Chapter 5

Choose the statement that is incorrect

A bias in the CPI gives workers with wage contracts linked to the CPI less real income than the firm intended.

Which of the following is included in the measure of U.S. GDP?

A loaf of wonder bread produced and sold in the United States

Measuring the inflation rate

A major purpose of the CPI is to measure inflation changes in cost of liv8ng and in the value of money To measure these changes we calculate the inflation rate as annual % change in CPI

Unemployed

A person must be available for work and must be in one of 3 categories Without work but has made specific efforts to find a job within the previous 4 weeks Waiting to be called back to a job from which he or she has been laid off Waiting to start a new job in 30 days

Employed

A person must have either a full time job or a part time job

Reading the CPI numbers

CPI is defined to equal 100 for a period called the ref period

Inflation rate formula

CPI this year-CPI last year divided by CPI last year x100

Choose the statement that is incorrect.

Canada has the worlds highest HDI value

Quality change bias

Cars get better every yr. part of the rise in the prices of these good is payment for improved quality and is not inflation but the CPI counts the entire price rise as inflation and so overstates inflation

Commodity substitution bias

Changes in relative prices lead consumers to change the items they buy but because the CPI ignores the substitution of chicken for beef, it says the price of meat has increased

Hyperinflation

Inflation at its worst, inflation rate of 50 % a month or higher that grinds the economy to a halt and causes a society to collapse Rare

Suppose that the number of jobs in the fishing industry decreases but the number of jobs in the travel industry decreases

Initially structural unemployment increases

Calculating the CPI

Find the cost of the CPI basket at base period prices Find the cost of the CPI basket at current period prices Calculate the CPI for the base period and the current period

Constructing the CPI

First stage in construvt8ng the CPI is to select wha5 is called CPI basket this basket contains the goods and services represented in the index , each weighted by its relative importance

Frictional unemployment

Flows into and out of the labor force and the processes of job creation and job destruction create the need for people to search for jobs and for businesses to search for workers Is a permanent and healthy phenomenon in dynamic growing economy

When the unemployment rate is less than the natural unemployment rate, reAl a GDP is ________ than potential GDP and the output gap is ________

Greater;positive

Incorrect statements

In the US in 2009 22 million fewer people had jobs in 1989 A bias in the CPI gives workers with wage contracts linked to the CPI less real income than the firm intended

Choose the statement that is incorrect

In the United States in​ 2009, 22 million fewer people had jobs than in 1989.

To create more jobs the US govt can do all the following except

Increase unemployment benefits

GDP deflator

Is a bit like the PCE deflator except that it includes all the goods and services that are counted as part of GDP

Discouraged worker

Is a marginally attached worker who has stopped looking for a job because of repeated failure to find one.

core inflation rate

Is a measure of the inflation rate that excludes volatile prices in an attempt to reveal the underlying inflation trend

Marginally attached worker

Is a person who currently is neither working nor looking for work but has indicated that he or she wants and is available for a job and has looked for work sometime in the recent past

Chained CPI

Is a price index that is calculated using a similar method to that used to calculate chained dollar real GDP The chained CPI measures a lower inflation rate on average than the standard

Unemployment

Is a serious personal and social 3conomic problem for 2 reasons. Lost incomes and prod, lost human capital The most costly long term unemployment that results from job loss There's always some unemployment, key reason is that the econ9my is a complex mechanism that is always changing- it experiences frictions, structural change and cycles

efficiency wage

Is a wage set above the going market to enable firms to attract the most productive workers, get them to work hard and discourage them from quitting

Personal consumption expenditure deflator

Is calculated from data in the national income accounts

Full employment

Is defined as a situation in which the unemployment rate equals the natural unemployment rate Rate is influenced by many factors: age distribution of the population, scale of structural change, real wage rate, unemployment benefits

When the unemployment rate is less than the natural employment rate real GDP

Is greater than potential GDP and the output gap is positive

The rise in unemployment after mid 2009

Is most likely cyclical

Scale of structural change

Is sometimes small The amount of structural unemployment fluctuates with the pace and volume of technological change and the change driven by fierce international competition especially from fast changing Asian econ9mies

Employment-to-population ratio

Is the percentage of people of working age who have jobs Employment to population ratio = number of people employed/working-age population x 100

Unexpected inflation or deflation

Redistributes income Redistributes wealth Lowers real GDP and employment Diverts resources from production

Part time workers who want full time jobs

Some part time workers would like full time jobs and can't find them these workers are called economic part time workers and they are partly unemployed

