Econ 101 Test #2

Zero Unemployment

A condition that will never exist. Since there will always be frictional unemployment, we will never see zero unemployment.

Seasonal Unemployment

A type of unemployment that results from employment that is seasonal in nature. For example, a ski instructor will likely be unemployed during the summer month, and many life guards will likely be unemployed during the winter.

Full Employment

The economic state that exists when the unemployment rate equals the "Full Employment" Unemployment Rate.

Where would disinflation fit into (the previous) question 5?

During periods of disinflation, the rate of inflation is positive, but it is slowing down. That is, the price level is still rising, but at a slower rate than during the previous period.

Explain the difference between GDP and GNP

GDP measures the value of good and services produced within a country's borders, while GNP measures the value of goods and service produced by a country's citizens. Both measurements are used to gage the aggregate level of economic activity in a country.

In the context of economic definitions of the labor force, employment and unemployment, explain why some people who are not working, are not counted as unemployed. Also explain where people who are known as discouraged workers fit within this classification system.

In order to be classified as unemployed, you must be both: A. Part of the workforce B. Not employed People who are not employed and not part of the workforce only meet one of the two criteria. For this reason these people would not be considered unemployed. Discouraged workers are people who are no longer part of the workforce because they are no longer looking for work. Discouraged Workers are people who often have been looking for work for a long time, and have not been successful in finding a job that meets their pay requirements, or because they do not have the skills for the jobs available. If however, things improved in the labor market, they might return to look for employment. For this reason, some economists believe that Discouraged Workers should not be counted as Out-of-Workforce, because they represent people who truly want to work, but have just given up.

What does the natural rate of unemployment represent?

The Natural Rate of Unemployment is the rate of unemployment below which unemployment cannot go. (There will always be some unemployed workers.) The Natural Rate of unemployment is equal to Structural Unemployment (if there is any) and Frictional Unemployment, the type of unemployment that will never go away. The Natural Rate of Unemployment is the other side of the coin to full employment (zero cyclical unemployment).

Who is counted in the civilian non-institutionalized population?

The civilian non-institutionalized population includes people over the age of 16 who are not in the military, or not otherwise institutionalized. This population includes people who are both in the workforce and out of the workforce.

What is the official definition of a recession?

The official definition of a recession is whenever the Business Cycle Dating Committee of the National Bureau of Economic Research says the economy experienced a recession. The two cycles of negative growth rule of thumb is commonly reported, but incorrect, because the Business Cycle dating committee considers other factors and macroeconomic measures, including the unemployment rate, factory orders, consumer confidence, etc.

Which methods are available to us for making international comparisons of GDP across countries, and why might we want to pick one over another?

The two methods available to us when making international comparisons of GDP are GDP based on market exchange rates, and GDP based on Purchasing Power Parity. GDP based on market exchange rates will be effected by changes in a country's exchange rate throughout the year, and does not account for differences in purchasing power that may occur between two countries. Therefore, GDP calculated on the basis of Purchasing Power Parity would be the preferred approach because it does provide us with a more accurate idea of the standard of living people in different countries enjoy.

Structural Unemployment

Unemployment caused by changes in the structure of demand for consumer goods and the technology used to produce those goods. (Workers who are unemployed either because their skills are not demanded by employers or because they lack sufficient skills in the current economy to obtain employment.)

Cyclical Unemployment

Unemployment caused by insufficient aggregate expenditures. (Unemployment caused by a downturn in the business cycle.)

Describe what is happening to the price level when we move from a period of inflation, to a period deflation?

When moving from a period of inflation to a period of deflation, we would first observe a slow down in the rate of increase in the price level, to a period in which the price level is decreasing. We call the period when we move from large increases in the price level, to small increases in the price level disinflation. Once the price level is declining, the economy would be entering a period of deflation.