HOW ELSE CAN YOU MEASURE AN ECONOMY’S HEALTH? Unemployment and Inflation

Basic Laborious terms  Labor Force:  # of people employed + # of people unemployed Doesn’t include: Students, kids, retired people, the homeless 

Who’s “employed”?  ≥ 16 years with a job  Must work 1 hour per week  ≥ 16 years w/o a job  Actively searching for a job EMPLOYED UNEMPLOYED

How do you calculate… # unemployed _______________________ # of people in the labor force (unemployed + employed) # people in labor force __________________ total population Unemployment Rate Labor Force Participation Rate

LABOR FORCE INDICATORS (2005)

4 TYPES OF UNEMPLOYMENT  Frictional  Voluntarily between jobs College graduates  PBJ is healthy and natural!  Structural  Mismatch of skills Don’t have technology skills

4 TYPES OF UNEMPLOYMENT  Cyclical  Increases during a recession  Decreases during an expansion  Seasonal  Changes due to weather

Other workers…  Willing and able to work, but become so frustrated that they stop trying  Claim to be unemployed in order to receive unemployment benefits even when they don’t want job or receive money elsewhere. Discouraged Workers Dishonest Workers

Unemployment and Recessions The average unemployment rate was 5.9%

What do economists strive for?  Some unemployment is a good thing  Frictional unemployment is expected  Too much unemployment is a bad thing  OKUN’S LAW: for every one percentage increase in unemployment rate, output (GDP) falls by 2-3 percentage points

FULL EMPLOYMENT AKA THE NATURAL RATE OF UNEMPLOYMENT  When there is no cyclical unemployment  Full potential!  4-5%

THE NATURAL RATE Cyclical unemployment is shown by the shaded regions.

Practice Problems over GPD/Unemployment  Which of the following are included in the calculation of GDP? Which category?  A new stock purchased from Apple  The money received from babysitting a neighbor  An IPOD purchased for your mom’s birthday  The Ford’s leftover on a lot at the end of the year  The tire used to make your bike  The government builds a new highway  Clothing purchased from China

Calculating Unemployment 1. What is the formula for calculating the unemployment rate? Labor force participation rate? 2. If given the following circumstances, what is the unemployment rate? Labor force participation?  1000 people (the population)  475 civilians employed  200 full-time students  100 stay-at home parents  25 active job seekers

What is occurring in Bolivia in the 1980s? Why is this occurring? How does it affect its citizens? The Causes and Effects

HOW DO YOU CALCULATE INFLATION? The Consumer Price Index

Consumer Price Index  Measures the average price of goods that urban consumers buy  400 consumer goods and services  Can be from abroad

What’s in the CPI?

Calculating CPI: Base Year Prices CommodityQuantity2005 per unit priceTotal Oranges10$1$10 Haircuts5$8$40 Total cost of Market Basket ---- $50 1.Calculate the total market basket of one year by multiplying Quantity X 2005 per commodity price, then adding both commodities together MARKET BASKET/BASE YEAR

Calculating CPI: 2006 CommodityQuantity2006 per unit priceTotal Oranges10$2$20 Haircuts5$10$50 Total cost of Market Basket ---- $70 1.Calculate the total market basket of 2006 by multiplying Quantity X 2006 per commodity price, then adding both commodities together MARKET BASKET

How do we Calculate CPI? Cost of current price Cost of CPI base price x 100 CommodityQuantity2005 per unit priceTotal Oranges10$1$10 Haircuts5$8$40 Total cost of Market Basket ---- $50

How do we Calculate Inflation? CPI current  CPI previous CPI previous x 100 Inflation rate = Inflation = = 20 X 100 = 40%50

What’s the Inflation Rate? CommodityQuantity1993 per unit price1994 per unit price Food4 units$7$5 Clothing5 units$5$8 Shelter3 units$9$20 1. What is the market basket total for 1993? 2. What is the market basket total for 1994? 3. What is the inflation rate between the two years? 4. How do you think this inflation would affect people earning a fixed income?

Inflation is the gradual increase of prices (from CPI) Inflation CPI in current year  CPI in previous year CPI in previous year x 100 Inflation rate =

The Types and Causes of Inflation $$$  Demand Pull Inflation:  Rightward shift of the demand curve  Excess demand for products causing shortages “Too much money chasing too few goods!” Caused by printing too much money  Cost Push Inflation:  Leftward shift of the supply curve Caused by high input costs 1970s  high price of oil

The effects of inflation…  If there is inflation… these people are affected in the following ways: HurtUnaffectedHelped Fixed income receivers Savers Lenders * Decrease in purchasing power Flexible income receivers Borrowers

To protect against inflation:  Lenders add an inflation premium: *Nominal interest rate (what we pay) = real interest rate + expected inflation  Firms add the COLA (Cost of Living Adjustment) calculated from the CPI *Real income= nominal income/price index

What roles do interest rates play in the health of economies?  Interest Rates: the price of money  Interest rates can affect the way people behave A high nominal interest rate encourages people to save more A low nominal interest rate encourages people to take out more loans