Macro: Exam 2

Extraordinary crisis measures

)The financial crisis of 2008, the slow recovery, and ongoing financial stress have brought three more tools into play. They are: -Quantitative easing (or QE) (When the Fed creates bank reserves by conducting a large-scale open market purchase at a low or possibly zero federal funds rate. The three episodes are QE1, QE2, and QE3) -Credit easing (When the Fed buys private securities or makes loans to financial institutions to stimulate their lending) -Operation Twist (When the Fed buys long-term government securities and sells short-term government securities. Meant to lower long-term interest rates and stimulate long-term borrowing and investment expenditure)

11.1 What is Money?

--

11.2 The Banking System

--

11.3 The Federal Reserve System

--

11.4 Regulating the Quantity of Money

--

9.1 The Basics of Economic Growth

--

9.2 Labor Productivity Growth

--

9.3 Causes and Effects of Economic Growth

--

9.4 Achieving Faster Growth

--

8.2 The Natural Unemployment

-- BLS measures the amount of unemployment by counting the number of people who do not have a job, are willing to work, and have looked for work in the past 4 weeks. we classify unemployment as frictional, structural, or cyclical when the economy is at full employment, all the unemployment is frictional or structural and the unemployment rate is called the natural unemployment rate.

7.2 The CPI and Other Price Level Measures

-- The CPI is one of several alternative price level measures

Political equilibrium arises from the balance of the interests of one group against the interests of another group.

Change brings gains for some and losses for others, so change is slow. And even when change occurs, if the economic growth rate can be increased by even as much as half a percentage point, it takes many years for the full benefits to accrue. A well-intentioned government cannot dial up a big increase in the economic growth rate, but it can pursue policies that will nudge the economic growth rate upward.

The following sequence of events takes place:

-An open market purchase creates excess reserves. -Banks lend excess reserves. -Bank deposits increase. -The quantity of money increases. -New money is used to make payments. -Some of the new money is held as currency—a currency drain. -Some of the new money remains in deposits in banks. -Banks' desired reserves increase. -Excess reserves decrease but remain positive The sequence described above repeats in a series of rounds, but each round begins with a smaller quantity of excess reserves than did the previous one. The process ends when there are no excess reserves. An open market sale works similarly to an open market purchase, but the sale decreases the monetary base and sets off a multiplier process similar to that described in

Three types of financial institutions accept the deposits that are part of the nation's money:

-Commercial banks -Thrift institutions -Money market funds

The main actions that governments can take to achieve these objectives are

-Create incentive mechanisms. -Encourage saving. -Encourage research and development. -Encourage international trade. -Improve the quality of education.

Today's fiat money consists of:

-Currency -Deposits at banks and other financial institutions

The amount of job search depends on a number of factors that change over time. The main ones are:

-Demographic change -Unemployment benefits -Structural change

The real wage rate might be set above the full-employment equilibrium level for three reasons:

-Efficiency wage -Minimum wage -Union wage

The CPI calculation has three steps:

-Find the cost of the CPI market basket at reference base period prices. -Find the cost of the CPI market basket at current period prices. -Calculate the CPI for the reference base period and the current period. The principles that you've applied in this simplified CPI calculation apply to the more complex calculations performed every month by the BLS.

The quantity of labor supplied increases as the real wage rate increases for two reasons:

-Hours per person increase. -Labor force participation increases.

The new growth theory emphasizes three facts about market economies:

-Human capital expands because of choices. -Discoveries result from choices. -Discoveries bring profit, and competition destroys profit.

The two fundamental causes of unemployment of the frictional-structural classification are:

-Job search -Job rationing

Two other facts play a key role in the new growth theory:

-Many people can use discoveries at the same time. -Physical activities can be replicated.

The official definition of unemployment omits two types of underused labor:

-Marginally attached workers -Part-time workers who want full-time work

Money performs three vital functions. It serves as a:

-Medium of exchange -Unit of account -Store of value

The potential sources of bias in the CPI are:

-New goods bias -Quality change bias -Commodity substitution bias -Outlet substitution bias

The Fed's policy tools are

-Required reserve ratios -Discount rate -Open market operations -Extraordinary crisis measures

the influences on labor productivity growth under two broad headings:

-Saving and investment in physical capital -Expansion of human capital and discovery of new technologies These two broad influences on labor productivity growth interact and are the sources of the extraordinary growth in productivity during the past 200 years.

The key elements in the structure of the Federal Reserve are

-The Chair of the Board of Governors (the Fed's chief executive, public face, and center of power and responsibility) -The Board of Governors (has seven members (including the Chair), who are appointed by the President of the United States and confirmed by the Senate, each for a 14-year term) -The regional Federal Reserve Banks (1 for each district, Each regional Federal Reserve Bank has nine directors, three of whom are appointed by the Board of Governors and six of whom are elected by the commercial banks in the Federal Reserve district) -The Federal Open Market Committee (is the Fed's main policy-making committee)

The quantity of labor employed depends on firms' decisions about how much labor to hire (the demand for labor). It also depends on households' decisions about how to allocate time between employment and other activities (the supply of labor). And it depends on how the labor market coordinates the decisions of firms and households (labor market equilibrium). So we will study:

-The demand for labor -The supply of labor -Labor market equilibrium

Three factors limit the quantity of deposits that the banking system can create:

-The monetary base -Desired reserves -Desired currency holding

To trade off between risk and profit a bank divides its assets into four parts:

-reserves -liquid assets -securities -loans

The main reason economic growth is either absent or slow is that some societies lack the incentive system that encourages growth-producing activities.

...

To achieve faster economic growth, we must increase the growth rate of capital per hour of labor, increase the growth rate of human capital, or increase the pace of technological advance.

...

The Fed's normal policy tools work by changing either the demand for or the supply of the monetary base, which in turn changes the interest rate.

....

The expansion of human capital is the most fundamental source of economic growth Human capital—the accumulated skill and knowledge of people—comes from three sources:

1. Education and training Our ability to read, write, and communicate effectively contributes enormously to our productivity. a host of other specialist skills has made huge contributions to labor productivity and to the advance in technology. 2. Job experience We also learn from on-the-job experience—from learning by doing 3. Health and diet Strong, healthy, well-nourished workers are much more productive than those who lack good nutrition, healthcare, and opportunities to exercise. This fact creates a virtuous circle.

Desired Reserves

A bank's desired reserves are the reserves that the bank chooses to hold. The desired reserve ratio is the ratio of reserves to deposits that a bank wants to hold. This ratio exceeds the required reserve ratio by an amount that the banks determine to be prudent on the basis of their daily business requirements. A bank's actual reserve ratio changes when its customers make a deposit or a withdrawal. A bank's excess reserves are its actual reserves minus its desired reserves. When the banking system as a whole has excess reserves, banks can create money by making new loans. When the banking system as a whole is short of reserves, banks must destroy money by decreasing the quantity of loans.

