICS, where a team of 7 enthusiasts embarks on a journey to understand unorganized markets. By engaging with a coffee street vendor and crafting questionnaires, this project uncovers valuable insights into consumer behavior and market dynamics in informal settings."
In a tight labour market, job-seekers gain bargaining power and leverage it into greater job quality—at least, that’s the conventional wisdom.
Michael, LMIC Economist, presented findings that reveal a weakened relationship between labour market tightness and job quality indicators following the pandemic. Labour market tightness coincided with growth in real wages for only a portion of workers: those in low-wage jobs requiring little education. Several factors—including labour market composition, worker and employer behaviour, and labour market practices—have contributed to the absence of worker benefits. These will be investigated further in future work.
A toxic combination of 15 years of low growth, and four decades of high inequality, has left Britain poorer and falling behind its peers. Productivity growth is weak and public investment is low, while wages today are no higher than they were before the financial crisis. Britain needs a new economic strategy to lift itself out of stagnation.
Scotland is in many ways a microcosm of this challenge. It has become a hub for creative industries, is home to several world-class universities and a thriving community of businesses – strengths that need to be harness and leveraged. But it also has high levels of deprivation, with homelessness reaching a record high and nearly half a million people living in very deep poverty last year. Scotland won’t be truly thriving unless it finds ways to ensure that all its inhabitants benefit from growth and investment. This is the central challenge facing policy makers both in Holyrood and Westminster.
What should a new national economic strategy for Scotland include? What would the pursuit of stronger economic growth mean for local, national and UK-wide policy makers? How will economic change affect the jobs we do, the places we live and the businesses we work for? And what are the prospects for cities like Glasgow, and nations like Scotland, in rising to these challenges?
An accounting information system (AIS) refers to tools and systems designed for the collection and display of accounting information so accountants and executives can make informed decisions.
Independent Study - College of Wooster Research (2023-2024) FDI, Culture, Glo...AntoniaOwensDetwiler
"Does Foreign Direct Investment Negatively Affect Preservation of Culture in the Global South? Case Studies in Thailand and Cambodia."
Do elements of globalization, such as Foreign Direct Investment (FDI), negatively affect the ability of countries in the Global South to preserve their culture? This research aims to answer this question by employing a cross-sectional comparative case study analysis utilizing methods of difference. Thailand and Cambodia are compared as they are in the same region and have a similar culture. The metric of difference between Thailand and Cambodia is their ability to preserve their culture. This ability is operationalized by their respective attitudes towards FDI; Thailand imposes stringent regulations and limitations on FDI while Cambodia does not hesitate to accept most FDI and imposes fewer limitations. The evidence from this study suggests that FDI from globally influential countries with high gross domestic products (GDPs) (e.g. China, U.S.) challenges the ability of countries with lower GDPs (e.g. Cambodia) to protect their culture. Furthermore, the ability, or lack thereof, of the receiving countries to protect their culture is amplified by the existence and implementation of restrictive FDI policies imposed by their governments.
My study abroad in Bali, Indonesia, inspired this research topic as I noticed how globalization is changing the culture of its people. I learned their language and way of life which helped me understand the beauty and importance of cultural preservation. I believe we could all benefit from learning new perspectives as they could help us ideate solutions to contemporary issues and empathize with others.
OJP data from firms like Vicinity Jobs have emerged as a complement to traditional sources of labour demand data, such as the Job Vacancy and Wages Survey (JVWS). Ibrahim Abuallail, PhD Candidate, University of Ottawa, presented research relating to bias in OJPs and a proposed approach to effectively adjust OJP data to complement existing official data (such as from the JVWS) and improve the measurement of labour demand.
Enhancing Asset Quality: Strategies for Financial Institutionsshruti1menon2
Ensuring robust asset quality is not just a mere aspect but a critical cornerstone for the stability and success of financial institutions worldwide. It serves as the bedrock upon which profitability is built and investor confidence is sustained. Therefore, in this presentation, we delve into a comprehensive exploration of strategies that can aid financial institutions in achieving and maintaining superior asset quality.
Fabular Frames and the Four Ratio ProblemMajid Iqbal
Digital, interactive art showing the struggle of a society in providing for its present population while also saving planetary resources for future generations. Spread across several frames, the art is actually the rendering of real and speculative data. The stereographic projections change shape in response to prompts and provocations. Visitors interact with the model through speculative statements about how to increase savings across communities, regions, ecosystems and environments. Their fabulations combined with random noise, i.e. factors beyond control, have a dramatic effect on the societal transition. Things get better. Things get worse. The aim is to give visitors a new grasp and feel of the ongoing struggles in democracies around the world.
Stunning art in the small multiples format brings out the spatiotemporal nature of societal transitions, against backdrop issues such as energy, housing, waste, farmland and forest. In each frame we see hopeful and frightful interplays between spending and saving. Problems emerge when one of the two parts of the existential anaglyph rapidly shrinks like Arctic ice, as factors cross thresholds. Ecological wealth and intergenerational equity areFour at stake. Not enough spending could mean economic stress, social unrest and political conflict. Not enough saving and there will be climate breakdown and ‘bankruptcy’. So where does speculative design start and the gambling and betting end? Behind each fabular frame is a four ratio problem. Each ratio reflects the level of sacrifice and self-restraint a society is willing to accept, against promises of prosperity and freedom. Some values seem to stabilise a frame while others cause collapse. Get the ratios right and we can have it all. Get them wrong and things get more desperate.
