ECON 100 Lecture 23 Monday, December 8

Announcements Solutions to PS#9 posted on course webpage. PS#10 to be posted later in the week. Webpage : https://ais.ku.edu.tr/course/25089/Default.html

Measuring the cost of living: Inflation Last lecture Measuring the cost of living: Inflation

October 2014 Consumer Price Index (CPI) increased by 1 October 2014 Consumer Price Index (CPI) increased by 1.90% in October 2014 CPI increased by 8.96 % over the last 12 months. http://www.turkstat.gov.tr/PreHaberBultenleri.do?id=16135

Annual inflation rate Turkey October 2014 April 2013 From October 2013 to October 2014 the over all price level has increased by 8.96%.

Inflation, the inflation rate, the Consumer Price Index Inflation refers to a situation in which the economy’s “overall price level” is rising. The inflation rate is the percentage change in “the overall price level” from the previous period. Economists measure the overall price level by the Consumer Price Index (CPI), and the rate of inflation by the percentage change in the CPI over a given period of time.

THE CONSUMER PRICE INDEX The consumer price index (CPI) is a measure of the overall cost of the fixed basket of goods and services bought by a typical consumer. Tüketici Fiyat Endeksi (TÜFE) is computed and reported by the Türkiye İstatistik Kurumu (TÜİK) at the end of each month.

How do we calculate the CPI?

How the Consumer Price Index Is Calculated Fix the Basket: Survey consumers to determine the basket of goods and services bought by the typical consumer. TUIK conducts regular consumer surveys to identify the basket of goods and services “the typical consumer” buys.

TUFE (Turkish CPI) weights: 2010 for 2012 see http://www. tuik. gov

Answer these…

Q1 What basket of goods is used to construct the CPI? a. a random sample of all goods and services produced in the economy b. the goods and services that are typically bought by consumers as determined by government surveys c. only food, clothing, transportation, entertainment, and education the least expensive and the most expensive goods and services in each major category of consumer expenditures ANSWER: B

Q2 In the calculation of the CPI, coffee is given greater weight than tea if a. The typical consumer buys more coffee than tea. b. the price of coffee is higher than the price of tea. c. it costs more to produce coffee than it costs to produce tea. coffee is more readily available than is tea to the typical consumer. ANSWER: A

How the Consumer Price Index Is Calculated Find the Prices: Find the prices of each of the goods and services in the basket for each month.

How the Consumer Price Index Is Calculated Compute the Basket’s Cost: Use the data on prices to calculate the cost of the basket of goods and services for each month.

How the Consumer Price Index Is Calculated Compute the Index: Choose a year as the base year. The base year becomes the benchmark against which other years will be compared. To compute the index for a given year, say 2013, divide the cost of the basket in year 2013 by the cost of the basket in the base year then multiply by 100.

How the Inflation rate is computed Compute the inflation rate: The inflation rate in a given period is the percentage change in the consumer price index (CPI) from the period before.

Comparing prices: now and then

Correcting Variables for Inflation: Comparing dollar/lira figures from different times Inflation makes it harder to compare dollar/lira amounts from different times. We use the CPI to adjust figures so that they can be compared.

Formula for comparing prices from different years Pnow = 4.5TL P15 years ago = 0.60TL CPInow = 900 CPI15 years ago = 150 FORMULA: Price15 years ago x [CPInow/CPI15 years ago] If the price you computed with the formula is lower than Pnow then the good is more expensive now than it was 15 years ago. Source of data: Bureau of Labor Statistics, www.bls.gov

A C T I V E L E A R N I N G: Exercise Are minimum wage earners better off in 2014 or in 2008? Jan - June, before tax and deductions Jan - June, after tax and deductions July - Dec, before tax and deductions July - Dec, after tax and deductions YEAR Minimum wage, Turkey 2008 - 2014

Q3 A C T I V E L E A R N I N G: Exercise January 2008: CPI = 12796; after tax minimum wage : 481,55 TL October 2014: CPI = 21629; after tax minimum wage : 891 TL Are minimum wage earners better off today than in January 2008?

Here is the answer

A C T I V E L E A R N I N G: Exercise We ask the following min wage in 2014/ min wage in 2008 >? CPI in 2014/CPI in 2008 Formula = min wage in Jan 2008 x [CPINov2014/CPIJan2008] CPINov2014/CPIJan2008 = 21629/12796 = 1.70 Formula = 481.55TL x 1.70 = 818TL Min wage 2014 November is 891TL

The final application is…

Real vs. Nominal Interest Rates The nominal interest rate is the rate of growth in the TL value of your deposit. Deposit 1000TL in the bank, in one year you will get 1088.5TL. The nominal interest rate is not corrected for inflation.

Real vs. Nominal Interest Rates The real interest rate is corrected for inflation The real interest rate is the rate of growth in the purchasing power of your deposit. Put 1000TL and you will get 1088.50TL at the end of one year. Can you buy more stuff with 1088.50TL one year later than what you can buy with1000TL now?