Job Rationing

A situation that arises when the real wage rate is above the full-employment equilibrium level think of the market as rationing scarce resources (labor market, the real wage rate rations employment and therefore rations jobs. Changes in the real wage rate keep the number of people seeking work and the number of jobs available in balance) In some industries, the real wage rate is set above the full-employment equilibrium level, which brings a surplus of labor. In these labor markets, jobs are rationed by some other means. But the real wage rate is not the only possible instrument for rationing jobs.

Store of Value

Any commodity or token that can be held and exchanged later for goods and services Money acts as a store of value (why it is accepted in exchange for goods and services) The more stable the value of a commodity or token, the better it can act as a store of value and the more useful it is as money. No store of value is completely stable. (fluctuates over time)

The Fed requires banks to hold a minimum percentage of deposits as reserves, called the required reserve ratio.

Banks' desired reserves might exceed the required reserves, especially when the cost of borrowing reserves is high.

Liquid Assets

Banks' liquid assets are short-term Treasury bills and overnight loans to other banks. The interest rates on liquid assets are low but they are low-risk assets.

Encourage International Trade

Free international trade stimulates economic growth by extracting all the available gains from specialization and trade. The fastest-growing nations today are those with the fastest-growing exports and imports.

Economic growth is like the perpetual motion machine

Growth is driven by insatiable wants that lead us to pursue profit and innovate our insatiable wants are still there, so the process continues—wants, profit incentives, innovation, and new products. The economic growth rate depends on the ability and the incentive to innovate.

Economist Simon Kuznets posed these questions in the 1950s: Does the gap between high and low incomes widen or narrow as real GDP grows? And what determines the long-term level and trends of income inequality?

He remarked that getting the answers was hampered by a scarcity of data and strongly held opinions. Over the years since the 1950s, more data have become available, but strongly held opinions continue to get in the way of clear thinking.

Law of Diminishing Marginal Return

If the quantity of capital is small, an increase in capital brings a large increase in production; and if the quantity of capital is large, an increase in capital brings a small increase in production. This law applies to all factors of production, not only to capital is the reason why the demand for labor curve slopes downward

The Labor Market

In macroeconomics, we apply the concepts of demand, supply, and market equilibrium to the economy-wide labor market.

Other Influences in Labor Supply Decisions

Income taxes and unemployment benefits are two of these factors. The work-leisure decision depends on the after-tax wage rate—the wage rate actually received by the household. So, for a given wage rate, the income tax decreases the after-tax wage rate and the quantity of labor supplied decreases. The result is a decrease in the supply of labor. Unemployment benefits lower the cost of searching for a job and encourage unemployed workers to take longer to find the best job available. The result is a decrease in the supply of labor. Higher income tax rates and more generous unemployment benefits decrease the supply of labor—the labor supply curve lies farther to the left.

Replicating Activities

Production activities can be replicated. If one firm increases its capital and output, that firm experiences diminishing returns. But the economy can increase its capital and output by adding another identical fiber cable factory, and the economy does not experience diminishing returns. New growth theory believes: capital does not experience diminishing returns (As capital accumulates, labor productivity grows indefinitely as long as people devote resources to expanding human capital and introducing new technologies.)

Discoveries and Profits

Profit is the spur to technological change The forces of competition squeeze profits, so to increase profit, people constantly seek either lower-cost methods of production or new and better products for which people are willing to pay a higher price. Inventors can maintain a profit for several years by taking out a patent or copyright, but eventually a new discovery is copied and profits disappear.

The Explanations

Read this chapter! BUT Economists do not yet have sound answers to the questions Simon Kuznets posed 60 years ago.

An open market purchase that increases bank reserves also increases the monetary base by the amount of the open market purchase

Regardless of whether the Fed buys securities from the banks or from the public, the quantity of bank reserves increases and gives the banks excess reserves that they then lend.

Encourage Saving

Saving finances investment, which brings capital accumulation. So encouraging saving can increase the growth of capital and stimulate economic growth. Tax incentives can increase saving (Economists claim that a tax on consumption rather than on income provides the best incentive to save.)

Markets

Economic freedom also requires free markets. But markets cannot operate without property rights. Property rights and markets create incentives for people to specialize and trade, to save and invest, to expand their human capital, and to discover and apply new technologies. Real GDP per person increases, and the standard of living rises. people must face incentives that encourage them to pursue the three activities that generate ongoing economic growth: saving and investment, expansion of human capital, and the discovery and application of new technologies.

Create Incentive Mechanisms

Economic growth occurs when the incentives to save, invest, and innovate are strong enough. These incentives require property rights enforced by a well-functioning legal system.

Encourage Research and Development

Everyone can use the fruits of basic research and development efforts. Because basic inventions can be copied, the inventor's profit is limited and so the market allocates too few resources to this activity. Governments can direct public funds toward financing basic research, but this solution is not foolproof. It requires a mechanism for allocating public funds to their highest-valued use.

Money Market Funds

a financial institution that obtains funds by selling shares and uses these funds to buy assets such as U.S. Treasury bills. Money market fund shares act like bank deposits. Shareholders can write checks on their money market fund accounts, but there are restrictions on most of these accounts.

Commercial Bank

a firm that is chartered by the Comptroller of the Currency in the U.S. Treasury (or by a state agency) to accept deposits and make loans A commercial bank accepts three broad types of deposits: checkable deposits, savings deposits, and time deposits A bank pays a low interest rate (sometimes zero) on checkable deposits, and it pays the highest interest rate on time deposits. try to maximize their stockholders' wealth by lending for long terms at high interest rates and borrowing from depositors and others. (but lending is risky)

Minimum Wage Law

a government regulation that makes hiring labor for less than a specified wage illegal If the minimum wage is set below the equilibrium wage, the minimum wage has no effect. The minimum wage law and market forces are not in conflict. But if a minimum wage is set above the equilibrium wage, the minimum wage is in conflict with market forces and unemployment arises. Because skill grows with work experience, teenage labor is particularly affected by the minimum wage (they'll hire only the people with experience where as before they hired more people)

Means of Payment

a method of settling a debt when a payment has been made, the deal is complete Ex: The loan isn't money. Money is what Gus uses to pay off the loan.

Medium of Exhange

an object that is generally accepted in return for goods and services. Ex: Money is a medium of exchange Money guarantees that there is a double coincidence of wants because people with something to sell will always accept money in exchange for it. (Money enables you to specialize in the activity in which you have a comparative advantage (see Chapter 3, here) instead of searching for a double coincidence of wants.)

