Econ211 -Chap. 26
What does demand-pull inflation mean?
"too much spending chasing too few goods"
What is frictional unemployment?Exs
Consisting of search unemployment and wait unemployment-for workers who are either searching for a job or waiting to take jobs in the near future. Exs: Workers that are in between jobs, seasonal workers laid off temporarily, moving voluntarily from one job to another, workers been fired and seeking reemployment
What is the main measure of inflation in the US?
Consumer Price Index (CPI), compiled by BLS. Gov uses this index to report inflation rates each month and each year.
Is demand-pull or cost-push inflation will have negative GDP gap?
Cost-push = neg GDP gap, potential GDP> actual GDP
What is cyclical unemployment?
Cyclical une results from insufficient demand for goods and services. Unemployment that is caused by a decline in total spending and typically begins in the recession phase. As demand for goods and services decreases, unemployment increases.
With unequal burdens with unemployment, why is Education one?
Less educated workers have higher une rates than workers with more education. Less edu = lower skills
The sacrifice of output from low unemployment rates.
GDP gap
How is CPI calculated?
The CPI reports the price of a "market basket" of some 300 goods and services are typically purchased by a consumer. The composition of the market basket for the CPI is based on spending patterns of urban consumers in a specific period. The BLS updates the composition of the market basket every 2 years so that it reflects the most recent patterns of consumer purchases and captures inflation that consumers are currently experiencing
Why is unemployment an economic problem?
When lose jobs = lose income = you can't spend = manufact products decrease = more peeps lose jobs.
How is demand-pull inflation produced?
When resources are already fully employed, the business sector can't respond to excess demand by expanding output. So the excess demand bids up the prices of the limited output, which produced demand-pull inflation
With unequal burdens with unemployment, why is Occupation one?
Workers in lower-skilled jobs have higher une rates than pro jobs. Bear the brunt of recessions, most businesses keep their high skilled workers during recession
How much of US growth comes from more inputs? Improved productivity?
1/3 more inputs, 2/3 improved productivity
Economists define and measure economic growth as either what 2 things?
1. An ↑ in real GDP occurring over some time period. 2. An ↑ in real GDP per capita occuring over some period of time
Society can increase its real output and income in 2 fundamental ways, what are they?
1. by increasing its inputs of resources(land, labor, capital, entre) 2. by increasing the productivity of those inputs
What is real income?
A measure of the amount of goods and services nominal income can buy; it is the purchasing power of nominal income, or income adjusted to inflation
What happens in the recession phase of the business cycle?
A period of decline in total output, income, and employment. Last 6 months or more. Widespread contraction of business activity in many sectors of the econ. Declines in GDP and increase unemployment.
With unequal burdens with unemployment, why is Race and Ethnicity one?
Afro and Hispanic une rate is higher cuz lower education attainment and greater concentration of lower skilled jobs and discrimination in market place.
What does the CPI also do?
Also uses CPI to adjust SS benefits and income tax brackets for inflation
Alternating rises and declines in the level of economic activity, sometime over several years
Business Cycle
What happens in the peak phase of the business cycle?
Business activity has reached a temporary maximum. The econ is near or at full employment. Level of real output is at or close to capacity. Price level likely to rise too.
What are changes in price level usually caused by?
Caused by an excess of total spending beyond the economy's capacity to produce.
What are the 2 types of inflation?
Demand-Pull Inflation and Cost-Push Inflation
Is demand-pull or cost-push inflation will have positive GDP gap?
Demand-pull = positive GDP gap, where actual GDP > potential GDP
How do demand-pull and cost-push differ in their sustainability?
Demand-pull will continue as long as there is total excess spending. Cost-push is automatically self-limiting-it will die out by itself.
What do the redistribution of effects of inflation depend on?
Depends on if inflation was expected or unexpected
What are the noneconomic costs with cyclical unemployment?
Depression = idleness = loss of skills, loss of self-respect, plummeting moral= some unrest and violence too
How is potential GDP determined?
Determined by assuming that the natural rate of unemployment prevails. The growth of potential GDP is simply projected forward on the basis of the economy's "normal" growth rate of real GDP.
What is the GDP gap? Formula too!
Difference btw actual and potential GDP. GDP gap = actual GDP - potential GDP
How is Real GDP per capita (output) found?
Divide real GDP by the size of the population. The resulting number is compared in percentage terms with the previous period
What is hyperinflation? What do economists agree with this?
Extraordinarily rapid inflation. Agree that it can have devastating effects on real output and employment
What 3 types of people are hurt by unanticipated inflation?