Age distribution of the population

An economy with a young population has a large number of new job seekers every yr and has a high level of frictional unemployment An economy with an aging population has fewer new job seekers and a low level of frictional unemployment

cyclical unemployment increases

And other things remain the same the natural unemployment rate does not change

Older workers

Are more prone to experience structural unemployment During the recession the unemployment rate of older workers increases

The reference base period for the CPI is 1982-1984. In February 2014, the CPI was 234.8. This number tells us that the _________ of the prices paid by urban consumers for a fixed basket of consumer goods and services was __________

Average;134.8 percent higher in February 2014 than the average of 1982-1984

New good bias

Because a pc is more expensive than a typewriter was, the arrival of the PC puts an upward bias into the CPI and its inflation rate

Bureau of Labor Statistics

Believes that the official unemployment definition gives the correct measure but it provides data on 2 types of underemployed labor excluded from the official measure They are marginally attached workers, part time workers who want full time jobs

The personal consumption expenditure deflator is calculated as

(Nominal C /reAl C)x100

Interest in price level, inflation, deflation

2 main reasons: first we want to measure annual %change of the price level- the inflation rate or deflation rAte Second we want to distinguish between the money values and real values of economic variables such as your student loan and parents savings

Value at the market exchange rate, GDP per person in the United States in 2013 is ________times thAn in China. Valued at purchasing power of parity prices, real GDP per person in the United States in 2013 is _______ times thAn of China.

7.9;5.4

Aggregate income in an economy in 2014 is $995 billion. Saving is $20 billion and imports are $25 billion. Aggregate expenditure in the economy in 2014 is _______.

995 billion

Magnitude of the bias

Commission said the CPI overstates inflation by 1.1 percentage a year most likely inflation is actually 2 percent a year

CPI formula

Cost of CPI basket at current prices divided by cost of CPI basket at base period prices x 100

Unemployment benefits

Create a safety net but they don't fully replace lost earnings Increase the natural 7nemployment rate by lowering the opportunity cost of job search Influence cyclical unemployment initially and natural unemployment eventually

Extending the period over which the govt is willing to pay unemployment benefits to 99 weeks

Decreases the cost of being unemployed and increases the unemployment rate

Price survey- monthly

Each month BLS employees check the prices of 80,000 goods and services in the CPI basket in 30 metropolitan areas CPI measures price change

Part time workers who want full time jobs

Economic part time workers and they are partly unemployed

Consumer price index

Every month bureau of labor statistics measures the price level by calculating the CPI which is a measure of the avg of the prices paid by urban consumers for a fixed basket of goods and services Tells you about the value of the money in your pocket

Net exports increase when________

Exports increase by more than imports increase

unemployment rate

Is the percentage of the people in the labor force who are unemployed Is supposed to measure underutilized labor It is an imperfect measure because it does not include marginally attached workers and part time workers who want full time jobs Unemployment rate = number of people unemployed/labor force x 100 Labor force = number of people employed + number of people unemployed Fluctuates over the business cycle and reaches a peak value after a recession ends

labor force participation rate

Is the percentage of the working-age population who are members of the labor force Labor force participation rate = labor force/working-age population x 100

Labor force

Is the sum of the employed and the unemployed.

working age population

Is the total number of people aged 16 years and over who are not in jail, hospital, or some other form of institutional care.

Natural unemployment

Is the unemployment that arises from frictions and structural change when there is no cyclical unemployment - when all the unemployment is frictional and structural

Lost incomes and production

Lost production means lower consumption and a lower investment in capital , which lowers the living standard in both the present and future

Inflation deflation

Low, steady and anticipated inflation or deflation is t a problem but an unexpected burst of inflation or period of deflation brings big problems and costs

Biased CPI

Main sources of bias in the CPI are New good bias Quality change in bias Commodity substitution bias Outlet substitution bias

Natural unemployment rate

Natural unemployment as a percentage of the labor force

GDP deflator formula

Nominal GDP / Real GDP x 100

PCE deflator

Nominal c/real c x 100

Unemployment rate peaked in

Oct 2009

The u5 and u6 measure

Of unemployment tells us if more people are economic part time workers

The u2 measure

Of unemployment tells us if more unemployed people are job losers

The U1 measure

Of unemployment tells us if people are taking longer than usual to find a job

The CPI rises from 120 to 126 then

On average the price paid by urban consumers for a fixed basket of consumer goods and services rises by 6 %

Redistributes wealth

People enter into loan contracts that are fixed in money. Unexpected burst inflation the money that the borrower repays to the lender buys less than the money originally loaned. The borrower wins and the lender loses. The interest of on the loan doesn't compensate the lender for the loss in the value of the money loaned Unexpected deflation - the money that the borrower repays to the lender buys more than the money originally loaned. The borrower loses and the lender wins

not in the labor force

People in the workin* age population who are neither employed nor unemployed are classified as not on the labor force