Money

any commodity or token that is generally accepted as means of payment the three parts of this definition will be explained in the next slides

Efficiency Wage

a real wage rate that is set above the full-employment equilibrium wage rate to induce a greater work effort if a firm pays more than the going market average wage, employees have an incentive to work hard because they know that if they are fired, they cannot expect to find a job with another firm at a similar wage rate. -paying an efficiency wage, a firm can attract the most productive workers -its workers are less likely to quit their jobs, so the firm faces a lower rate of labor turnover and lower training costs -firm's recruiting costs are lower because it always faces a steady stream of available new workers. Paying an efficiency wage is costly, so only those firms that can't directly monitor the work effort of their employees use this device Ex: truck drivers are an example of workers that can be monitored well

The expansion of human capital and the discovery of new technologies have a profoundly different effect on labor productivity than capital accumulation has.

They don't display diminishing marginal returns

The real wage rate is the nominal wage rate (the dollars per hour that people earn on average) divided by the price level We express the real wage rate in constant dollars—today in 2009 dollars

Think of the real wage rate as the quantity of real GDP that an hour of labor earns

Discoveries Used by All

This fact means that as the benefits of a new discovery spread, free resources become available. These resources are free because nothing is given up when an additional person uses them. They have a zero opportunity cost.

Discoveries and Choices

When people discover a new product or technique, they consider themselves lucky but it really depends on how many people are looking for a new technology and how intensively they are looking.

How Open Market Operations Change the Monetary Base

When the Fed buys securities in an open market operation, it pays for them with newly created bank reserves and money. Similarly, when the Fed sells securities in an open market operation, buyers pay for the securities with bank reserves and money. The Fed sets a target for the federal funds rate and conducts open market operations on the scale needed to hit its target. A change in the federal funds rate is only the first stage in an adjustment process that follows an open market operation.

Full Employment and Potential GDP

When the labor market is in equilibrium, the economy is at full employment and real GDP equals potential GDP. Now that we've determined the full-employment quantity of labor, we can find potential GDP. The production function in Figure 8.4(b) tells us that 200 billion hours of labor produces $16 trillion of real GDP. This quantity of real GDP is potential GDP.

Job Rationing and Unemployment

Whether because of efficiency wages, a minimum wage law, or the actions of labor unions, if the real wage rate is above the full-employment equilibrium level, the natural unemployment rate increases. The above-equilibrium real wage rate decreases the quantity of labor demanded and increases the quantity of labor supplied. (look at graph in textbook)

Economic Growth

a sustained expansion of production possibilities Maintained over decades, rapid economic growth transforms a poor nation into a rich one Slow economic growth or the absence of growth can condemn a nation to devastating poverty Economic growth is different from the rise in incomes that occurs during the recovery from a recession. Economic growth is a sustained trend, not a temporary cyclical expansion.

Union Wage

a wage rate that results from collective bargaining between a labor union and a firm Because a union represents a group of workers, it can usually achieve a wage rate that exceeds the level that would prevail in a competitive labor market it is estimated that, on average, union wage rates are 30 percent higher than nonunion wage rates. In some industries, union wages are higher than nonunion wages because union members do jobs that require greater skill than nonunion jobs. (but they'd get higher wages anyway) more prominent in Europe than the US

By increasing the required reserve ratio, the Fed can force the banks to hold a larger quantity of monetary base. By raising the discount rate, the Fed can make it more costly for the banks to borrow reserves—borrow monetary base. And by selling securities in the open market, the Fed can decrease the monetary base. All of these actions lead to a rise in the interest rate.

Similarly, by decreasing the required reserve ratio, the Fed can permit the banks to hold a smaller quantity of monetary base. By lowering the discount rate, the Fed can make it less costly for the banks to borrow monetary base. And by buying securities in the open market, the Fed can increase the monetary base. All of these actions lead to a decrease in the interest rate.

The banking system consists of the Federal Reserve and the banks and other institutions that accept deposits and that provide the services that enable people and businesses to make and receive payments.

Sitting at the top of the system is the Federal Reserve (or the Fed) sets the rules and regulates and influences the activities of banks and other institutions.

Structural Change

Technological change influences unemployment Sometimes, it brings a structural slump, a condition in which some industries and even regions contract while other industries and regions flourish. When these events occur, labor turnover is high, job search increases, and the natural unemployment rate rises. At other times, technological change brings a structural boom. It creates new jobs that are a good match for the people who are losing their jobs. When these events occur, labor turnover might be high, but job search decreases because new jobs are found quickly, and the natural unemployment rate falls.

Required reserve ratios

The Fed requires the banks and thrifts to hold a minimum percentage of deposits as reserves.

Economic Growth Rate

The annual percentage change of real GDP growth rate of real GDP = (real GDP in current year - real GDP in previous year) / (real GDP in previous year) x 100 The growth rate of real GDP tells us how rapidly the total economy is expanding. This measure is useful for telling us about potential changes in the balance of economic power among nations, but it does not tell us about changes in the standard of living.

Reserves

The currency in the bank's vaults plus the balance on its reserve account at a Federal Reserve Bank The currency in a bank's vaults is a reserve to meet its depositors' withdrawals The bank uses its reserve account at the Fed to receive and make payments to other banks and to obtain currency.

Barter

The direct exchange of goods and services for other goods and services, which requires a double coincidence of wants without money, you have barter. money smoothes the mechanism of exchange.

Many forces interact to determine the unemployment rate. Understanding these forces is a challenging task. Economists approach this task in two steps.

The first step is to understand what determines the natural unemployment rate—the unemployment rate when the economy is at full employment. The second step is to understand what makes unemployment fluctuate around the natural unemployment rate. (We take the second step in Chapters 13-15 when we study economic fluctuations.)

Improve the Quality of Education

The free market would produce too little education because it brings social benefits beyond the benefits to the people who receive the education. By funding basic education and by ensuring high standards in skills such as language, mathematics, and science, governments can contribute enormously to a nation's growth potential.

there is always some unemployment

The key reason is that the labor market is constantly churning. New jobs are created and old jobs die; and some people move into the labor force and some move out of it. This churning creates unemployment.

Currency

The notes (bills) and coins we use

Rule of 70

The number of years it takes for the level of any variable to double is approximately 70 divided by the annual percentage growth rate of the variable Ex: Growing at 1 percent a year, real GDP per person doubles in 70 years—an average human life span. But real GDP per person doubles in 35 years if its growth rate is 2 percent a year and in 10 years if its growth rate is 7 percent a year.

