Econ 1A Module 2

Examples of Frictional Unemployment:

- Graduating students are a good illustration of frictional unemployment. They join the labor force and are unemployed until they find work.

Inflation

A generalized rise in the average level of prices.

Structural Unemployment

A mismatch between the jobs available and the skill levels of the unemployed. It occurs when an underlying shift in the economy makes it difficult for some groups to find jobs. It is a product of technological change and other changes in the structure of the economy.

GDP Gap

the difference between what the economy can produce at the natural rate of unemployment (potential real GDP) and actual output (actual real GDP). Mathematically, we have: GDP gap = potential real GDP − actual real GDP

Natural Rate of Unemployment

Defined as the rate of unemployment that would occur in an economy if there were no cyclical unemployment. So it includes seasonal, frictional, and structural unemployment.

Natural rate of unemployment is not observable, but estimated.

It describes the labor market when the economy is producing what it realistically can produce in the absence of cyclical unemployment.

Natural rate of unemployment varies over time within a range from around 4 percent to around 7 percent.

It will also vary across countries, as labor markets and macroeconomic policies differ.

The Labor Department arrives at the size of the actual labor force by using this formula:

Labor force = (all U.S. residents) - (residents under 16 years of age) - (institutionalized adults) - (adults not looking for work)

Real Interest Rate ≈

Nominal Interest Rate - Inflation Rate

Percentage change in real value ≈

Percentage change in nominal value - Inflation Rate

If the base year is 1982-1984, and the Consumer Price Index for 2015 is 237, what is the nominal hourly wage of $15 in 2015 worth in 1982-1984 dollars (base year constant dollar price)?

Real Value = (Nominal Value) ÷ (Price Index) x 100 = $15 ÷ 237 x 100 = $6.33

Unemployment Rate

The percentage of the labor force that is not working. Calculated by dividing the number of people who are unemployed by the number of people in the labor force: Unemployment Rate = (Number Unemployed) ÷ (Number in the Labor Force)

Which of the following factors could start a demand-pull inflation? a. an increase in tax rates b. an increase in government expenditure c. a decrease in wage rates d. a decrease in exports

b. an increase in government expenditure

Refer to the data in Scenario 1. What will be the size of the labor force in the United States in the year 2023? a. 153 million b. 294 million c. 174.5 million d. 198 million e. 315.5 million

c. 1745.5 million

Examples of Structural Unemployment:

- Robots have been replacing unskilled workers in manufacturing. These workers must get training in computer operations if they want to keep working in the same industry. - When the North American Free Trade Agreement (NAFTA) lifted trade restrictions, many factories relocated to Mexico. They left their former employees without a place to work.

Economists have identified four basic types of unemployment:

- Seasonal unemployment - Frictional unemployment - Structural unemployment - Cyclical unemployment

Examples of Cyclical Unemployment:

- The U.S. economy faced cyclical unemployment in the Great Recession of 2008. As more and more subprime mortgage lenders filed for bankruptcy, homes were not being constructed. Consequently, many people who were employed as construction workers and home builders lost their jobs and experienced cyclical unemployment.

The business cycle contains four phases:

- The expansion (boom), when real GDP is increasing; - The peak, which marks the end of an expansion and the beginning of a contraction; - The contraction (recession), when real GDP is falling; - The trough, which marks the end of a contraction and the beginning of an expansion.

Nominal Value

- Value expressed in dollars of the current period (current prices) - Does not correct for inflation

Real Value

- Value expressed in terms of units/prices with constant purchasing power (constant prices) - Inflation adjusted value Real Value = (Nominal Value) ÷ (Price Index) x 100

Examples of Seasonal Unemployment:

- When local crops are harvested, farms need lots of workers; the rest of the year, they do not. - Ski resort towns are booming during the ski season, when employment peaks, but need fewer workers during the rest of the year. - In the nation as a whole, the Christmas season is a time of peak employment and low unemployment rates.

Recession

A period (lasting from at least two consecutive quarters) in which real GDP falls. The National Bureau of Economic Research (NBER) defines a recession as "a period of significant decline in total output, income, employment, and trade, usually lasting from six months to a year, and marked by widespread contractions in many sectors of the economy."

Seasonal Unemployment

A product of regular, recurring changes in the hiring needs of certain industries on a monthly or seasonal basis.

Frictional Unemployment

A product of the short-term movement of workers between jobs and of first-time job seekers

The business cycle is

A recurring pattern of rising and falling real GDP.