[4:55 p.m.] Bryan Oates
OJPs are becoming a critical resource for policy-makers and researchers who study the labour market. LMIC continues to work with Vicinity Jobs’ data on OJPs, which can be explored in our Canadian Job Trends Dashboard. Valuable insights have been gained through our analysis of OJP data, including LMIC research lead
Suzanne Spiteri’s recent report on improving the quality and accessibility of job postings to reduce employment barriers for neurodivergent people.
Decoding job postings: Improving accessibility for neurodivergent job seekers
Improving the quality and accessibility of job postings is one way to reduce employment barriers for neurodivergent people.
Economic Risk Factor Update: June 2024 [SlideShare]Commonwealth
May’s reports showed signs of continued economic growth, said Sam Millette, director, fixed income, in his latest Economic Risk Factor Update.
For more market updates, subscribe to The Independent Market Observer at https://blog.commonwealth.com/independent-market-observer.
2. 27-2
U.S. Real GDP since 1947
U.S. GDP tends to increase over time with ups and downs.
3. 27-3
• Two observations on U.S. GDP over time
• An upward-trend line: Potential GDP growth.
• Alternating increases and decreases along the
trend line.
• The business cycle is a periodic, but irregular, up-
and down-movement of total production and
other measures of economic activity.
The Business Cycle
LO1
4. 27-4
• Expansion
• When production (real GDP) increases
• Recession
• When production (real GDP) decreases
• Peak and Trough
• An expansion ends at a peak and a recession ends
at a trough.
Phases of Business Cycle
LO1
6. 27-6
Most Recent Business Cycle
• The shaded periods show the recessions — periods of
falling production that lasts for at least six months.
7. 27-7
U.S. Recessions since 1950
Period
Duration,
Months
Depth
(Decline in Real
Output)
1953-54 10 -2.6%
1957-58 8 -3.7
1960-61 10 -1.1
1969-70 11 -0.2
1973-75 16 -3.2
1980 6 -2.2
1981-82 16 -2.9
1990-91 8 -1.4
2001 8 -0.4
2007-09 18 -3.7
Source: National Bureau of Economic Research, www.nber.org, and Minneapolis Federal Reserve Bank,
www.minneapolisfed.gov. Output data are in 2000 dollars
Duration of Recessions
LO1
8. 27-8
Duration of Business Cycle
Figure summarizes
U.S. recession,
expansion, and cycle
length since 1854.
Recessions have
shortened.
Expansions have
lengthened, and
complete cycles
have lengthened.
9. 27-9
Causes of Business Cycles
• Unexpected events (shocks) trigger changes in
production and employment
• Sources of shocks that cause business cycles
• Irregular innovation
• Productivity changes
• Monetary factors
• Political events
• Financial instability
• Resource availability and prices
LO1
10. 27-10
• Current Population Survey
Every month, 1,600 interviewers working on a joint
project of the Bureau of Labor Statistics (BLS) and
the Bureau of the Census survey 60,000 households
to establish the age and job market status of each
member of the household.
• It classified peoples into categories
•Working-age population
•Labor force
•Employed and Unemployed
Measurement of Labor Market
Condition
11. 27-11
• Working-Age Population
Working-age population is the total number of
people aged 16 years and over who are not in a jail,
hospital, or some other form of institutional care or
in the U.S. Armed Forces.
• In 2012, the U.S. population was 314.9 million — 243.3 million
people were working-age population and 71.6 million people
were not (young, in military or institutionalized).
Measurement of Labor Market
Condition
12. 27-12
• Labor Force
Labor force is the number of people employed plus
the number unemployed.
• In 2012, the U.S. working-age population was 243.3 million —
155.0 million people were labor force and 88.3 million people
were not.
• People not in labor force are working-age population who are
not willing to work (not working or looking for work) —
students, full-time housewife, senior citizen.
Measurement of Labor Market
Condition
13. 27-13
• Employed under Population Survey
The survey counts as employed all persons who,
during the week before the survey:
1.Worked at least 1 hour in a paid job or 15 hours
unpaid in family business.
2.Were not working but who had jobs from which
they were temporarily absent.
• In 2012, the labor force was 155.0 million — 142.5 million
people were employed and 12.5 million were unemployed.
Measurement of Labor Market
Condition
14. 27-14
• Unemployed under Population Survey
The survey counts as unemployed all persons who,
during the week before the survey:
1.Had no employment
2.Were available for work,
and either:
1.Had made efforts to find employment during the
previous four weeks, or
2.Were waiting to be recalled to a job from which
they had been laid off.
Measurement of Labor Market
Condition
15. 27-15
Measurement of Labor Market
Condition
• Two Main Labor Market Indicators
Unemployment rate
The percentage of people in the labor force who are
unemployed.
Labor force participation rate
The percentage of the working-age population who
are members of the labor force.