Although currency and bank deposits are money, currency inside the banks is not money.

b/c it isn't available as a means of payment You change the form of your money, but there is no change in the quantity of money that you own. Your bank deposit decreases, and your currency holding increases

Securities Loans

bonds issued by the U.S. government and by other organizations (Some bonds have low interest rates and are safe. Some bonds have high interest rates and are risky.) the provision of funds to businesses and individuals. (Loans earn the bank a high interest rate, but they are risky and, even when not very risky, cannot be called in before the agreed date.)

In defining money and describing the things that serve as money today

checks, credit cards, debit cards, and mobile wallets are NOT considered money

Nominal Value

one that is expressed in current dollars price of stamp in 2016 dollars = price of stamp in 1916 dollars x (CPI in 2016/CPI in 1916)

Diminishing Returns

each additional hour of labor employed produces a successively smaller additional amount of real GDP Diminishing returns arise because the quantity of capital (and other factors of production) is fixed. As more labor is hired, the additional output produced decreases because the extra workers have less capital with which to work

Remember, most money is deposits, not currency. What banks create is deposits, and they do so by making loans.

examples in the text

Saving and Investment in Physical Capital

increase the amount of capital per worker and increase labor productivity Labor productivity took a dramatic upturn when the amount of capital per worker increased during the Industrial Revolution production methods that use large amounts of capital per worker, such as auto plant assembly lines, enable workers to be much more productive.

M2

measure of money including M1 plus savings deposits and small time deposits, money market funds, and other deposits Some of the savings deposits in M2 are also instantly convertible into a means of payment BUT NOT ALL Time deposits are deposits that can be withdrawn only after a fixed term. Money market funds are deposits that are invested in short-term securities.

M1

measure of money including currency held by individuals and firms, traveler's checks, and checkable deposits owned by individual and businesses all the components of M1 serve as means of payment.

The lower the real wage rate, the greater is the quantity of labor that firms find it profitable to hire.

real wage rate influences the quantity of labor demanded because what matters to firms is not the number of dollars they pay for an hour of labor (the nominal wage rate) but how much output they must sell to earn those dollars. If an additional hour of labor produces at least as much additional output as the real wage rate, a firm hires that labor. As a firm hires more labor, eventually the extra output from an extra hour of labor equals the real wage rate. (big example under "The Demand for Labor in a Soda Factory")

Current Population Survey

the Bureau of the Census survey 60,000 households and ask a series of questions about the age and labor market status of their members

Federal Open Market Committee

the Fed's main policy-making committee. The FOMC consists of the following twelve members: -The Chair and the other six members of the Board of Governors -The president of the Federal Reserve Bank of New York -Four presidents of the other regional Federal Reserve Banks (on a yearly rotating basis) The FOMC meets approximately every six weeks to review the state of the economy and to decide the actions to be carried out by the New York Fed.

Job Search

the activity of looking for an acceptable vacant job. the constant churning in the labor market means that there are always some people looking for jobs, and these people are part of the unemployed.

The Federal Reserve System (the Fed)

the central bank of the United States A central bank is a public authority that provides banking services to banks and governments and regulates financial institutions and markets. A central bank does not provide banking services to businesses and individual citizens. Its only customers are banks such as Bank of America and Citibank and the U.S. government. The Fed is organized into 12 Federal Reserve districts The Fed's main task is to regulate the interest rate and quantity of money to achieve low and predictable inflation and sustained economic expansion.

Discovery of New Technologies

the discovery of new technologies has made an even greater contribution Since the Industrial Revolution, technological change has become a part of everyday life. To reap the benefits of technological change—to use new technologies to make labor productivity grow—capital must increase.

Nominal Interest Rate

the dollar amount of interest expressed as a percentage of the amount loaned Ex: suppose that you have $1,000 in a bank deposit—a loan by you to a bank—on which you receive interest of $50 a year. The nominal interest rate is $50 as a percentage of $1,000, which is 5 percent a year.

Federal Funds Rate

the interest rate at which banks can borrow and lend reserves in the federal funds market is the central target of the Fed's monetary policy actions

Discount rate

the interest rate at which the Fed stands ready to lend reserves to commercial banks.

Money Multiplier

the number by which a change in the monetary base is multiplied to find the resulting change in the quantity of money. the ratio of the change in the quantity of money to the change in the monetary base. The magnitude of the money multiplier depends on the desired reserve ratio and the currency drain ratio. The smaller are these two ratios, the larger is the money multiplier. The larger the desired reserve ratio and the larger the currency drain ratio, the smaller is the money multiplier. The desired reserve ratio and the currency drain ratio that determine the magnitude of the money multiplier are not constant, so neither is the money multiplier constant.

Quantity of Labor Supplied

the number of labor hours that all the households in the economy plan to work during a given time period at a given real wage rate The real wage rate influences the quantity of labor supplied because what matters to people is not the number of dollars they earn but what those dollars will buy

Open market operations

the purchase or sale of government securities—U.S. Treasury bills and bonds—by the Federal Reserve in the open market When the Fed conducts an open market operation, it makes a transaction with a bank or some other business but it does not transact with the federal government. The New York Fed does this

Labor Productivity

the quantity of real GDP produced by one hour of labor labor productivity = (real GDP / aggregate hours)

Demand for Labor

the relationship between the quantity of labor demanded and the real wage rate when all other influences on firms' hiring plans remain the same We can represent the demand for labor as either a demand schedule or a demand curve.

Supply of Labor

the relationship between the quantity of labor supplied and the real wage rate when all other influences on work plans remain the same. We can represent the supply of labor as either a supply schedule or a supply curve.

Property Rights

the social arrangements that govern the protection of private property Physical, financial, and intellectual property Clearly established and enforced property rights provide people with the incentive to work and save.

Real GDP per person

the standard of living depends on this (also called per capita real GDP) real GDP per person = real GDP / population the contribution of real GDP growth to the change in the standard of living depends on the growth rate of real GDP per person growth rate of real GDP per person = growth rate of real GDP - growth rate of population This formula makes it clear that real GDP per person grows only if real GDP grows faster than the population. If the growth rate of the population exceeds the growth of real GDP, then real GDP per person falls.

Monetary Base

the sum of coins, Federal Reserve notes, and banks' reserves at the Fed.

Classical Growth Theory

the theory that the clash between an exploding population and limited resources will eventually bring economic growth to an end says that labor productivity growth is temporary When labor productivity rises and lifts real GDP per person above the subsistence level, which is the minimum real income needed to maintain life, a population explosion occurs. Eventually, the population grows so large that capital per worker and labor productivity fall and real GDP per person returns to the subsistence level. An old growth theory remains relevant today because some people believe that it might turn out to be correct Closely tied to the Malthusian Theory This dismal implication led to economics being called the dismal science.

