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For example, assume that the market basket of goods cost $5,000 in 2011 and that the same basket of goods now costs $5,750. The CPI for today, using 2011 for the base year, is

115.0 = ($5,750 ÷ $5,000) × 100

What is real GDP in 2014 dollars using 2013 prices? Apples Price Pears Price Apples Quantity Pears Quantity 2013 $1.00 $1.00 100 120 2014 $0.80 $2.00 150 100

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deflation

A decline in overall prices throughout the economy. This is the opposite of inflation.

inflation

A general rise in prices throughout the economy. It is a measure of changes in the cost of living.

disinflation

A reduction in the rate of inflation. An economy experiencing disinflation still faces inflation, but at a declining rate

disinflation

A reduction in the rate of inflation. An economy experiencing disinflation still faces inflation, but at a declining rate.

hyperinflation

An extremely high rate of inflation; above 100% per year.

GDP deflator

An index of the average prices for all goods and services in the economy, including consumer goods, investment goods, government goods and services, and exports. It is the broadest measure of inflation in the national income and product accounts (NIPA).

The consumer price index (CPI)

An index of the average prices paid by urban consumers for a typical market basket of consumer goods and services.

consumer price index (CPI)

An index of the average prices paid by urban consumers for a typical market basket of consumer goods and services.

producer price index (PPI)

An index of the average prices received by domestic producers for their output.

producer price index (PPI)

An index of the average prices received by domestic producers for their output. The PPI contains the following: Price indexes for roughly 500 mining and manufacturing industries, including over 10,000 indexes for specific products and product categories Over 3,700 commodity price indexes organized by type of product and end use About 800 indexes for specific outputs of industries in the service sector, and other sectors that do not produce physical products Several major aggregate measures of price changes, organized by stage of processing, both commodity-based and industry-based

discouraged workers

Discouraged workers are the portion of marginally attached workers who have given up actively looking for work and, as a result, are not counted as unemployed.

Who Are NOT Considered in the Labor Force?

Discouraged workers are the portion of marginally attached workers who have given up looking for work because they believe there are not enough good jobs. Marginally attached workers are those who have looked for work in the past 12 months but not in the last 4 weeks. Students who do not work are not counted in the labor force. Retired persons and children under 16 are not counted in the labor force. Institutionalized persons including persons in prison also are not counted in the labor forc

The Household Survey

Every month the Census Bureau, as part of the Current Population Survey (CPS), contacts roughly 60,000 households to determine the economic activity of people.

Jennifer received news that she is getting a 5% raise. However, the Bureau of Labor Statistics just reported that prices are rising by 7%. Based on the given information, which of the following is true? Jennifer is losing purchasing power by 2%. Jennifer's purchasing power will rise by 2%. Inflation has no impact on purchasing power. Jennifer's purchasing power will rise by 7%.

Jennifer is losing purchasing power by 2%.

Employed

People are counted as employed if they have done any work at all for pay or profit during the survey week. Regular full-time work, part-time work, and temporary work are all included.

structural unemployment

Unemployment caused by changes in the structure of consumer demands or technology. It means that demand for some products declines and the skills of this industry's workers often become obsolete as well. This results in an extended bout of unemployment while new skills are developed.

frictional unemployment

Unemployment resulting from workers who voluntarily quit their jobs to search for better positions, or are moving to new jobs but may still take several days or weeks before they can report to their new employers.

cyclical unemployment

Unemployment that results from changes in the business cycle, and where public policymakers can have their greatest impact by keeping the economy on a steady, low-inflationary, solid growth path.

underemployed workers .

Workers who are forced to take jobs that do not fully utilize their education, background, or skills. Underemployed workers often hold part-time jobs

underemployed workers

Workers who are forced to take jobs that do not fully utilize their education, background, or skills. Underemployed workers often hold part-time jobs.

marginally attached workers

Workers who were available for work and actively looked for it during the last 12 months, but not in the last 4 weeks.

Unemployed People

are counted as unemployed if they do not have a job, but are available for work and have been actively seeking work for the previous four weeks. Actively looking for work includes efforts such as responding to online job ads, sending off résumés, scheduling job interviews, visiting school placement centers, and contacting private or public employment agencies.

The natural rate of unemployment or nonaccelerating inflation rate of unemployment (NAIRU)

is the rate of unemployment that exists when prices and wages are equal to people's expectations. At the natural rate of unemployment, the economy is at "full employment." Natural rate of unemployment = Frictional + Structural Unemployment The natural rate of unemployment is very stable in the United States, at around 5% to 6%.

CPI = (Cost in Current Period ÷ Cost in Base Period) × 100

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Price indexes are used for two primary purposes: escalation and deflation. An escalator agreement modifies future payments, usually increasing them, to take the effects of inflation into account. Deflating a series of data with an index involves adjusting some current value (often called the nominal value) for the impact of inflation, thereby creating what economists call a real value. Using the GDP deflator, for instance, to deflate annual GDP involves adjusting nominal GDP to account for inflation, thereby yielding real GDP, or GDP adjusted for inflation.

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The Main Causes of Inflation

Strong consumer demand: Consumers spend more money, demand increases, and prices rise. Supply shocks on key inputs: When prices for goods with inelastic demand (such as food or oil) rise, the higher prices are passed on to other industries and to consumers. Government printing money: The government prints money to finance its borrowing, more money is chasing a relatively fixed amount of goods and services, and therefore prices rise.

natural rate of unemployment

The level of unemployment at which price and wage decisions are consistent; a level at which the actual inflation rate is equal to people's inflationary expectations and where cyclical unemployment is zero.

labor force

The total number of those employed and unemployed. The unemployment rate is the number of unemployed divided by the labor force, expressed as a percent.

The Payroll Survey

Officially called the Current Employment Statistics (CES) Survey, the payroll or establishment survey focuses on approximately 146,000 companies and government agencies that are asked how many employees they currently have

price level

The absolute level of a price index, whether the consumer price index (CPI; retail prices), the producer price index (PPI; wholesale prices), or the GDP deflator (average price of all items in GDP).

Why do so many policymakers, businesspeople, and consumers dread inflation? Your attitude toward inflation will depend in large part on whether you live on a fixed income, whether you are a creditor or debtor, and whether you have properly anticipated inflation. Page 458 Many elderly people live on fixed incomes; often, only their Social Security payments are indexed to inflation. People on fixed incomes are harmed by inflation because the purchasing power of their income declines. If people live long enough on fixed incomes, inflation can reduce them from living comfortably to living in poverty. Creditors, meanwhile, are harmed by inflation because both the principal on loans and interest payments are usually fixed. Inflation reduces the real value of the payments they receive, while the value of the principal declines in real terms. This means that debtors benefit from inflation; the real value of their payments declines as their wages rise with inflation. Many homeowners in the 1970s and 1980s saw the value of their real estate rise from inflation. At the same time, their wages rose, again partly due to inflation, but their mortgage payment remained fixed. The result was that a smaller part of the typical household's income was needed to pay the mortgage. Inflation thus redistributes income from creditors to debtors.

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