16. 27-16
Measurement of Labor Market
Condition
• Unemployment Rate
• Labor Participation Rate
Unemployment rate =
Number of
people unemployed
x 100
Labor force
Labor force
participation rate = Working-age population
x 100
Labor force
17. 27-17
Measurement of Labor Market
Condition
Under 16
and/or
Institutionalized
(71.6 million)
Not in
labor
force
(88.3 million)
Employed
(142.5 million)
Unemployed
(12.5 million)
Total
population
(314.9
million)
Labor
force (155
million)
Unemployment rate =
12,500,000
155,000,000
X 100 = 8.1%
Labor participation rate =
155,000,000
243,300,000
X 100 = 63.7%
LO2
18. 27-18
Measurement of Labor Market
Condition
• Shortcomings of unemployment measure
Unemployment rate reported on Population Survey
is not accurate measurement of unemployment.
The official definition of unemployment omits two
types of labor:
•Involuntary part-time workers counted as full-
time
•Discouraged workers are not counted as
unemployed
LO2
19. 27-19
Measurement of Labor Market
Condition
• Involuntary part-time workers
Involuntary part-time workers are people who work
1 to 34 hours per week but are looking for full-time
work.
• Discouraged workers
Discouraged worker is a person who does not have
a job, is available and willing to work, but has not
made specific efforts to find a job within the
previous four weeks because previous unsuccessful
attempts were discouraging.
LO2
20. 27-20
Measurement of Labor Market
Condition
• In 2012, there were 8 million involuntary part-time workers.
• In 2012, there were 909,000 discouraged workers.
• By including discouraged workers, the labor force should be
155.9 million (155.0 million + 0.9 million) in 2012.
• By including discouraged workers and involuntary part-time
workers, the unemployed were 21.4 million (12.5 million + 8
million + 0.9 million) in 2012.
• Then, the actual unemployment rate could be 13.7% (21.4
million ÷ 155.0 million) in 2012 instead of official rate of 8.1%.
21. 27-21
U.S. Unemployment Rate since
1929
• U.S. unemployment rate: 1929–2011
From 1948 to
2011, the
average
unemployment
rate was 5.8%.
24. 27-24
Labor Participation Rate
• The labor force
participation rate of
women has increased.
• The labor force
participation rate of
men has decreased.
26. 27-26
• Four Types of Unemployment
Unemployment is classified into four types based on
its cause.
•Frictional unemployment
•Structural unemployment
•Cyclical unemployment
•Seasonal unemployment
Types of Unemployment
LO2
27. 27-27
• Frictional unemployment
the unemployment that arises from normal labor
turnover—from people entering and leaving the
labor force and between jobs while searching jobs
and waiting to take jobs.
Types of Unemployment
LO2
For example, a graduate
looking for his first job.
28. 27-28
• Structural unemployment
the unemployment that arises due to changes in the
structure of the demand for labor—changes in
technology or international competition change the
skills needed to perform jobs or change the locations
of jobs.
Types of Unemployment
LO2
For example, telephone
switching is now done by
computer, rather than by
operators. Also, call centers
have been relocated to India.
29. 27-29
• Cyclical unemployment
Caused by the recession
phase of the business cycle
— it fluctuates over the
business cycle that
increases during a
recession and decreases
during an expansion.
Types of Unemployment
LO2
30. 27-30
• Seasonal unemployment
the unemployment that arises because of seasonal
patterns.
Types of Unemployment
LO2
For example, lifeguards are
only needed during
summer. Also, during
Christmas season,
additional sales persons are
hired at retail stores.
31. 27-31
• Seasonal unemployment occurs regularly and is
predictable. The Bureau of Labor Statistics reports
the unemployment rate adjusted for seasonal
changes (seasonally adjusted).
• Seasonal unemployment cannot be avoided.
• Structural unemployment is a result of dynamics
(growth) of economy – no pain, no gain.
• Frictional unemployment is considered desirable for
the economy.
• Only cyclical unemployment is desirable to avoid.
Types of Unemployment
LO2
32. 27-32
Natural Rate of Unemployment
• Natural Unemployment
the unemployment that arises from frictions,
structural, and seasonal change when there is
no cyclical unemployment—when all the
unemployment is frictional, structural, and
seasonal.
Natural rate of unemployment (NRU) is the
natural unemployment as a percentage of the
labor force
LO2
33. 27-33
Natural Rate of Unemployment
• Natural Rate of Unemployment (NRU) can
vary over time due to
• Demographic changes (e.g. age distribution)
• Changing job search methods
• Public policy changes (e.g. unemployment
benefit, minimum wage)
• Pace of structural changes
• Actual unemployment can be above or fall
below the NRU
LO2
34. 27-34
Full Employment
• Full employment
When the economy is experiencing only frictional,
structural or seasonal unemployment, but not
cyclical unemployment.
•It occurs when the unemployment rate equals the
natural rate of unemployment.
•Full employment DOES NOT mean everyone has
job.
LO2
35. 27-35
Potential GDP
• Potential GDP
The level of real GDP when the economy is at full
employment (at natural rate of unemployment).
Actual real GDP can be above or below the potential
GDP.
•When the actual unemployment rate is below the
NRU, the actual real GDP is greater than the potential
GDP.