Fixed-Income Receivers, Savers, Creditors
What two types of people are unaffected/helped by inflation?
Flexible-Income Receivers and Debtors
What does Okun's law indicate? What can we calculate with this info?
For every 1 percentage point by which actual unemployment rate exceeds the natural rate, a negative GDP gap of about 2% occurs. -With this info, we can calculate the absolute loss of output associated with any above-natural unemployment rate.
What is the key difference btw structurally unemployed and frictional?
Frictionally une workers have salable skills and live where jobs exist or are able to move to areas where they do. Structurally une workers find it hard to obtain jobs w/o retraining, gaining additional education, or relocating. Frictional is short term; Structural is long term
Why is it difficult to distinguish btw structural, frictional, and cyclical unemployment?
Frictionally unemployed workers have skills and live in area where jobs exist or able to move to do so. Structurally une find it hard to get new jobs w/o retraining or going back to school. Frict is short term and Struct is long term. Cyclical begins in the recession phase, une due to decline in total spending.
How does Cost-push inflation die out on it's own?
Increased per unit costs = decrease supply = lower real output and employment. These decreases constrain further per-unit cost increases. Aka cost-push inflation makes a recession and in a recession, households and businesses concentrate on keeping their resources fully employed, not on pushing up prices of those resources
What two key beginning things does inflation effect?
Inflation distributes a given level of Total Real Income and may also effect an economy's level of Real Output
What is the link with redistribution and inflation?
Inflation redistributes real income from some people to others
What power does inflation reduce? Do all prices rise?
It reduces the "purchasing power" of money.
Why is the NRU a positive percentage when the labor markets are in balance?
It takes time for frictionally une job seekers to find open jobs they can fill. It also take time for the structurally une to achieve skills and geo relocation needed for reemployment
With unequal burdens with unemployment, why is Gender one?
Men more likely to be hired then women
International Comparisons of unemployment rate
Nations have diff NRUs and maybe in diff phases of their business cycles= thats why diff with other nations
If unemployment is above the natural rate, the GDP gap negative or pos?
Neg cuz actual GDP falls short of potential GDP
When is the GDP negative? Positive?
Neg= actual GDP< potential GDP, Positive = actual GDP > potential GDP
What are the consequences of a negative GDP gap?
Negative GDP is when your Real GDP is less than your potential, so it's bad for economic growth cuz it is less than what was expected
Do all prices rise during inflation?
No, it doesn't mean that all prices are rising. Even during rapid inflation, some prices remain relatively constant while others falling.
How have inflation rates been in the US in the last few years?
Not relatively high or low
What are the 6 unequal burdens of unemployment for people?
Occupation, Age, Race and Ethnicity, Gender, Education, Duration
What are the 2 main probs with counting une and e?
Part-time counted as full employed-by counting them as full, it understates unemploy rate. Discouraged workers-not actively seeking work, so not counted as unemployed-BLS understates unemployment prob by not counting them.
What are the 4 phases of the business cycle?
Peak, recession, depression(trough), and expansion.
What happens in the expansion phase of the business cycle?
Period in which real GDP, income, and employment rise. Eventually econ reaches full employment again.
With what 2 things is the growth of Real GDP more useful?
Potential military expansion or political preeminence
In the business cycle phase of expansion, what happens when full employment again and if spending expands more rapidly than production capacity?
Prices of all goods and services will rise = inflation occurs
This is measured broadly as real output per unit of input
Productivity
When does productivity rise?
Rises when the health, training, education, and motivation of workers are improved; when workers have more and better machinery and natural resources with which to work. When production is better organized and managed. When labor is reallocated from less efficient industries to more efficient industries.
With unequal burdens with unemployment, why is Age one?
Teens high une rates then Adults cuz have lower skill levels and quit jobs more frequently.
What factors make it difficult to determine the unemployment rate?
The BLS lists Part-time workers as being fully employed, thus understating the amount of unemployment. Discouraged workers are not counted as unemployed, so this also understates the unemployment rate. Can be confusing because the labor force includes those who are employed and those who are unemployed but actively seeking work and are capable of work. Also can be a lil confusing with frictional and structural unemployment.
When inflation is rapid and sustained, what is the cause of it?
The cause is the overissuance of money by the central bank (aka FED)
What do most economists believe is the main reason why fluctuations in business activities occur?
The cause of cyclical changes in levels of real output and employment is changes in the level of total spending. Also casual factors, such as major innovations, political events, and money creation
What is deflation? Who is helped/hurt?