If the nominal interest rate and the rate of inflation are both small (in the 5 to 10% range), then we can use the following formula as an approximation: Real interest rate = (nominal interest rate) – (inflation rate)

EXAMPLE Real and Nominal Interest Rates Put 1,000TL in the bank for one year. Nominal interest rate is 9%. Yearly inflation is 3.5%. Real interest rate = Nominal interest rate – rate of Inflation = 9.0% – 3.5% = 5.5% The purchasing power of the 1,000TL deposit has grown 5.5%. 31

Very difficult exercise! Your turn now Very difficult exercise!

18/10/2012 Perşembe Faiz Düştü Düşmesine de http://www. mahfiegilmez Türkiye'de brüt nominal mevduat faizi ortalama yüzde 8,5. Bunun vergisi yüzde 15. Bu durumda net nominal faiz yüzde 7,2 oluyor. “In Turkey, the before-tax nominal interest rates on deposits is around 8,5%. There is 15% tax on interest income. So, the nominal after tax interest rate is about 7.2%.”

Q4 Suppose in October 2012 you deposited 1000TL in the bank for one year. What is the real interest rate? CPI in October 2012: 18428,49 CPI in October 2013: 19849,69

Real and nominal interest rates in Turkey

Your turn now

Q5 The consumer price index was 225 in 2006 and 234 in 2007. The nominal interest rate during this period was 6.5 percent. What was the real interest rate during this period? a. 2.5 percent b. 4.0 percent c. 7.5 percent d. 10.5 percent ANWER: A

End of PART 1

Describing Unemployment Three Basic Questions How does government measure the economy’s rate of unemployment? What problems arise in interpreting the unemployment data? How long are the unemployed typically without work?

Unemployment: Definitions and measurement

Labor Force Statistics Produced by Türkiye İstatistik Kurumu (TÜİK) Regular surveys of households, interviews with “adult population” (15 years or older). Most current report is issued on November 17 2014 Örnek hanehalklarında yaşayan 15 ve daha yukarı yaştaki toplam 95 bin 578 fert ile görüşülmüştür. 95,578 persons aged 15 and over from the sample households were interviewed in this period.

Labor Force Statistics The adult population (15 or older) is divided into 3 groups: employed: paid employees, self-employed, and unpaid workers in a family business. unemployed: not working now but have looked for work during previous 3 months. (4 weeks in Europe and US) not in the labor force: everyone else in the adult population. Labor force is 1 + 2: It is the sum of the employed and unemployed workers. (Labor force = employed + job searchers).

The two very important statistics are The unemployment rate (u-rate) The labor force participation rate (LFPR)

Labor Force Statistics Unemployment rate (the “u-rate”): % of the labor force that is unemployed u-rate # of unemployed labor force = 100 x Labor force participation rate: % of the adult population that is in the labor force labor force participation rate labor force adult population = 100 x Labor force = the sum of the employed and unemployed. (employed + job searchers) .

Most recent unemployment figures for Turkey August 2014

TUIK, Household Labour Force, August 2014 Unemployment rate realized as 10.1% Number of unemployed persons aged 15 years old and over has realized as 2 million 944 thousand persons in the period of August 2014 in Turkey. Unemployment rate realized as 10.1%. Labour force participation rate realized as 51.2% Labour force participation rate (LFPR) realized as 51.2% with 29 million 257 thousand persons in the period of August 2014 in Turkey. LFPR realized as 72.1% for male and 30.9% for female.

Labor Force Statistics Turkey August 2014 0. Adult population 57,098,000 Employed 26,313,000 Unemployed 2,944,000 Labor force 29,257,000

The breakdown of the adult population in August 2014 Employed (26.3 million) Adult Population (57.1 million) Labour Force (29.3 million) Unemployed (2.9 million) Not in the labor force (27.8 million)

The important definitions, one more time Self-test The important definitions, one more time

Q6, answer: E The unemployment rate is computed as the number of individuals seeking work divided by the number of employed individuals. the number of employed individuals minus the number of individuals seeking work. the number of individuals seeking work divided by the total population. the fraction of those individuals seeking work who fail to find a job in a certain time period. the number of individuals seeking work divided by the sum of employed individuals and those seeking work.

Q7, answer: D The labor force participation rate is calculated as the number of individuals seeking work divided by the number employed. the fraction of the working age population that is employed. the fraction of the labor force that is seeking work. the fraction of the working age population that is employed or seeking work. the fraction of the working age population that is seeking work.

These are the 2012 figures (Turkey) Q8. Please compute the unemployment rate and the labor force participation rate. Employed 24,760,000 Unemployed 2,790,000 Adult population 55,162,000

Unemployment rate 2013 - 2014

Unemployment rate 1988 – 2012

Labor force participation rates in Turkey

Labor force participation, Turkey, 1988-2006 Year LFPR Agriculture

Labor force participation rates, selected countries, 2005

End of the lecture