•When the actual unemployment rate is below the
NRU, the actual real GDP is greater than the potential
GDP.
LO2
36. 27-36
GDP Gap
• GDP Gap
• GDP gap = actual GDP – potential GDP
• Can be negative or positive
• Okun’s Law
• Every 1% of cyclical unemployment creates
a 2% GDP gap
LO2
39. 27-39
Economic Cost of Unemployment
• Costs to the Economy
• Forgone output (lower GDP) and consumption:
Unemployed could be used to produce goods and services
valuable to the economy
• Costs to Individuals
• Lost income and consumption (lower standard living)
• Missed opportunities for developing skills through work
• Costs to the Society
• Taxes for unemployment benefits and welfare
• Crimes, protectionism, anti-immigration
LO2
40. 27-40
Unequal Burdens
• Burden of Unemployment fall in
• Occupation: Blue color
• Age: Young
• Race and ethnicity: Black
• Gender: Male (Mancession)
• Education: low education attainment
• Duration of Unemployment varies along
business cycle
• Longer unemployment during recessions
LO2
41. 27-41
Unequal Burdens
Unemployment Rates by Demographic Group: Full Employment Year (2007) and Recession Year
(2009)*
Demographic Group
Unemployment Rate
2007 2009
Overall 4.6% 9.3%
Occupation:
Managerial and professional
Construction and extraction
2.1 4.6
7.6 19.7
Age:
16-19
African American, 16-19
White, 16-19
Male, 20+
Female, 20+
15.7 24.3
29.4 39.5
13.9 21.8
4.1 9.6
4.0 7.5
Race and ethnicity:
African American
Hispanic
White
8.3 14.8
5.6 12.1
4.1 8.5
Gender:
Women
Men
4.5 8.1
4.7 10.3
Education:**
Less than high school diploma
High school diploma only
College degree or more
7.1 14.6
4.4 9.7
2.0 4.6
Duration:
15 or more weeks
1.5 4.7LO2
42. 27-42
Noneconomic Costs
• Some costs of unemployment cannot be measured
• Loss of self-respect
• Plummeting morale
• Family disintegration
• Poverty and reduced hope
• Heightened racial and ethnic tensions
• Suicide, homicide, fatal heart attacks, mental
illness
• Can lead to violent social and political change
LO2
43. 27-43
Consumer Price Index (CPI)
• Consumer Price Index (CPI): a measure of the
average of the prices paid by urban consumers for a
fixed market basket of consumer goods and services.
• Each month, BLS employees check the prices of the
80,000 goods and services in the CPI basket in 30
metropolitan areas.
• We can use these numbers to compare what a fixed
basket of goods costs this month with what it cost in
some previous month.
44. 27-44
CPI as Index Number
• Reference base period: a period for which the CPI is
defined to equal 100.
• Currently, the reference base period is 1982-1984.
In 2006, CPI = 201.6
In 2007, CPI = 207.3
45. 27-45
Inflation
• Inflation: General rise in the price level
• Deflation: General fall in the price level
• Inflation rate: A percentage change in price index
• From 2006 to 2007
Inflation
Rate
207.3 - 201.6
201.6= x 100 = 2.8%
CPI in current year − CPI in previous year
CPI in previous year
x 100Inflation rate =
46. 27-46
CPI Market Basket
• Make the relative importance of the items in the CPI
basket the same as in the budget of an average
urban household.
• The CPI is calculated each month, but the CPI basket
is not updated each month.
• The CPI basket in 2011 is based on information
obtained from the Consumer Expenditure Surveys
conducted during 2009 and 2010.
48. 27-48
Calculating CPI
• The CPI calculation has three steps:
1. Find the cost of the CPI basket at base period prices.
2. Find the cost of the CPI basket at current period prices.
3. Calculate the CPI for the base period and the current
period.
CPI
Cost of CPI Basket in Particular Year
Cost of CPI Basket in Base Period
= x 100
53. 27-53
Bias in CPI Measure
• CPI measure is over-estimated
• The potential sources of bias in the CPI are
• New goods bias
• Quality change bias
• Commodity substitution bias
• Outlet substitution bias
54. 27-54
Bias in CPI Measure
• New Goods Bias
• New goods do a better job than the old goods that
they replace, but cost more.
• The arrival of new goods puts an upward bias into
the CPI and its measure of the inflation rate.
• Quality Change Bias
• Better cars and televisions cost more than the
versions they replace.
• A price rise that is a payment for improved quality is
not inflation but might get measured as inflation.
55. 27-55
Bias in CPI Measure
• Commodity Substitution Bias
• If the price of beef rises faster than the price of
chicken, people buy more chicken and less beef.
• The CPI basket doesn’t change to allow for the
effects of substitution between goods.
• Outlet Substitution Bias
• If prices rise more rapidly, people use discount
stores more frequently.
• The CPI basket doesn’t change to allow for the
effects of outlet substitution.
56. 27-56
Bias in CPI Measure
• The Magnitude of the Bias
• The Boskin Commission estimated the bias to be
1.1 percentage points per year.