The effects of unanticipated deflation-declines in the price level- are the reverse of inflation. Those hurt by inflation will be helped by deflation and vice versa
Why is growth a widely held economic goal?
The expansion of total output relative to population results in rising real wages and incomes and thus higher standards of living. An economy experiencing growth is better able to meet people's wants and resolve socioeconomic problems
With unequal burdens with unemployment, why is Duration one?
The number of persons unemployed for long periods is lower % in the labor force then overall unemployment rate. pg.133
What happens in the depression(trough) phase of the business cycle?
Trough of a recession, output and employment "bottom out" at their lowest levels. Short lived or long
What are the 3 main groups with une and e?
Under 16 or Institutionalized, Not in Labor Force-potential workers actively seeking work, Labor force-those employed and those unemployed actively seeking work are counted
What is the problem with having a positive GDP gap?
When actual GDP > potential GDP for some time, positive GDP gap creates inflationary pressures and cannot be sustained indefinitely
When is the economy fully employed?
When it is experiencing only frictional and structural une, no cyclical. Full employment is something less than 100 percent employment of the labor force.
What is inflation?
a rise in the general level of prices. When inflation occurs, each dollar of income will buy fewer goods and services than before.
With the business cycle, if spending increases , what results?
an increase in production becomes profitable, and output, employment, and incomes all rise. Continued increase spending may raise price level cuz limited amount of goods available.
How is economic growth calculated?
as a percentage rate of growth per quarter(3 month) or per year.
What does cost-push inflation explain?
explains rising prices in terms of factors that raise per-unit production costs at each level of spending.
What is the basic economic cost of unemployment? aka GDP gap
forgone output. When econ fails to create enough jobs for all willing to work, potential production of goods is lost.
What is structural unemployment?
frictional une fits in this category. Changes in time in consumer demand and technology alter both the demand for labor Occupationally(demand of certain skills) and Geographically(moving to better place of work). May go back to school to learn skills or wait for geographic switch and move there = structurally unemployed
What are the 3 types of unemployment?
frictional, structural, and cyclical
Economists describe the unemployment rate that is consistent with full employment as what?
full-employment rate of unemployment or NRU (natural rate of unemployment). At the NRU, economy is producing its potential output = the real GDP that occurs when the econ is fully employed.
In the business cycle, what happens when the econ reaches near full employment?
further gains in real output difficult to achieve
During inflation, when is real income affected?
if the change in price level differs from the change in a person's nominal income.
What is unanticipated inflation?
inflation whose full extent was not expected
What can happen is inflation is anticipated inflation?
it is fully expected, so an income receiver may be able to avoid or lessen the adverse effects of inflation and real income
Ex: if the price level rises by 6% and Bob's nominal income increases by 6%, is his real income changed or unchanged
it remains unchanged.
Ex: If Bob's nominal income rises by 2% and the price level rises 6%, what will happen to his real income?
it will decline by 4%
Ex: if Bob's income rises by 10% and price level rises 6%, then what will happen to his real income?
it will increase by 4%
With Okun's Law, we discover that sometimes an econ's actual output will exceed what?
its potential or full potential.
With the business cycle, if total spending sinks, many businesses find that producing their current volume of goods and services is no longer profitable, what else happens?
output, employ, and incomes all fall.
How long do business cycles last?
sometime over several years
What is the major source of cost-push inflation?
supply shocks- abrupt increases in the costs of raw materials or energy inputs have on occasion driven up per-unit production costs and thus product prices.
What is a per-unit production cost?
the average cost of a particular level of output. This average cost is found by dividing the total cost of all resource inputs by the amount of output produced.
Compared with NRU, what happens when cyclical une occurs?
the economy has much more une than that which would occur at the NRU. The econ can operate for a while at an une rate below the NRU. Thus, the une rate temporarily falls below natural rate.
What is nominal income?
the number of dollars received as wages, rent, interest, or profits.
When does NRU(natural rate of unemployment) occur?
the number of job seekers = the number of job vacancies.
What is the only way to determine the difference btw demand-pull and cost-push?
the original source of inflation must be known. Thus, gov and Fed maybe slow to undertake policies to reduce excessive total spending
What is the nominal interest rate?
the percentage increase in money that the borrower pays the lender, including that resulting from the built-in expectation of inflation, if any
What is the real interest rate?
the percentage increase in purchasing power that the borrower pays the lender
With Inflation, the effect of output depends on what?
the type of inflation and its severity
Overall real income is aka
total purchasing power
With the equation for real income, how does real income remain the same?
when nominal income rises at the same percentage rate as the price index. real income = nominal income/price index