Unemployment rate

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					      Macro Economic Terms
Ch. 7,8, + 9 - GDP, Unemployment, Inflation and Growth
       Impact of Unemployment
   For individuals extended periods of unemployment can
    lead to lower incomes, poverty, as well a variety of social
    problems such as alcoholism, divorce, etc.
   At a macroeconomic level unemployment means that the
    there is an underutilization of resources and a decreased
    output (goods and services) for the entire society.
   Lowest rate of unemployment was at end of WW II at
    1.2%
   Highest rate of unemployment was in Great Depression
    at almost 25%
   Definition of Unemployment
 Unemployment is defined as those people in
  the civilian labor force who are looking for
  work, but cannot find a job.
Therefore, the definition of the civilian labor
  force becomes very important. Let’s look at
  who is counted in and out of this concept.
 Who is in and who is out of the
     civilian labor force?
 IN                     OUT
                         People in military (not
 People working in       counted in civilian labor
  private sector jobs     force)
 People working in      People taking care of the
                          home if unpaid (e.g. house
  public sector jobs      wife)
 Unemployed people,     High school students
  seeking work            under 18, working part
                          time
                         People “working under the
                          table”
      The Unemployment Rate

 Unemployment rate is determined by the number
  of people in the civilian workforce actively
  seeking work, but unable to find jobs.
 Unemployment rate = unemployed/civilian
  workforce x 100
 For example 9,000,000/100,000,000 = .09
 .09 x100 = 9% unemployment rate
You calculate the unemployment
rate with the following statistics:
   Labor force is 2000 workers
   Unemployed is 120 workers
   What is unemployment rate?
   120/2000 = .06 and .06 x100= 6 or 6%
   Your turn: make up an unemployment
    problem and have your neighbor solve it.
       The Underemployed and
        Discouraged Workers
 The underemployed are those people who have
  jobs, but who work part time or below their skill
  level
 Discouraged workers are those people who have
  given up looking for jobs. Their numbers not
  included in the labor force or unemployment
  statistic.
 The over employed are people working two jobs
  or over 40 hours per week.
    Calculate the Unemployment
                Rate
   Population      500
   Military         50
   Employed        200
   Unemployed       50