• Consequences of the CPI Bias
• Distortion of wage contracts
• Increases in government outlays and decreases in
taxes: CPI is used to adjust social security benefits,
food stamp payments, and federal pensions
57. 27-57
Alternative Measure of Price
• GDP price index: an average of current prices of all the
goods and services included in GDP expressed as a
percentage of base-year prices.
GDP price index = (Nominal GDP ÷ Real GDP) X 100
•GDP price index uses the prices of all the goods and services in
GDP, while CPI uses prices of consumption goods and services.
•GDP price index weights each item using information about
current as well as past quantities, while CPI weights each item
using information from a past Consumer Expenditure Survey.
58. 27-58
Types of Inflation
• Demand-Pull inflation
• Excess spending relative to output
• Central bank issues too much money
• Cost-Push inflation
• Due to a rise in per-unit input costs
• Supply shocks
LO3
59. 27-59
Inflation
• Due to frequent supply shocks, food and energy
prices change much more than other items in
frequency and magnitude
• CPI is greatly affected by changes in food and
energy prices
• Core inflation
• Without food and energy goods
• Focuses on more stable prices
• Used to evaluate a long run trend of inflation
LO3
60. 27-60
Nominal and Real Values
• Nominal value of a good: its value in terms of
money.
• Real value of a good: its value relative to other good,
service, or bundle of goods.
• Example: Nominal GDP vs. Real GDP
• As prices increase (inflation), a value of money
decreases and its purchasing power.
• You cannot compare prices of same goods in two
different period directly.
61. 27-61
Comparing Prices in Different
Periods
• First class stamp was 2¢ in 1911
• First class stamp is 49¢ in 2015
• Is stamp more expensive?
• If a price of stamp has increased proportionally to all
other goods, then
Price of stamp in 2015 dollars
= Price of stamp in 1911 dollars x
CPI in 2015
CPI in 1911
= 2¢ x
237.0
9.8
= 48.4 cents
62. 27-62
Real Wage vs. Nominal Wage
• Nominal wage rate: the average hourly wage rate
measured in current dollars.
• Real wage rate: the average hourly wage rate
measured in the dollars of a given reference base
year.
• Minimum wage rate changed over time.
• Minimum wage rate was $0.25 in 1938
• Minimum wage rate was $3.35 in 1982-4
• Minimum wage rate raised to $7.25 in 2009 and remained
since then
63. 27-63
Real Minimum Wage Rate
• To calculate the real wage rate, we divide the nominal hourly
wage rate by the CPI and multiply by 100.
Nominal wage rate in particular year
CPI in particular year
x 100Real wage rate =
Year CPI Real Wage Rate
1938 14.1 $0.25/14.1 x 100 = $1,77
1982-84 100.0 $3.35/100 x 100 = $3.35
2009 214.5 $7.25/214.5 x 100 = $3.38
2015 237.0 $7.25/237.0 x 100 = $3.06
64. 27-64
Real Wage Rate in the U.S.
• Although the
nominal wage rate
increased almost
every year, the
real wage rate
barely changed
since 1981.
65. 27-65
Nominal and Real Interest Rate
• Nominal interest rate: the dollar amount of interest
expressed as a percentage of the amount loaned.
• Real interest rate: the goods and services forgone in
interest expressed as a percentage of the amount
loaned.
Real interest rate = Nominal interest rate – Inflation rate
• In 2014, the inflation rate was 1.62%, and an interest
rate on saving account at SECU was 0.75%.
Real interest rate = 0.75% - 1.62% = - 0.87%
66. 27-66
Nominal and Real Interest Rate
• During the 1970s,
the real interest rate
became negative
• The nominal interest
rate increased
during the high-
inflation 1980s.
68. 27-68
Nominal and Real Income
• Nominal income
• Unadjusted for inflation
• Real income
• Nominal income adjusted for inflation
Percentage
change in
real income
=
Percentage
change in
nominal income
Percentage
change in
price level
∼
LO4
69. 27-69
Distributional Effect of Inflation
• Who is hurt by inflation?
• Fixed-income receivers: Real incomes fall
• Savers: Value of accumulated savings deteriorates
• Creditors (lenders): Get paid back in “cheaper
dollars”
• Who benefits from inflation?
• Debtors (Borrowers): Pay back the loan with
“cheaper dollars”
• COLA-income receivers: Social security recipients
LO4
70. 27-70
Hyperinflation
• Hyperinflation: Extraordinarily rapid inflation
• Zimbabwe’s 14.9 billion percent inflation in 2008
• Hyperinflation devastates an economy
• Businesses don’t know what to charge
• Consumers don’t know what to pay
• Money becomes worthless
LO5
Editor's Notes
This chapter previews the business cycle, unemployment, and inflation. It is an important chapter as it sets the stage for the analytical presentation in later chapters.
Business cycles are alternating increases and decreases in economic activity over time. Each business cycle consists of four phases. A peak is when business activity reaches a temporary maximum with full employment and near-capacity output. A recession is a decline in total output, income, employment, and trade lasting six months or more; this is sometimes referred to as an economic contraction. The trough is the bottom of the recession period and the expansion is when output and employment are recovering and expanding toward the full employment level.
