Macroeconomics chapter 6

Deflation

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

structural unemployment

unemployment cause d by changes in the structure of consumer demands for 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.

underemployed

people who are forced to take jobs, that do not fully- or in some cases even remotely- exploit their education, background, or skills.

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).

labor force

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

frictional unemployment

unemployment for any economy that includes 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.

Inflation

A measure of changes in the cost of living. A general rise in prices throughout the economy. Main causes of inflation: 1. Strong consumer demand: Consumers spend more money, demand increases, and prices rise. 2. Supply shocks on key inputs: Prices for inelastic goods such as food and inputs such as oil rise; higher prices are passed on to other industries and to consumers. 3. government printing money: the government prints money to finance its borrowing, more money is chasing a relatively fixed amount of goods and services, and therefor prices rise.

consumer price index

A measure of the average change in prices paid by urban consumers for a typical market basket of consumer goods and services. To calculate CPI CPI= (cost in current period /cost in base period)* 100 For example, assume that the market basket of goods cost $5000 in 2008 and that the same basket of goods now costs $5750 ($5750/ $5000) *100= 115.0 Therefore, the cost of goods has risen by 15%over this time period because the index in the base year is always 100. Again, the choice of a base year does not matter as long as the CPI for each year is calculated relative to the cost in the selected base year. In fact, one can use CPI data as reported by the BLS to calculate price changes between any two years, neither of which is the base year, using the following data. %change in price= [(CPI in curent year/ CPI in orginal year) *100] -100 For example, if the CPI in 2013 was [(233.8/215.3)*100]-100 = 8.6% challenges of cpi: overstated due to product substitution, quality improvements, and the introduction of new products

producer price index

A measure of the average changes in the prices received by domestic producers for their output. PPI measures the net revenue accruing to a representative firm for specific products. Faces the same challenges as CPI including quality changes, deleted products, and some manufacturers exiting the industry.

hyperinflation

An extremely high rate of inflation; above 100% per year. Hyperinflation is usually caused by an excess of government spending over tax revenues (extremely high deficits) coupled with the printing of money to finance these deficits. hyperinflation requires restoring confidence in the government's ability to bring its budget under control. It usually requires a change in government and a new currency, and most important a commitment to reduce the growth of the money supply.

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)

consequence of inflation

People Living on a fixed income, w/ rising inflation, harms these people because their purchasing power declines. Creditors are harmed by inflation because both the principal on loans and interest payments are usually fixed. Inflation reduces the real value of the payments received , while the value of the principle declines in real terms. Thus debros benefit from inflation the real value of their payments declines as their wages rise with inflation This result takes place only if the inflation is unanticipated. Inflation can also result in faulty signals, therfore reducing producer and consumer welfare.

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. People who have a job, but are on vacation, ill, having child care problems, etc are treated as employed. One other group called unpaid family workers is considered employed if they work 15 hours or more.

Deflating series: Nominal versus real values

The formula for converting a nominal value, or current dollar value, into a real value, or constant dollar value, is Real= Nominal* (Base year index/current year index) For example, nominal GDP in 2013 was 16,633.4 billion. The GDP deflator, havng been 100 in 2005, was 116.1 in in 2013. Real GDP for 2013 (in 2005 dollars) was therefore : $16,633.4 (100/116.1)= 14.326.8 billion Note that because the economy has faced some inflation- 16.1% from 2005 to 2013- the nominal value of GDP has been reduced by this amount to arrive at the real value. In other words, of the 24% growth in nomial GDP, 16.1% was due to inflation. real gdp growth is less than 8%, about 1% per year.

Discouraged workers

To continue to be counted as unemployed those without work must actively seek work (apply for jobs, interview, register with employment services, etc.) Discouraged workers are those who have given up actively looking for work and, as a result, are not counted as unemployed.

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.

Disinflation

a reduction in the rate of inflation. An economy going through disinflation is still facing inflation, but at a declining rate.

natural rate of unemployment (NAIRU)

is the rate of unemployment that exists when prices and wages are equal to people's expectations. At the NAIRU, the economy is at "full employment" NAIRU=frictional +structural unemployment NAIRU is very stable in the US at around 5-6%

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 resumes, scheduling job interviews, visiting school placement centers, and contacting private or public employment agencies.