 50/250 = .2 x 100 = 20%
   Calculate the
Unemployment Rate
       Types of Unemployment
 Frictional unemployment is temporary unemployment of
  workers moving from one job to another.
 Seasonal unemployment is linked to seasonal work (e.g.
  farm workers)
 Structural unemployment is due to the decline of
  industries, so that workers no longer have necessary job
  skills. (Steel workers laid off due to decline of Steel
  industry don’t have computer skills for new jobs)
 Cyclical unemployment has to due with job loss due to an
  recession.
         “Full Employment”
 Economists do not assume 0%
  unemployment as full employment
 They argue that there will always be a
  certain level of frictional unemployment as
  people move between jobs in a free market
  place
 The government currently describes “full
  employment” as between 4 and 6 percent.
  Why did the price of the candy
   rise in the second round?
 What was the price of candy in the first round?
 What was the price of candy in the second round?
  Why did the price of candy rise in the second
  round?
 Was the DaveDollar worth more or less in the
  second round?
 What can you deduce from this activity is the
  impact of price rises on consumers?
           Prices and Inflation
 Inflation is a general rise in prices.
 A short term rise in a specific commodity like oil
  may lead to inflation.
 However, economists also look at many other
  products. In some cases the drop in some product
  prices may mean that there is not a net increase in
  prices to the consumer.
 Deflation is the general drop in prices.
       Impact of price changes
 The main problem with inflation is that it
  decreases the purchasing power of consumers.
 A price rise means that the dollars that people hold
  are worth less.
 Falling prices may benefit consumers, however
  deflation can hurt owners and producers. For
  example, a drop in housing prices decreases the
  equity in a person’s home.
     How is the price index and
       inflation is calculated
 The government has a number of indexes, but the
  most common is the Consumer Price Index or CPI
 The CPI measures the changes in basic consumer
  prices over time using an imaginary “market
  basket.”
 The simple equation for calculating the CPI (Price
  index) is: cost of market basket today/cost of
  market basket in base year x 100 For example:
  120/100 x 100 = 120%
 The rate of inflation is the new price index minus
  100. For example 120-100= 20 % inflation rate
                     Your turn
 The cost of a market basket in the current year is 100
 The cost of a market basket in a base year was 75
 Calculate the price index and the rate of inflation
 100/75 x 100 = 133
 133-100= 33% rate of inflation
 What if the current market basket was 150 and the base
  year was 75
 150/75 x 100 = 200 price index
 200 -100= 100% rate of inflation.
 Now make an inflation problem for your partner.
Puzzling unemployment statistics
 Wednesday’s Chronicle said that employment in
  the service sector expanded in September for the
  ninth straight month
 This morning the TV news said that there was a
  fall in unemployment claims from 470,000 to
  450,000 this month.
 Tomorrow the new unemployment percentage will
  be released. Do you think that these numbers
  indicate that the unemployment rate will fall, or is
  it possible that the new rate could increase or stay
  the same? Explain.
             Other indexes
 The Producer Price Index measures the
  general price changes of producer goods
 The GDP deflator is most often used to
  compare the GDP of different years. The
  measure takes out price level changes in
  measuring the total number of goods and
  services in the economy.
              Puzzling Prices
 Question: Can you explain how the prices of
  gasoline and food could be going up but the
  economy is still having deflation?
 Answer:The general price level could be falling,
  despite the fact that some prices are going up. The
  CPI measures the general level of prices in a
  market basket.
 Question:Do you know what the term is for when
  prices are going up, but at a slower rate than
  previously?
 Answer: Disinflation
   Anticipated and unanticipated
             inflation
 Anticipated inflation is the rate of inflation that
  consumers, the government and businesses believe
  will occur.
 Unanticipated inflation causes more problems if
  prices rise or decline more than people anticipate.
 Unanticipated inflation helps debtors who borrow
  money,but hurts banks and money lenders.
  Nominal and real interest rates
 The nominal interest rate is the price of borrowing
  money in today’s dollars. For example, your bank
  account may pay a nominal rate of 5%.
 The real interest rate = nominal rate minus the
  anticipated rate of inflation. For example if the
  nominal rate is 5% and the anticipated rate of
  inflation is 3%, then the real interest rate is 2%.
    Cost Push and Demand Pull
             inflation
 When resources and factors of production
  rise in prices this is called cost push
  inflation.
 When increased demand pushes up price
  levels, this is called demand pull inflation.
 Gross Domestic Product (GDP)
 GDP equals the total amount of goods and
  services produced in an economy over one year.
 If GDP goes up then an economy is growing, if
  GDP goes down then it is shrinking.
 GDP is calculated as total consumption +
  investment + government spending + (exports -
  imports) or C+I+G+NX=GDP
 This is the single most important statistic used by
  economists to measure economic growth
Consumption component of GDP
 Consumption consists of consumer
  spending on goods and services including:
 Durable items such as cars, furniture and
  appliances
 Non-durable goods such as food and clothes
 Services
 Investment component of GDP
 Investment consists of non-residential fixed
  investment including:
 The creation of tools and equipment
 The building of new homes or apartments
 Inventory changes (stocks of products held
  by business)
Government component of GDP
 Government spending consists of federal,
  state, and local government spending on
  goods and services
 However, the government component of
  GDP does not include transfer payments
  such as social security or unemployment
  insurance
   The Net Export component of
              GDP
 Net Exports is equal to total US exports minus
  total US imports
 Exports are goods and services purchased by
  people in foreign nations
 Imports are foreign goods purchased by US
  consumers
 In years where the value of exports is higher than
  the value of imports, the GDP number is higher.
 In years, such as the last few years, where the
  value of export is lower than the value of imports,
  the GDP number is lower.
              Per capita GDP
 Per capita GDP means the amount of GDP per
  person.
 The simple formula per capita GDP is
  GDP/population
 If population falls and GDP remains constant then
  per capita GDP rises.
 Conversely, if population rises and GDP remains
  constant, then per capita GDP falls.
 If GDP rises faster than population increases, then
  per capita GDP increases. This leads to a higher
  standard of living.
    What’s not counted in GDP
 Buying and selling securities (stocks and bonds)
 Government transfer payments, like social security
 Private transfer payments between individuals
  (e.g.. Purchasing a used car from a neighbor)
 Housework and childcare (if it done outside the
  market)
 Illegal activities
          Issues related to GDP
 Critics of the GDP argue that a single measure cannot
  adequately measure the welfare and well being of a
  country.
 Growth may bring negative externalities like pollution,
  which adversely effects the quality of life of a people.
 Economic growth may not be fairly distributed to poorer
  sectors of society.
 Economic growth does not always bring happiness.
 Societies with a different mix of market and non-market
  activities are not easily compared with GDP as measure.
        Real vs.. Nominal GDP
 The nominal GDP is the current GDP in today’s
  prices.
 When economists want to compare GDP for two
  different years, they need a way take out the price
  level changes from year to year. This gives them a
  real GDP measurement.
 The tool they use to create constant dollars is the
  GDP deflator. A base year is chosen for prices and
  years before or after that year are calculated
     Calculation of Real GDP
 The calculation of real GDP = nominal
  GDP/GDP deflator x 100
 For example if GDP = 200 and GDP
  deflator is 133 then
 Real GDP = (200/133) x 100
 150 real GDP = 1.5 x 100
       Calculation of Deflator
 You can derive the deflator if you have the
  nominal and real GDP’s for a year
 GDP deflator = nominalGDP/RealGDP x
  100
 E.g. GDP deflator = (110/100) x 100
 Deflator is 110 = 1.1 x 100
   Expenditure and Income
 Approaches to GDP calculation
 C+I+G+NX calculates the value of goods and
  services in the product market for a year.
 Economists also calculate the total of income
  accrued to the factors of production. In the Gross
  Domestic Income (GDI) economists add up
  wages, profits, and rents.
 There is an identity between the two methods,
  meaning that if calculated properly GDP should
  equal GDI.
The business cycle
   Expansions and Contractions
 During periods of expansion GDP grows,
  unemployment falls, and prices tend to rise
 During periods of contraction GDP falls,
  unemployment rises, and prices often fall.
 Two quarters of GDP decline is termed a
  recession. A severe recession is called a
  Depression.
     What is economic growth?
 Economic growth is defined as increases in per
  capita real GDP.
 Growth can be shown by an increase in the
  production possibilities curve for a nation.
 Economic growth leads to the possibility of
  increasing the standard of living for a nation’s
  citizens, however increases in real per capita GDP
  don’t tell us specifically about income
  distribution.
 What causes economic growth?
 Productivity increases in labor - real GDP growth
  divided by the number of workers (e.g. more
  output per worker)
 Saving is important to growth. If you want more
  future growth a nation must save today.
 Growth and improvements in technology
 Research and development and innovation
 human capital - education of labor
 Open economy (e.g. free market)
 Population growth and immigration

				
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