Unemployment and Inflation Chapter 9 McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/IrwinCopyright © 2015 by McGraw-Hill Education. All rights reserved.

Unemployment I. Unemployment 1. Definitions: (i) Population = number of people living in Thailand. - Thailand (2014) = million Source: (ii) Population can be divided into two groups: million (a) Working-age population  15 years of age and older. - Thailand (2014) = million (b) Below 15 years of age. - Thailand (2014) = million Source: LO2

(iii) Working age population can be divided into two groups: million (a) In the labor force - Thailand (2014) = million (b) Not in the labor force - Thailand (2014) = million Source: (iv) Labor force can be divided into two groups: million (a) Employed  full-time or part-time. - Thailand (2014) = million (b) Unemployed  no work, and actively looking. - Thailand (2014) = million Source: Unemployment

2. Diagram to link all definitions: Unemployed 3. Unemployment rate = * 100 Labor Force

Caution! II. Shortcomings of Unemployment Rates 1. Does not distinguish between Full-time versus Part-time jobs 2. Does not measure discouraged workers

III. Types of Unemployment 1. Frictional unemployment - Individuals searching for jobs or waiting to take jobs soon. - Example: Workers to do not like their jobs and quit. 2. Structural unemployment - Occurs due to changes in the structure of the demand for labor - Example: Computer diskette workers lose their jobs to USB key workers. 3. Cyclical unemployment - Caused by the recession phase of the economy. - Example: Recession in 1997 in Thailand, recession in 2008 in the United States. Types of Unemployment

Definition of Full Employment IV. Natural Rate of Unemployment 1. Regardless of how well the economy is doing, unemployment will always exist. 2. The natural rate of unemployment, NRU, is the sum of the _________________________ + _______________________ rates. - Thailand: ??? ___________________, Canada: Around 7%. 3. Actual unemployment can be above or fall below the NRU. 4. If the actual unemployment rate is equal to the NRU, then the economy is at full-employment, producing potential GDP = Yp. LO3

Okun’s Law V. Okun’s Law 1. What happens when the actual unemployment rate is not equal to the NRU? 2. If actual Un > NRU, we expect a (weak, strong) economy. 3. If actual Un < NRU, we expect a (weak, strong) economy. 4. But by how much? 5. Okun’s Law: (Actual Un – NRU) = (%ΔY - %ΔYp) - Example 1: - Example 2:

Inflation VI. Inflation 1. Inflation is defined as the percentage change in the general price levels over a period of time (can be monthly, quarterly, yearly). The equation for percentage change is: % change in prices = inflation rate = (Price index new – Price index old ) *100 Price index old 2. The price index can be from Chapter 7, the nominal GDP divided by real GDP *100 (which is called GDP deflator). 3. The price index can also be something called Consumer Price Index (CPI).

Consumer Price Index (CPI) VII. CPI 1.CPI only concentrates on consumer goods, C, such as food and cosmetics, and excludes goods and services bought by I, G, NX. 2. CPI examines a basket of goods and services that a typical consumer consumes, holds the product types and quantities fixed, and then evaluate how much more (or less) this basket costs over time. 3. The components inside the basket are revised only once every few years.

Consumer Price Index (CPI) 4. Thailand’s CPI Source:

Consumer Price Index (CPI) LO2 CPI Expenditure in new year Expenditure in base year = x A numerical example: Base year Qty Prices Qty Prices Qty Prices Food 10 $50 $55$60 Phones 1 $100 $110$120 Movies 2 $10 $11$12 Expenditure:

Redistribution Effects of Inflation VIII. Why does Inflation matter? 1. Inflation negatively affects fixed income earners - Nominal income = money income, such as 1,000 baht per day. - What we can buy with nominal income depends on inflation. - The higher the inflation rate, the less we buy. - How much we can buy with the 1,000 baht is real income. - In general, - Example: Money income rises by 10%, prices rise by 7%, our real income or purchasing power rises by _______%. Percentage change in real income  Percentage change in nominal income Percentage change in price level LO3

Redistribution Effects of Inflation LO3 2. Inflation affects borrowers and lenders - Suppose you borrowed 100 baht in 2005, CPI= You buy 1 unit of good (gift basket) that costs 100 baht. - You promised to pay back (to the bank or your friend) 105 in This is equivalent to 5% interest (nominal interest rate). - Suppose the CPI in 2006 turned out to be Is the lender gaining or losing from this deal, and by how much? - In general, real interest rate  nominal interest rate – inflation rate - Extend from one person to one country: Countries with high inflation rates will have a difficult time borrowing money in the international markets. It will also be expensive (high interest rates) to borrow.