Chapter 6

Problems with measuring CPI

doesn't take into account homeland security, life expectancy, crime rates, climate change and other conditions effecting the quality of life.

CPI

(Cost in current period / Cost in base period) x 100

Unemployment rate

# of unemployed/ labor force expressed as a percentage [unemployed/ (employed and unemployed)] X 100

What is real GDP in 2014 if nominal GDP in 2014 is $15,000 billion, the GDP deflator in 2014 is 110, and the GDP deflator in 2010 was 100?

$13,636 billion

Inflation

Increases and decreases of purchasing power A measure of changes in the cost of living caused by: demand factors, supply shocks, and government policy

Labor force

Total number of those employed and unemployed (students, children, retirees, prisoners are NOT counted in the labor force)

Cyclical Unemployment

Unemployment that results from changes in the business cycle. Economic growth slows, recessions and layoffs. Public policy makers can have their greatest impact by keeping the economy on a steady, low inflationary, solid growth path. EX: during a recession

GDP deflator

An index of the average prices for all goods and services in the economy including consumer goods, investment goods, government goods and services and exports it is very broad leaves out imports Great depression was only depression so far

Jennifer just got news that she is getting a 5% raise. However, the Bureau of Labor Statistics just reported that prices are rising by 7%.

Jennifer is losing purchasing power by 2%.

deflation

a decline in overall prices throughout the economy

Disinflation

a reduction in the rate of inflation, still facing inflation but at a declining rate

Seasonal unemployed

a ski instructor looking for work during the summer

When the economy is operating at the natural rate of unemployment:

cyclical unemployment is zero.

Last year the consumer price index (CPI) was 115 and this year's CPI is 125. The rate of inflation is:

8.7%.

Producer Price Index

A measure in the average changes in the prices received by domestic producers for their output.

Consumer Price Index

A measure of the average change in prices paid by consumers for a typical market basket of consumer goods and services. A fixed bundle of goods and services Market basket of current period/ market basket of base year

Unemployed

Do NOT have a job but are available for work and have been actively seeking work for the previous four weeks

Structural Unemployment

Extended periods of unemployment caused by changes in the structure of consumer goods or technology Demand for some products declines and the skills of this industries workers often become obsolete. To find new work these workers must gain new skills/education

Natural rate of Unemployment

Full employment a level of unemployment at which price and wage decisions are consistent inflation rate is equal to people's inflationary expectations cyclical unemployment is zero and there is only Frictional and Structural unemployment

Employed

If they have done any work at all for pay or profit during the survey week Regular full time part-time temporary work (ill, vacation, child care, still count as employed) plus unpaid family members working 15 hours or more

Inflation is caused by?

Increase in aggregated demand or decrease in aggregated supply

Discouraged workers

Individuals that have given up actively looking for work, therefore not counted as unemployed or counted in the labor force.

Real interest rates

Nominal interest rate - inflation

Real wages

Nominal wage - inflation

Actively seeking employment

People who are not employed but want a job are counted as unemployed only if they are?

Frictional Unemployment

Short-term duration of unemployment caused by workers switching jobs, voluntarily for a variety of reasons Taking time to find the right job EX: college grad looking for job

Jennifer did not work during college. She just obtained a bachelor's degree in marketing, and she is now looking for a marketing job in the retail industry. Jennifer is considered:

frictionally unemployed.

Jordan Meadows lost his job as an airline pilot and has not been able to find another job as a pilot. Since he is old enough to be eligible for his pension, he decides to retire and devote himself to caring for his elderly parents, According to the Bureau of Labor Statistics, Jordan is:

not in the labor force.

During the 1970s, when handheld calculators became popular and replaced slide rules in performing computations, workers in the slide rule industry lost their jobs. These workers' unemployment status is:

structural.

Price Level

the absolute level of a price index