Quantity of Labor Demanded

the total labor hours that all the firms in the economy plan to hire during a given time period at a given real wage rate The lower the real wage rate, the greater is the quantity of labor demanded

Working-age Population

the total number of people aged 16 years and over who are not in jail, hospital, or some other form of institutional care or in the U.S. Armed Forces one of two groups within the first category of the survey: the working-age population and others

Economic Freedom

when people are able to make personal choices, their private property is protected by the rule of law, and they are free to buy and sell in markets Impediments to economic freedom are corruption in the courts and government bureaucracy; barriers to trade, such as import bans; high tax rates; stringent regulations on business, such as health, safety, and environmental regulation; restrictions on banks; labor market regulations that limit a firm's ability to hire and lay off workers; and illegal markets, such as those that violate intellectual property rights. No unique political system is necessary to deliver economic freedom No country with a high level of economic freedom is economically poor, but many countries with low levels of economic freedom stagnate.

Demographic Change

An increase in the proportion of the population that is of working age brings an increase in the entry rate into the labor force and an increase in the unemployment rate. (examples in the textbook)

Unit of Account

An agreed-upon measure for stating the prices of goods and services It is the number of movies, cappuccinos, ice-cream cones, or sticks of gum that you must give up to attend the concert. It's easy to do such calculations when all these goods have prices in terms of dollars and cents You need only one calculation to figure out the opportunity cost of any pair of goods and services. (look further into the chapter if you want clarification)

Human Capital Expansion and Choices

All these choices govern the speed at which human capital expands.

Capital Accumulation and Diminishing Marginal Returns

Although saving and investment in additional capital is a source of labor productivity growth, without the expansion of human capital and technological change, it would not bring sustained economic growth Eventually growth would slow and most likely stop. The reason is a fundamental fact about capital known as the law of diminishing marginal returns

Deposits

Deposits at banks, credit unions, savings banks, and savings and loan associations are also money. b/c they can be used to make payments (You can write a check or use your debit card to tell your bank to move some money from your account to someone else's.)

Unemployment Benefits (discussed even further here)

Like said before: The opportunity cost of job search influences the length of time that an unemployed person spends searching for a job Ex: Generous unemployment benefits are a large part of the story of high unemployment rates in Europe and some other countries such as Canada

Money Multiplier Equations

Money = deposits + currency Monetary base = reserves + currency money multiplier = money / monetary base money multiplier = (1 + currency drain ratio)/(desired reserve ratio + currency drain ratio)

Fiat Money

Money in the world today Fiat = decree or order The objects used as money have value only because of their legal status as money.

A Commodity or Token

Money is always something that can be recognized and that can be divided up into small parts

Generally Accepted

Money is generally accepted, which means that it can be used to buy anything and everything Ex: a bus pass is not money. a $5 bill is money.

Labor Force Participation

Most people have productive opportunities outside the labor force and choose to work only if the real wage rate exceeds the value of other productive activities. Ex: does a job pay more than the day care needed for you to work that job The higher the real wage rate, the more likely it is that a parent will choose to work and so the greater is the labor force participation rate.

Labor Market Equilibrium

The price of labor services is the real wage rate. A rise in the real wage rate eliminates a shortage of labor by decreasing the quantity demanded and increasing the quantity supplied. A fall in the real wage rate eliminates a surplus of labor by increasing the quantity demanded and decreasing the quantity supplied. If there is neither a shortage nor a surplus, the labor market is in equilibrium. Ex: if the real wage rate is less than $50 an hour, the quantity of labor demanded exceeds the quantity supplied and there is a shortage of labor. In this situation, the real wage rate rises. If the real wage rate exceeds $50 an hour, the quantity of labor supplied exceeds the quantity demanded and there is a surplus of labor. In this situation, the real wage rate falls.

Desired Currency Holding

The proportion of money held as currency isn't constant but at any given time, people have a definite view as to how much they want to hold in each form of money. when the total quantity of bank deposits increases, so does the quantity of currency that they want to hold. Because desired currency holding increases when deposits increase, currency leaves the banks when loans are made and deposits increase. the leakage of currency from the banking system the currency drain. And we call the ratio of currency to deposits the currency drain ratio. The greater the currency drain ratio, the smaller is the quantity of deposits and money that the banking system can create from a given amount of monetary base. The reason is that as currency drains from the banks, they are left with fewer reserves (and less excess reserves), so they make fewer loans.

Hours per Person

The real wage rate is the opportunity cost of taking leisure and not working. As the opportunity cost of taking leisure rises, other things remaining the same, households choose to work more. But other things don't remain the same. A higher real wage rate brings a higher income, which increases the demand for leisure and encourages less work. So a rise in the real wage rate has two opposing effects. But for most households, the opportunity cost effect is stronger than the income effect, so a rise in the real wage rate brings an increase in the quantity of labor supplied.

Sustained growth of real GDP per person can transform a poor society into a wealthy one.

The reason is that economic growth is like compound interest.

Productivity Curve

The relationship that shows how real GDP per hour of labor changes as the quantity of capital per hour of labor changes (quantity of capital is measured in real dollars) If capital per hour of labor keeps increasing, labor productivity increases by ever smaller amounts and eventually stops rising the effects of the expansion of human capital and the discovery of new technologies and labor productivity: They shift the productivity curve upward. (check picture)

The Data

The share of total income received by the top 1 percent of Americans moved up from 8 percent in 1980 to 18 percent in 2014. Correspondingly, the income shares of lower income groups decreased. The Great Divergence is the reverse of the Great Compression that preceded it. From 1913 to 1980, the income share of the top 1 percent decreased from 18 percent to 8 percent. His data showed that between 1880 and 1950, the share of total income going to the top 5 percent shrank from 31 percent to 20 percent in America and from 46 percent to 24 percent in Britain.

The Monetary Base

The size of the monetary base limits the total quantity of money that the banking system can create because banks have a desired level of reserves and households and firms have a desired level of currency holding and both of these desired holdings of the monetary base depend on the quantity of money.

New Growth Theory

The theory that our unlimited wants will lead is to ever greater productivity and perpetual economic growth According to new growth theory, real GDP per person grows because of the choices people make in the pursuit of profit.

Thrift Institutions

The three types of thrift institutions are savings and loan associations, savings banks, and credit unions. A savings and loan association (S&L) is a financial institution that accepts checkable deposits and savings deposits and that makes personal, commercial, and home-purchase loans. A savings bank is a financial institution that accepts savings deposits and makes mostly consumer and home-purchase loans. (The depositors own some savings banks (called mutual savings banks)) A credit union is a financial institution owned by a social or economic group, such as a firm's employees, that accepts savings deposits and makes mostly consumer loans.