Deflation

Persistently falling price level

Inflation

Persistently rising price level

Distinguishing high inflation from a high price level

Price level rises rapidly, inflation rate is high Price level rises slowly, inflation rate is low

Lost human capital

Prolonged unemployment permanently damages a persons job prospects by destroy8ng human capital

Unemployment benefits influence the unemployment rate for all of the following reasons except

Receiving these benefits is a privilege and they encourage people to find jobs as quickly as possible

Alternative price indexes

The CPI is just one of many alternative price level index numbers and because of the bias in the CPI , other measures are used for some purposes Alternatives are: Chained CPI Personal co dump toon and expenditure deflator gDP deflator

CPI basket consists of items that urban households buy

The CPI places more weight on transportation than on medical care

Price level

The avg level of prices and the value of money

Some consequences of the bias

The bias in the CPI distorts private contracts and increases govt outlays. Many private agreements such as wage contracts are linked to the CPI

Looking at the 3 unemployment measures U3, U4, and U5 from Jan 2009-July 2010 we can conclude all of the following except

The employment to population is rising

Output gap

The gap between real GDP and potential gDP As the output gap fluctuates over the business cycle the unemployment rate fluctuates around the natural unemployment rate

Cyclical unemployment

The higher than normal unemployment at a business cycle trough and the lower than normal 7nemployment at a business cycle peak A worker who is laid off because the economy is in a recession and who gets rehired some months later when the expansion begins has experienced cyclical unemployment

If we count marginally attached workers as unemployed

The labor force participation rate rises

Real wage rates

The natural 7nemployment rate is influenced by the level of the real wage rate That bring unemployment are a minimum wage and efficiency wage

Outlet substitution bias

When confronted with higher prices people use discount stores more frequently and convenience stores less frequently. This phenomenon is called outlet substitution . The CPI does not monitor outlet substitutions

Redistributes income

Workers and employers sign wage contracts that last for a yr or more. An unexpected burst of inflation raises prices but doesn't immediately raise wages An unexpected period of deflation has the opposite effect . Wage rates don't fall but the prices fall. Workers are better off because their fixed wages buy more than they bargained for and employers are worse off with lower profits

Real GDP and unemployment over the cycle

The quantity of real GDP at full employment is potential GDP Over the business cycle real GDP fluctuates around potential GDP

Structural 7nemplyment

The unemployment that arises when changes in technology or international competition change the skills needed to perform jobs or change the locations of jobs Usually Last longer than frictional because workers must retrain and possibly relocate to find a job

In 2020, U.S. GDP using the income approach is 14.4 trillion and net domestic income at factor cost is 11.4 trillion. What is the value of indirect taxes less subsidies plus depreciation in 2010?

The value of indirect taxes less subsidies plus depreciation in 2010 is $3 trillion

The CPI basket consists of items that urban households buy. The CPI places more weight on __________ thAn on _______

Transportation;medical care

Alternative measures of the unemployment rate

U1 long term 7nemployment -15 weeks or more U2 unemployed job losers U3 official unemployment rate U4 discouraged workers U5 marginally attached workers U6 economic part time workers

Lowers real GDP and employment

Unexpected inflation that raises firms profits bring a rise in investment and a boom in production and employment. Unexpected deflation has even greater consequences for real GDP and jobs. Businesses and households that are in debt are worse off and they cut their spending. A fall in total spending brings a r3cession and rising unemployment

Diverts resources from production

Unpredictable inflation/deflation turns the economy into a casino and diverts resources from productive activities to forecasting inflation waste of resources is a cost of inflation

Census bureau

census bureau divides the working age population into 2 groups: those in the labor force and those not in the labor force It also divides the labor force into 2 groups: the employed and the 7nemployed Calculates 3 indicators of the state of the labor market . They are unemployment rate, employment to pop ratio, labor force participation rate

Older unemployed workers

might become marginally attached workers or discouraged workers during a recession because they take longer. Time than younger unemployed workers to transition to a new job The often lack the skills to craft resumes and cover letter They take about 5 weeks longer than younger unemployed workers to find a job

If the CPI rises from 120 to​ 126, then​ ______.

on​ average, the price paid by urban consumers for a fixed basket of consumer goods and services rises by 5 percent

Suppose that the number of jobs in the fishing industry decreases but the number of jobs in the travel industry increases. Initially,

structural unemployment increases

If we count marginally attached workers as unemployed​ ______.

the labor force participation rate rises

When cyclical unemployment increases and other things remain the​ same, ______.

the natural unemployment rate does not change