Business cycles are alternating increases and decreases in economic activity over time. Each business cycle consists of four phases. A peak is when business activity reaches a temporary maximum with full employment and near-capacity output. A recession is a decline in total output, income, employment, and trade lasting six months or more; this is sometimes referred to as an economic contraction. The trough is the bottom of the recession period and the expansion is when output and employment are recovering and expanding toward the full employment level.
This figure shows the business cycle. Economists distinguish four phases of the business cycle; the duration and strength of each phase may vary. Additionally, individual cycles vary in duration and intensity. You can see that the long run trend is economic growth.
The NBER is a nonprofit economic research organization. Within the NBER is the Business Cycle Dating Committee whose job it is to declare the start and the end of recessions in the U.S. They declared that the 2007 recession began in December 2007 and ended in June 2009.
The following are economic shocks that can cause business cycles. Major innovations may trigger new investment and/or consumption spending. But these occur irregularly and unexpectedly and may contribute to the variability of economic activity. Examples include the computer and the internet. Changes in productivity may be a related cause. Unexpected changes in resource availability or unexpected changes in the rate of technological advances can affect productivity.
As the monetary authorities print more money, an inflationary boom can occur. Printing less money than what people were expecting can trigger an output decline.
As the economy adjusts to political events like peace treaties or war, economic strains can occur. Rapid asset price increases or decreases can spill over to the general economy and cause booms and busts. The recession of 2007 was led by excessive money, overvalued real estate and unsustainable mortgage debt.
The BLS is the Bureau of Labor Statistics, an agency within the Department of Labor. The unemployment rate is calculated by taking a random survey of 60,000 households nationwide. (Note: Households are in the survey for four months, out for eight, back in for four, and then out for good. Interviewers use the phone or home visits using laptops.)
The population is divided into three groups:
Group 1 consists of those under age 16 or institutionalized. In this country, if you are under 16 you are expected to be in school. If you are in an institution such as a nursing home or prison you obviously cannot present yourself to the labor market.
Group 2 consists of those “not in labor force”. Examples of individuals who are not in the labor force are full-time college students who are not working, stay at home parents, and retirees.
Group 3 consists of those age 16 and over who are willing and able to work, and actively seeking work (individuals who have demonstrated job search activity within the last four weeks).
So, Group 3 is the labor force. The labor force is simply described as those who are either employed or unemployed. To be counted as unemployed you must be a part of the labor force.
Figure 26.2 shows the labor force, employment, and unemployment in 2009. The labor force consists of persons 16 years of age or older who are not in institutions and who are employed, or unemployed but seeking employment. The unemployment rate is defined as the percentage of the labor force that is not employed and is found by taking the number of those unemployed and dividing that number by the labor force. Remember to multiply the result by 100 so you can express this as a percentage. The BLS rounds the number to one decimal point.
Two factors cause the official unemployment rate to understate actual unemployment. Part time workers are counted as “employed” even if they really want full-time work. “Discouraged workers” who want a job, but are not actively seeking one, are not counted as being in the labor force, so they are not part of the unemployment statistic. If they are not seeking work, they are officially in group 2 as described on the preceding slide. In 2012 909,000 people fell into this category, up from 396,000 in 2007.
Two factors cause the official unemployment rate to understate actual unemployment. Part time workers are counted as “employed” even if they really want full-time work. “Discouraged workers” who want a job, but are not actively seeking one, are not counted as being in the labor force, so they are not part of the unemployment statistic. If they are not seeking work, they are officially in group 2 as described on the preceding slide. In 2012 909,000 people fell into this category, up from 396,000 in 2007.
This Global Perspective shows the unemployment rates in five industrialized nations, 1999-2009. Compared with Italy, France, and Germany, the United States has had a relatively low unemployment rate in recent years.
Frictional unemployment is regarded as somewhat desirable, because it indicates that there is mobility as people change or seek jobs. Frictional unemployment is usually a short term type of unemployment. Structural unemployment occurs when certain skills become obsolete or geographic distribution of jobs changes. This can be a long-term type of unemployment. Cyclical unemployment is caused by the recession phase of the business cycle. As firms respond to insufficient demand for their goods and services, output and employment are reduced.
Extreme unemployment during the Great Depression (25 percent in 1933) is an example of cyclical unemployment.
It is sometimes not clear which type describes a person’s unemployment circumstances.
Frictional unemployment is regarded as somewhat desirable, because it indicates that there is mobility as people change or seek jobs. Frictional unemployment is usually a short term type of unemployment. Structural unemployment occurs when certain skills become obsolete or geographic distribution of jobs changes. This can be a long-term type of unemployment. Cyclical unemployment is caused by the recession phase of the business cycle. As firms respond to insufficient demand for their goods and services, output and employment are reduced.
Extreme unemployment during the Great Depression (25 percent in 1933) is an example of cyclical unemployment.
It is sometimes not clear which type describes a person’s unemployment circumstances.
Frictional unemployment is regarded as somewhat desirable, because it indicates that there is mobility as people change or seek jobs. Frictional unemployment is usually a short term type of unemployment. Structural unemployment occurs when certain skills become obsolete or geographic distribution of jobs changes. This can be a long-term type of unemployment. Cyclical unemployment is caused by the recession phase of the business cycle. As firms respond to insufficient demand for their goods and services, output and employment are reduced.