6.1 Labor Market Indicators

--

7.3 Nominal and Real Values

--

The Real Wage Rate

Anything that raises the real wage above the market equilibrium creates a surplus of labor and increases the natural unemployment rate. An efficiency wage is a wage set by firms above the going market wage to attract the most productive workers, get them to work hard, and discourage them from quitting. When firms set efficiency wages, some workers would like to work for these firms but can't get jobs.

Unemployment and Real GDP

At full employment, there is no cyclical unemployment. At a business cycle trough, cyclical unemployment is positive and at a business cycle peak, cyclical unemployment is negative.

The third step uses the numbers you've just calculated to find the CPI for 2010 and 2016.

CPI=Cost of CPI basket at current period prices/ Cost of CPI basket at base period prices × 100.

Natural Unemployment Rate

Natural unemployment as a percentage of the labor force The unemployment rate when all the unemployment is frictional and structural and there is no cyclical unemployment

The Pace of Structural Change

The amount of structural unemployment fluctuates with the pace of technological change. the same jobs using the same machines remain in place for many years. But sometimes a technological upheaval sweeps aside the old ways, wipes out millions of jobs, and makes the skills once used to perform these jobs obsolete.

Classical Macroeconomics

The view that the market economy works well, that aggregate fluctuations are a natural consequence of an expanding economy, and that government intervention cannot improve the efficiency of the market economy Aggregate fluctuations are a natural consequence of an expanding economy with rising living standards, and government intervention can only hinder the ability of the market to allocate resources efficiently Classical macroeconomics fell into disrepute during the Great Depression of the 1930s, a time when many people believed that capitalism, the political system of private ownership, free markets, and democratic political institutions, could not survive and began to advocate socialism, a political system based on state ownership of capital and central economic planning. Classical macroeconomics predicted that the Great Depression would eventually end but offered no method for ending it more quickly.

The CPI Market Basket

This "basket" contains the goods and services represented in the index and the relative importance, or weight, attached to each of them Ex: if the average household spends 2 percent of its income on public transportation, then the CPI places a weight of 2 percent on the prices of bus, subway, and other transit system rides.

Cost of Living Index

a measure of the change in the amount of money that people need to spend to achieve a given standard of living

Inflation Rate

a measure of the percentage change in the price level from one period to the next (equation in textbook)

Great Depression

a period of high unemployment, low incomes, and extreme economic hardship that lasted from 1929 to 1939 By 1933, the worst of the Great Depression years, real GDP had fallen by a huge 30 percent and as the figure shows, one in four of the people who wanted jobs couldn't find them. The horrors of the Great Depression led to the New Deal and shaped political attitudes that persist today big example of unemployment rate

Deflation

a situation in which the price level is falling and the inflation rate is negative

Part Time for Noneconomic Reasons

do not want full-time work and are not available for such work This group includes people with health problems, family or personal responsibilities, or education commitments that limit their availability for work.

To find the cost of the CPI market basket in the base period prices

multiply the quantities in the CPI market basket by the base period prices

Real Wage Rate

the average hourly wage rate measured in the dollars of a given reference base year real wage rate in 2015 = (nominal wage rate in 2015/ CPI in 2015) x 100

Unemployment Rate

the percentage of the labor force that is unemployed The amount of unemployment—the number of people who want jobs but can't find them—is an indicator of unused labor resources. (equation is in the textbook)

Potential GDP (further explained in this chapter)

the value of real GDP when all the economy's factors of production—labor, capital, land, and entrepreneurial ability—are fully employed Because real GDP depends on the quantity of labor employed, potential GDP depends on the production function and the quantity of labor employed

Distortion of Private Contracts

(large example in textbook) CPI bias gives more to workers and takes away from employers who give more because CPI is overinflated and that increases wage too much

6.3 Unemployment and Full Employment

--

8.1 Potential GDP

--

6.2 Labor Market Trends and Fluctuations

-- What do we learn about the U.S. labor market from changes in the unemployment rate, the labor force participation rate, and the alternative measures of unemployment?

Ch. 8: Potential GDP and the Natural Unemployment Rate

-- macroeconomic theory that explains macroeconomic performance and provides the basis for policies that might improve it. Today's theory is a merger of three earlier schools of thought that have contrasting views about the causes of recessions and the best policies for dealing with them

7.1 The Consumer Price Index

-- we need a way of comparing prices in different periods. That's what the Consumer Price Index or CPI enables us to do.

Three alternative measures of the price level that we'll describe here aim to improve on the CPI. These measures are the

-Chained Consumer Price Index (C-CPI) -Personal Consumption Expenditures Price Index (PCEPI) -PCEPI Excluding Food and Energy

The three main schools of macroeconomic thought are:

-Classical macroeconomics -Keynesian macroeconomics -Monetarist macroeconomics

A bias in the CPI has two main undesirable consequences:

-Distortion of private contracts -Increases in government outlays and decreases in taxes

We distinguish among three types of unemployment:

-Frictional unemployment -Structural unemployment -Cyclical unemployment

Three nominal and real variables occupy a central position in macroeconomics:

-Nominal GDP and real GDP -The nominal wage rate and the real wage rate -The nominal interest rate and the real interest rate

Constructing the CPI is a huge operation that costs millions of dollars and involves three stages:

-Selecting the CPI market basket -Conducting the monthly price survey -Calculating the CPI

The natural unemployment rate is influenced by many factors, but the most important ones are

-The age distribution of the population -The pace of structural change -The real wage rate -Unemployment benefits

The three main labor market indicators:

-The unemployment rate - The employment-population ratio -The labor force participation rate

People in the working-age population who by the above criteria are neither employed nor unemployed are classified as not in the labor force.

...

The Current Population Survey measures the number of full-time workers and part-time workers

...

The downward trend in the labor force participation rate that began in 2000 might arise in part from a mismeasurement of unemployment

...

The price of labor services is the wage rate—the income that an hour of labor earns. In macroeconomics, we are interested in economy-wide performance, so we focus on the average hourly wage rate

...

The real wage rate barely changed as the nominal wage rate increased because the nominal wage rate grew at a rate almost equal to the inflation rate. When the effects of inflation are removed from the nominal wage rate, we can see what is happening to the buying power of the average wage rate.

...

The real wage rate is a significant economic variable because it measures the real reward for labor services, which is a major determinant of the standard of living. The real wage rate is also significant because it measures the real cost of labor services, which influences the quantity of labor that firms are willing to hire.

