Eco 200 – Principles of Macroeconomics Chapter 8: Unemployment and Inflation.

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Presentation transcript:

Eco 200 – Principles of Macroeconomics Chapter 8: Unemployment and Inflation

Business cycle Pattern of rising and falling real GDP

Business cycle

Leading indicators Change before real GDP changes Often provide false indicators of the start of a recession

Coincident indicators Tend to change at the same time as real GDP

Lagging indicators Tend to change after real GDP

Unemployment Unemployment = # unemployed / labor force Labor force = noninstitutionalized residents 16+ years of age who are: Working, or Actively seeking work Labor force (and unemployment statistic) does not include those who are discouraged and have stopped looking for work

Unemployment rate may understate the cost of unemployment to society due to: underemployment, and discouraged workers. May overstate the cost of unemployment due to: the underground economy

Types of unemployment Seasonal – recurring seasonal pattern of unemployment (voluntary unemployment) Frictional – short-term movement between jobs and during first job search (search unemployment) (voluntary unemployment) Structural – due to technological change and/or changing patterns of labor demand (involuntary) Cyclical – due to business cycle (involuntary)

Costs of unemployment GDP gap = potential real GDP – actual real GDP Potential real GDP = GDP that occurs if unemployment rate = natural rate (no cyclical unemployment) Social and psychological costs

Unemployment statistics Unemployment rate is usually higher for women Teenagers have the highest unemployment rates Nonwhites have higher unemployment rates

Inflation Sustained increase in the average level of prices

Costs of inflation Arbitrary redistribution of income and wealth Higher transaction costs Creditors and debtors are affected by unexpected changes in the inflation rate Real interest rate = nominal interest rate minus inflation rate Unexpected inflation harms creditors and benefits debtors

Types of inflation Demand-pull inflation Cost-push inflation Structural inflation (wage-price spiral)

Hyperinflation Extremely high rate of inflation

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