Extreme unemployment during the Great Depression (25 percent in 1933) is an example of cyclical unemployment.
It is sometimes not clear which type describes a person’s unemployment circumstances.
Frictional unemployment is regarded as somewhat desirable, because it indicates that there is mobility as people change or seek jobs. Frictional unemployment is usually a short term type of unemployment. Structural unemployment occurs when certain skills become obsolete or geographic distribution of jobs changes. This can be a long-term type of unemployment. Cyclical unemployment is caused by the recession phase of the business cycle. As firms respond to insufficient demand for their goods and services, output and employment are reduced.
Extreme unemployment during the Great Depression (25 percent in 1933) is an example of cyclical unemployment.
It is sometimes not clear which type describes a person’s unemployment circumstances.
Frictional unemployment is regarded as somewhat desirable, because it indicates that there is mobility as people change or seek jobs. Frictional unemployment is usually a short term type of unemployment. Structural unemployment occurs when certain skills become obsolete or geographic distribution of jobs changes. This can be a long-term type of unemployment. Cyclical unemployment is caused by the recession phase of the business cycle. As firms respond to insufficient demand for their goods and services, output and employment are reduced.
Extreme unemployment during the Great Depression (25 percent in 1933) is an example of cyclical unemployment.
It is sometimes not clear which type describes a person’s unemployment circumstances.
Full employment does not mean zero unemployment, but it does mean that cyclical unemployment is zero. The full employment-unemployment rate is equal to the total frictional and structural unemployment because these types of unemployment are always occurring and are a natural part of our economy. The full employment rate of unemployment is also referred to as the natural rate of unemployment.
The natural rate is achieved when labor markets are in-balance; the number of job seekers equals the number of job vacancies. The natural rate of unemployment is not fixed but depends on the demographic makeup of the labor force and the laws and customs of the nation.
Full employment does not mean zero unemployment, but it does mean that cyclical unemployment is zero. The full employment-unemployment rate is equal to the total frictional and structural unemployment because these types of unemployment are always occurring and are a natural part of our economy. The full employment rate of unemployment is also referred to as the natural rate of unemployment.
The natural rate is achieved when labor markets are in-balance; the number of job seekers equals the number of job vacancies. The natural rate of unemployment is not fixed but depends on the demographic makeup of the labor force and the laws and customs of the nation.
Full employment does not mean zero unemployment, but it does mean that cyclical unemployment is zero. The full employment-unemployment rate is equal to the total frictional and structural unemployment because these types of unemployment are always occurring and are a natural part of our economy. The full employment rate of unemployment is also referred to as the natural rate of unemployment.
The natural rate is achieved when labor markets are in-balance; the number of job seekers equals the number of job vacancies. The natural rate of unemployment is not fixed but depends on the demographic makeup of the labor force and the laws and customs of the nation.
Full employment does not mean zero unemployment, but it does mean that cyclical unemployment is zero. The full employment-unemployment rate is equal to the total frictional and structural unemployment because these types of unemployment are always occurring and are a natural part of our economy. The full employment rate of unemployment is also referred to as the natural rate of unemployment.
The natural rate is achieved when labor markets are in-balance; the number of job seekers equals the number of job vacancies. The natural rate of unemployment is not fixed but depends on the demographic makeup of the labor force and the laws and customs of the nation.
The GDP gap is the difference between potential and actual GDP where potential GDP reflects the level of GDP associated with the natural rate of unemployment. Economist Arthur Okun quantified the relationship between unemployment and GDP as follows: For every 1 percent of unemployment above the natural rate, a negative GDP gap of about 2 percent occurs. This is known as “Okun’s law.” This means that the country is producing below what could potentially be produced, given our resources and level of technology. You might liken this to operating inside of the PPC if you covered the Production Possibilities Model.
This figure shows the actual and potential real GDP and the unemployment rate from 1989 to 2013. (a) The difference between actual and potential GDP is the GDP gap. A negative GDP gap measures the output the economy sacrifices when actual GDP falls short of potential GDP. A positive GDP gap indicates that actual GDP is above potential GDP. (b) A high unemployment rate means a large GDP gap (negative), and a low unemployment rate means a small or even positive GDP gap.
A high unemployment rate means a large GDP gap, and a low unemployment rate means a small or even positive GDP gap.
The GDP gap is the difference between potential and actual GDP where potential GDP reflects the level of GDP associated with the natural rate of unemployment. Economist Arthur Okun quantified the relationship between unemployment and GDP as follows: For every 1 percent of unemployment above the natural rate, a negative GDP gap of about 2 percent occurs. This is known as “Okun’s law.” This means that the country is producing below what could potentially be produced, given our resources and level of technology. You might liken this to operating inside of the PPC if you covered the Production Possibilities Model.
Unequal burdens of unemployment exist, see the next slide for the table of data. Rates are lower for white collar workers. Teenagers have the highest unemployment rates. African-Americans have higher unemployment rates than whites. Rates for males and females are comparable, though females currently have a lower unemployment rate. Less educated workers, on average, have higher unemployment rates than workers with more education. The “long term” -15 weeks or more- unemployment rate is much lower than the overall rate, although it has increased from 1.5% in 2007 to 4.7% in 2009.