...

we can interpret real GDP in 2016 as nominal GDP in 2016 multiplied by the ratio of a price index in 2009 to its value in 2016

... The price index that we would use is the GDP price index

The survey counts people as UNEMPLOYED who either

1. Had no employment, 2. Were available for work, and either 1. Had made specific efforts to find employment during the previous four weeks or 2. Were waiting to be recalled to a job from which they had been laid off.

The survey counts people as EMPLOYED who either

1. Worked at least 1 hour as paid employees or worked 15 hours or more as unpaid workers in their family business or 2. Were not working but had jobs or businesses from which they were temporarily absent.

Part Time for Economic Reasons

Also called involuntary part-time workers people who work 1 to 34 hours per week but are looking for full-time work unable to find full-time work because of unfavorable business conditions or seasonal decreases in the availability of full-time work.

The Age Distribution of the Population

An economy with a young population has lots of new job seekers every year and a high level of frictional unemployment. An economy with an aging population has fewer new job seekers and less frictional unemployment.

Quality Change Bias

Cars, smartphones, laptops, and many other items get better every year and that adds to the cost To the extent that a price rise is a payment for improved quality, it is not inflation. Again, the BLS does the best job it can to estimate the effects of quality improvements on price changes. But the CPI probably counts too much of any price rise as inflation and so overstates inflation.

Commodity Substitution Bias

Changes in relative prices lead consumers to change the items they buy. People cut back on items that become relatively more costly and increase their consumption of items that become relatively less costly. Ex: Suppose that you switch from carrots to broccoli, spend the same amount on vegetables as before, and get the same enjoyment as before. Your cost of vegetables has not changed. The CPI says that the price of vegetables has increased because it ignores your substitution between goods in the CPI market basket.

Increases in Government Outlays and Decreases in Taxes

Close to a third of federal government outlays are linked directly to the CPI A bias in the CPI would increase all of these expenditures by more than required to compensate for the fall in the buying power of the dollar. The CPI is also used to adjust the income levels at which higher tax rates apply. To the extent that the CPI is biased upward, the tax adjustments over-compensate for rising prices and decrease the amount paid in taxes.

Today's Consensus

Each of the earlier schools provides insights and ingredients that survive in today's consensus. Another component of today's consensus is the view that the long-term problem of economic growth is more important than the short-term problem of recessions Why: Even a small slowdown in economic growth brings a huge cost in terms of a permanently lower level of income per person. This cost is much larger than that arising from the income lost during recessions. But the costs of recessions are serious because they are concentrated on those who are unemployed.

The CPI is not a perfect measure of the cost of living (value of money) for two broad reasons.

First, the CPI does not try to measure all the changes in the cost of living. Second, even those components of the cost of living that are measured by the CPI are not always measured accurately.

It is vital to understand the forces that determine potential GDP for three reasons

First, when the economy is at full employment, real GDP equals potential GDP; so actual real GDP is determined by the same factors that determine potential GDP. Second, real GDP can exceed potential GDP only temporarily as it approaches and then recedes from a business cycle peak. So potential GDP is the sustainable upper limit of production. Third, real GDP fluctuates around potential GDP, which means that on the average over the business cycle, real GDP equals potential GDP.

PCEPI Excluding Food and Energy

Food and energy prices fluctuate much more than other prices and their changes can obscure the underlying trend in the price level. By excluding these highly variable items, the underlying price level and inflation rate can be seen more clearly. The two measures that use current period expenditures, the C-CPI and the PCEPI, are similar.

Because we measure the real wage rate in constant base period dollars, a change in the real wage rate measures the change in the quantity of goods and services that an hour's work can buy.

In contrast, a change in the nominal wage rate measures a combination of a change in the quantity of goods and services that an hour's work can buy and a change in the price level. So the real wage rate removes the effects of inflation from the changes in the nominal wage rate.

The Value of Money

Price level measures have the purpose to measure the cost of living or what amounts to the same thing

Output Gap

Real GDP minus potential GDP expressed as a percentage of potential GDP when the unemployment rate is above the natural unemployment rate, in part (a), the output gap is negative (real GDP is below potential GDP), in part (b); when the unemployment rate is below the natural unemployment rate, the output gap is positive (real GDP is above potential GDP); when the unemployment rate equals the natural unemployment rate, the output gap is zero (real GDP equals potential GDP). Ex: 2016. In that year, the unemployment rate had fallen to equal the natural rate but the output gap was about 2 percent below potential GDP. This discrepancy might arise from errors in estimating the natural unemployment rate and potential GDP.

Reference Base Period

The CPI is defined to equal 100 for a period The current reference base period is 1982-1984 Ex: In May 2016, the CPI was 240.2. This number tells us that the average of the prices paid by urban consumers for a fixed market basket of consumption goods and services was 140.2 percent higher in May 2016 than it was on the average during 1982-1984.

Cyclical Unemployment

The fluctuating unemployment over the business cycle—the higher than normal unemployment at a business cycle trough and the lower than normal unemployment 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.

Why did the labor force participation rate increase in the late 1900s?

The main reason is an increase in the number of women who have entered the labor force. from 1960 to 1999, the participation rate of women increased from 37 percent to 60 percent occurred for four main reasons: First, more women pursued a college education and so increased their earning power. Second, technological change in the workplace created a large number of white-collar jobs with flexible work hours that many women found attractive. Third, technological change in the home increased the time available for paid employment. Fourth, families looked increasingly to a second income to balance tight budgets.

Core Inflation Rate

The percentage change in the PCEPI excluding food and energy

Keynesian Macroeconomics

The view that the market economy is inherently unstable and needs active government intervention to achieve full employment and sustained economic growth That is, too little private spending is the cause of depression (and recession). To counter the problem of too little private spending, government spending must rise. One person, John Maynard Keynes, and his book The General Theory of Employment, Interest, and Money, published in 1936, began this school of thought.

Monetarist Macroeconomics

The view that the market economy works well, that aggregate fluctuations are natural consequence of an expanding economy, but the fluctuations in the quantity of money generate the business cycle (adds to the classical view) slowdown in the growth rate of money brings recession and a large decrease in the quantity of money brought the Great Depression. The view that monetary contractions are the sole source of recessions and depressions is held by few economists today. But the view that the quantity of money plays a role in economic fluctuations is accepted by all economists and is part of today's consensus.

Unemployment Benefits

Unemployment benefits increase the natural unemployment rate by lowering the opportunity cost of job search.

New Goods Bias

We can't compare the same baskets because today's basket wasn't available 10 years ago and the basket of 10 years ago isn't available today. To make comparisons, the BLS tries to measure the price of the service performed by yesterday's goods and today's goods. It is believed that the arrival of new goods puts an upward bias into the CPI and its measure of the inflation rate.