Depression

A severe, prolonged economic contraction.

Unanticipated/Unexpected Inflation

A situation in which the inflation rate is higher or lower than economists, regulators or others anticipated. Unexpectedly high inflation redistributes real income or purchasing power away from those receiving fixed payments to those making fixed payments. When inflation is higher than expected, it tends to hurt workers, recipients of fixed incomes, and savers.

Consumer Price Index (CPI)

A weighted average of the price increases. We can calculate the inflation rate by the percentage change in the CPI over a given period of time: Inflation Rate = [CPI(this year) - CPI(last year)] ÷ [CPI(last year)] x 100

When the unemployment rate is lower than the natural rate,

Actual real GDP is greater than potential real GDP.

When the unemployment rate is higher than the natural rate,

Actual real GDP is less than potential real GDP.

The GDP gap is a measure of the output lost

As a result of unemployment, or a cost associated with unemployment.

When growth occurs,

Cyclical unemployment decreases.

When a recession occurs,

Cyclical unemployment increases

Cost-Push Inflation

Increases in production costs that cause firms to raise prices to avoid losses.

Demand-Pull Inflation

Increases in total spending that are not offset by increases in the supply of goods and services and so cause the average level of prices to rise.

Assume the CPI for Year 1 is 125 and the CPI for Year 2 is 150, the annual inflation rate between these two years is:

Inflation Rate = [CPI(this year) - CPI(last year)] ÷ [CPI(last year)] x 100 = (150 - 125) ÷ 125 x 100 = 20 (percent)

Inflation in the United States can be measured using

The Bureau of Labor Statistics' Consumer Price Index (CPI)

Although all economies move through periods of expansion and contraction,

The duration of the periods of expansion and recession varies.

Business Cycle

The fluctuations in the economy between growth (expressed in rising real GDP) and stagnation (expressed in falling real GDP).

Potential Real GDP

The level of output produced when nonlabor resources are fully utilized and unemployment is at its natural rate. Potential real GDP measures what we are capable of producing at the natural rate of unemployment.

The higher the price level,

The lower the real value (or purchasing power) of the dollar.

The natural rate of unemployment is economists' notion of full employment.

Therefore, we define full employment as something less than 100-percent employment of labor force.

Consider an island countries called Arcadia. Suppose that in a given year there are a total of 100 adults who live there. 40 people are not in the labor force. That leaves 60 people who in the labor force, in which 55 people are employed and the other 5 are unemployed. The unemployment rate of Arcadia is:

Unemployment Rate = (Number Unemployed) ÷ (Number in the Labor Force) = 5 ÷ 60 = 0.083 = 8.3%

Cyclical Unemployment

Unemployment that results when the overall demand for goods and services in an economy cannot support full employment.

Anticipated/Expected Inflation

When inflation is expected, agents in the economy can plan for it and act accordingly - businesses raise prices, workers demand higher wages, lenders raise interest rates and so on.

The table given below lists the average price level in a country for four consecutive years. Table 3 Consumer Price Index (Base Year = 1992) Year Price Index 1992 1993 1994 1995 100 103.9 106.4 109.3 Refer to Table 3. Between 1993 and 1994, the annual inflation rate was _____ percent. a. 2.4 b. 2.7 c. 3.8 d. 6.0 e. 8.5

a. 2.4

Refer to Figure 2, the recovery phase of the business cycle can be represented by points: a. A. b. C. c. E. d. C to E. e. E to G.

e. E to G

Suppose the Organization of Petroleum Exporting Countries (OPEC) sharply increased the price of oil, which triggered higher inflation rates in the United States. This type of inflation is best classified as: a. built-in inflation b. demand-pull inflation c. cost-push inflation d. hyperinflation

c. cost-push inflation

Assume you borrow $1,000 on credit cards at an annual interest rate of 10%. If the inflation rate is 12% during the year indicating a 7% higher rate than anticipated, and the debt has to be paid back in 12 months, then: a. income will be redistributed from you to the bank. b. you will repay the bank with fewer dollars than you borrowed. c. the dollars repaid will have less purchasing power than those borrowed. d. the bank will obtain the same return on the loan as initially expected.

c. the dollars repaid will have less purchasing power than those borrowed.

Refer to the data in Scenario 1. What is the predicted unemployment rate in the United States for the year 2023? a. 6.8 percent b. 8.3 percent c. 11.5 percent d. 12.3 percent e. 16.5 percent

d. 12.3 percent