This table illustrates civilian labor force data for people age 25 or over. As you can see, the overall unemployment rate was 4.6 percent in 2007, and 0.3 percent in 2009.
Severe unemployment is socially catastrophic as it occurs at the individual level and spreads throughout society.
Not all prices rise at the same rate, and some prices may stay constant while other prices fall. Reduced purchasing power means that each dollar of income will buy fewer items than before. The CPI-U is the most commonly reported measure of inflation. The main index used to measure inflation is the Consumer Price Index (CPI). The CPI-U is the measure the media reports. This is the CPI for all urban consumers and thought to cover 87% of our population’s purchasing experiences. There are other price indexes reported by the BLS and each is important to different groups. For example, there is the CPI-W, the CPI-C, the PPI etc. To measure inflation, subtract last year’s price index from this year’s price index and divide by last year’s index. Finally, multiply by 100 to express as a percentage.
In this numerical example, using CPI data for 2007, there is a price index of 207.3 and 2006 has a price index of 201.6. You can calculate the inflation rate and find it is 2.8%. The BLS rounds to the tenths decimal place. “Rule of 70” permits quick calculation of the time it takes the price level to double: Divide 70 by the percentage rate of inflation and the result is the approximate number of years for the price level to double. Here the inflation rate is 2.8% so divide 70 by 2.8 and you get the number 25. Therefore, it would take about 25 years for prices to double at that rate of inflation. If the inflation rate is 7 percent, then it will take about ten years for prices to double.
This figure shows the inflation rate in the U.S. from 1960 to 2011.
This global perspective shows the inflation rates of five different countries. You can see that for the United States the inflation rate has been generally slightly higher than the other countries.
Demand-pull inflation is a result of spending increasing faster than production. It is often described as “too much spending chasing too few goods.”
Cost-push inflation occurs as prices rise because of a rise in per-unit production costs (Unit cost = total input cost/units of output).
In cost-push inflation, prices rise but output falls. Rising costs reduce profits and reduce the amount of output producers are willing to supply at the existing price level. As a result, the economy’s supply of goods and services declines and the price level rises. Supply shocks have been the major source of cost-push inflation. These typically occur with dramatic increases in the price of raw materials or energy.
It is difficult to distinguish between the causes of inflation, although cost-push will die out in a recession if spending does not also rise. Because food (like oranges) and energy products (like gasoline) prices are subject to wide swings that can be temporary in nature, the BLS also reports the core CPI which is the CPI less food and energy. The policy makers are mainly interested in whether the underlying core CPI is rising and how quickly. Based on that analysis, they may take measures to try to stop it.
This figure shows the inflation premium and nominal and real interest rates. The inflation premium—the expected rate of inflation—gets built into the nominal interest rate. Here, the nominal interest rate of 11 percent comprises the real interest rate of 5 percent plus the inflation premium of 6 percent.
Nominal income is the number of dollars received as wages, rent, interest, or profit. Real income refers to the purchasing power of your income (how much can actually be purchased with your income). Anticipated inflation is much less harmful than unanticipated inflation. Real income can decrease even with an increase in nominal income if the inflation rate is higher than the increase in nominal income.
Harm from unanticipated inflation causes real incomes and wealth to be redistributed. Were the inflation to be expected, people could plan ahead for it. Those expecting inflation may be able to adjust their work or spending activities to avoid or lessen the effects. Unanticipated inflation has stronger impacts. Fixed income groups will be hurt because their real income suffers. Their nominal income does not rise with prices. Savers will be hurt by unanticipated inflation because interest rate returns may not cover the cost of inflation. Their savings will lose purchasing power. Creditors (or lenders) can be harmed by unanticipated inflation. Interest on payments received may be less than the inflation rate and loan payments will have less purchasing power for the lender when the lender did not correctly anticipate and account for inflation.
There is a danger of creeping inflation turning into hyperinflation, which can cause speculation, reckless spending, and more inflation.
The Zimbabwe experience is interesting. The government of Zimbabwe faces a wide variety of difficult economic problems as it struggles with an unsustainable fiscal deficit, an overvalued official exchange rate, hyperinflation, and bare store shelves. Its 1998-2002 involvement in the war in the Democratic Republic of the Congo drained hundreds of millions of dollars from the economy. The government's land reform program, characterized by chaos and violence, has badly damaged the commercial farming sector, the traditional source of exports and foreign exchange and the provider of 400,000 jobs, turning Zimbabwe into a net importer of food products. The EU and the US provide food aid on humanitarian grounds. Badly needed support from the IMF has been suspended because of the government's arrears on past loans and the government's unwillingness to enact reforms that would stabilize the economy. The Reserve Bank of Zimbabwe routinely prints money to fund the budget deficit, causing the official annual inflation rate to rise from 32% in 1998, to 133% in 2004, 585% in 2005, past 1,000% in 2006, and 26,000% in November 2007, and to 11.2 million percent in 2008. Meanwhile, the official exchange rate fell from approximately 1 (revalued) Zimbabwean dollar per US dollar in 2003 to 30,000 per US dollar in September 2007.