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 growth of online shopping in recent years has provided an alternative to discount stores that makes outlet substitution even easier and potentially makes this source of bias more serious. (example in textbook)

Price Level and Inflation

When the price level rises rapidly, the inflation rate is high; when the price level rises slowly, the inflation rate is low; and when the price level is falling, the inflation rate is negative.

Consumer Price Index

a measure of the average of the prices paid by urban consumers for a fixed market basket of consumption goods and services The Bureau of Labor Statistics (BLS) calculates the CPI every month, and we can use these numbers to compare what the fixed market basket costs this month with what it cost in some previous month or other period. measured by the Consumer Expenditure Survey

Marginally Attached Worker

a person who does not have a job, is available and willing to work, has not made specific efforts to find a job within the previous four weeks, but has looked for work sometime in the recent past Marginally attached workers think of themselves as being in the labor force and unemployed

Discouraged Worker

a person who is similar to an unemployed worker, but who has not made specific efforts to find a job within the previous four weeks because previous unsuccessful attempts were discouraging Other marginally attached workers differ from discouraged workers only in their reasons for not having looked for a job during the previous four weeks Neither the unemployment rate nor the labor force participation rate includes marginally attached workers

Production Function

a relationship that shows the maximum quantity of real GDP that can be produced as the quantity of labor employed changes and all other influences on production remain the same Like the PPF, the production function is a boundary between the attainable and the unattainable displays diminishing returns

Full Employment

a situation in which the unemployment rate equals the natural unemployment rate.

GDP Price Index

an average of the current prices of all the goods and services included in GDP expressed as a percentage of the base year prices The GDP price index in 2009 (the base year) is defined to be 100, so we can interpret real GDP in any year as nominal GDP divided by the GDP price index in that year multiplied by 100. We don't calculate real GDP this way, but we can interpret it this way.

Personal Consumption Expenditures Price Index (PCEPI)

an average of the current prices of the goods and services included in the consumption expenditure component of GDP expressed as a percentage of base year prices PCEPI uses current quantities so, like the C-CPI, it avoids the sources of bias in the CPI.

Price Level

an average of the level of prices during a given period CPI is a measure of the price level

Chained Consumer Price Index

measure of the price level calculated using current month and previous month prices and expenditures called a "chained" CPI because the inflation rate calculated for the current month is linked back, like the links in a chain, to a reference base month. the C-CPI avoids the bias in the CPI It takes account of new goods, quality change, and substitution effects. The only weakness of the C-CPI is that it gets revised several times as the data on recent expenditures get revised.

To find the cost of the CPI market basket in the current period (ex: 2016)

multiply the quantities in the basket by their 2016 prices

You've seen that the official measure of unemployment does not include marginally attached workers and people who work part time for economic reasons. The Bureau of Labor Statistics (BLS) now provides three broader measures of the unemployment rate, known as U-4, U-5, and U-6, that include these wider groups of the jobless.

official unemployment rate (based on the standard definition of unemployment) is called U-3 U-1 is the percentage of the labor force that has been unemployed for 15 weeks or more and is a measure of long-term involuntary unemployment. U-2 is the percentage of the labor force that has been laid off and is another measure of involuntary unemployment.

Real Value

one that is expressed in the dollars of a given year price of stamp in 1916 dollars = price of stamp in 2016 dollars x (CPI in 1916/CPI in 2016)

the quantities of capital, land, and entrepreneurship and the state of technology are fixed. But the quantity of labor is not fixed. It depends on the choices that people make about the allocation of time between work and leisure

real GDP depends on the quantity of labor employed.

The Magnitude of the Bias

the answer was that the CPI overstated inflation by 1.1 percentage points a year. (That is, if the CPI reports that inflation is 3.1 percent a year, most likely inflation is actually 2 percent a year)

Nominal Wage Rate

the average hourly wage rate measured in current dollars

The participation rate of men decreased from 83 percent in 1960 to 70 percent in 2016

the decrease occurred as older men chose to retire earlier. But some arose from job loss at an age at which finding a new job is difficult. Decreased labor force participation of younger men occurred because more remained in school.

Real Interest Rate

the goods and services forgone in interest expressed as a percentage of the amount loaned real interest rate = nominal interest rate - inflation rate When the inflation rate is high, the gap between the real interest rate and nominal interest rate is large.

"new economy"

the high-technology sector driven by the expansion of the Internet—lowered the unemployment rate to below average from 1995 through the early 2000s

Labor Force

the number of people employed plus the number unemployed one of two groups in the second category of the survey that divides the working-age population: those in the labor force and those not in the labor force The third category divides the labor force into two groups: the employed and the unemployed

Employment-population Ratio

the percentage of the people of working age who are employed The number of people of working age who have jobs is an indicator of both the availability of jobs and the degree of match between people's skills and the skills that employers demand. (equation in textbook)

Labor Force Participation Rate

the percentage of the working-age population in the labor force The number of people in the labor force is an indicator of the willingness of working-age people to take jobs (equation in textbook)

During the recessions of 1973-1975, 1981-1982, 1990-1991, and 2008-2009,

the unemployment rate increased.

Frictional Unemployment

the unemployment that arises from people entering and leaving the labor force, from quitting jobs to find better ones, and from the ongoing creation and destruction of jobs—from normal labor turnover. Frictional unemployment is a permanent and healthy phenomenon in a dynamic, growing economy. unending flow of people into and out of the labor force as people move through the stages of life There is also an unending process of job creation and job destruction as new firms are born, firms expand or contract, and some firms fail and go out of business. The 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. both firms and workers spend time searching for what they believe will be the best available match. By this process of search, people can match their own skills and interests with the available jobs and find a satisfying job and a good income.

Structural Unemployment

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 lasts longer than frictional unemployment because workers must retrain and possibly relocate to find a job Structural unemployment is painful, especially for older workers for whom the best available option might be to retire early but with a lower income than they had expected

Potential GDP

the value of real GDP when the economy is at full employment—all the economy's factors of production (labor, capital, land, and entrepreneurial ability) are employed. As the unemployment rate fluctuates around the natural unemployment rate, real GDP fluctuates around potential GDP.

Full-time Workers

those who usually work 35 hours or more a week

Part-time Workers

those who usually work less than 35 hours a week part-time workers are divided into two groups: part time for economic reasons and part time for noneconomic reasons

The Bureau of Labor Statistics uses the data on full-time and part-time status

to measure the slack in the labor market that results from people being underemployed—employed but not able to find as much employment as they would like