1. INFLATION AND UNEMPLOYMENT - IS THERE A CORRELATION? 1 © Council for Economic Education

2. Inflation Unemployment Correlation What are the prices of goods and services today? How much are you paid for work you do? What do you know about prices your parents paid for goods and services when they were younger? What do you know about how much your parents were paid for work when they were your age? 2 © Council for Economic Education

3. Inflation Unemployment Correlation Inflation – A rise in the general or average price level of all the goods and services produced in an economy http://www.econedlink.org/interactives/index.p hp?iid=205 3 © Council for Economic Education

4. Inflation Unemployment Correlation Unemployment – The number of people 16 years old and up who are without jobs and are actively seeking work 4 © Council for Economic Education

5. Inflation Unemployment Correlation David is a 29 year old male. He does not work. He plays video games 8 hours a day and lives in the basement of his parent’s home. He has not filled out a job application in 6 months. Is David counted as unemployed? Martha is a 34 and is a stay at home mom. She does not work for pay outside the home. Is Martha counted as unemployed? Jennifer is a 19 year old female and works part time at the pizza parlor. Is Jennifer counted as unemployed? Walter is a 45 year old male and is not working. He has submitted his resume to two firms this week. Is Walter counted as unemployed? Ask the students to provide additional examples of those included and excluded from the unemployment statistics. 5 © Council for Economic Education

6. Inflation Unemployment Correlation Positive Relationships Variables move in the same direction: As one variable increases, the other variable increases or as one variable decrease, the other variable decreases Negative (Inverse) Relationships Variables move in the opposite direction: As one variable increases, the other variable decreases 6 © Council for Economic Education

7. Inflation Unemployment Correlation Phillips curve http://www.econedlink.org/lessons/docs_lesso ns/850_T12.pdf 7 © Council for Economic Education

8. Inflation Unemployment Correlation What do you notice about the graph in years 1964 through 1969? What kind of relationship is depicted by the Phillips curve? What is meant by a negative relationship? 8 © Council for Economic Education

9. Inflation Unemployment Correlation Rules of Correlation (r): Correlation (r) represents the relationship between two variables Correlation (r) can only be between 1 and -1 Strong correlations are closer to 1 or -1, while weak correlations are closer to 0. 9 © Council for Economic Education

10. Inflation Unemployment Correlation 1980’s 10 Open Excel and enter 1980s data as shown below DateUnemployment RateInflation Rate 19807.213.5 19817.610.4 19829.76.2 19839.63.2 19847.54.4 19857.23.5 198671.9 19876.23.6 19885.54.1 19895.34.8 © Council for Economic Education

11. Inflation Unemployment Correlation To produce a scatter plot select the area containing unemployment and inflation Click on insert Choose scatter, hover to show then select option for Scatter with only Markers Click on chart Under chart tools, go to layout, select Chart Title, then Above Chart and change label from “Unemployment” to “1980s” Then click on Axis Title, select Primary Horizontal Axis Title, then Title Below Axis rename title to “Inflation” Then click on Axis Title, select Primary Vertical Axis Title, then Rotated Title and rename title to “Unemployment” To find the regression line and its equation, click on chart, go to layout, choose Trendlines, scroll down to more trend line options, choose linear, automatic, and display equation on chart, hit close Select and move equation to side To find the correlation (r), click on Data, then Data Analysis, scroll down and select Regression. Hit OK. Click into the input Y range box, then go back to spreadsheet and select the Unemployment data column of information. Click into the input X range box, then go back to the spreadsheet and select the CPI/Inflation data column of information. Hit OK and review summary data, multiple R is your correlation coefficient (r) 11 © Council for Economic Education

12. Inflation Unemployment Correlation 12 What type of relationship exists in the decade? Is this a strong, medium or weak correlation? 1980s Data Analysis SUMMARY OUTPUT Regression Statistics Multiple R0.08 R Square0.01 Adjusted R Square-0.12 Standard Error1.57 Observations10 © Council for Economic Education

13. Inflation Unemployment Correlation 13 1990s data DateUnemployment RateInflation Rate 19905.65.4 19916.94.2 19927.53.0 19936.93.0 19946.12.6 19955.62.8 19965.42.9 19974.92.3 19984.51.5 19994.22.2 © Council for Economic Education

14. Inflation Unemployment Correlation 14 What type of relationship exists in the decade? Is this a strong, medium or weak correlation? 1990s Data Analysis SUMMARY OUTPUT Regression Statistics Multiple R0.43 R Square0.19 Adjusted R Square0.08 Standard Error1.04 Observations10 © Council for Economic Education

15. Inflation Unemployment Correlation For which decade do the data show, 80s or 90s, the strongest correlation between inflation and unemployment? How do you know? How do the graphs differ? In the 1980s graph, pick an outlier and explain how it affects the correlation coefficient. 15 © Council for Economic Education

16. Inflation Unemployment Correlation 16 2000s data DateUnemployment RateInflation Rate 200043.4 20014.72.8 20025.81.6 200362.3 20045.52.7 20055.13.4 20064.63.2 20074.62.9 20085.83.8 20099.3-0.3 © Council for Economic Education

17. Inflation Unemployment Correlation 17 What type of relationship exists for the decade? Is this a strong, medium or weak correlation? Is this different from what we observed in the 80s and 90s data? What explains the negative relationship for the 2000s? Does the recent data support the Phillips curve hypothesis? 2000s Data Analysis SUMMARY OUTPUT Regression Statistics Multiple R-0.86 R Square0.74 Adjusted R Square0.71 Standard Error0.79 Observations10 © Council for Economic Education

18. The Inflation Unemployment Correlation 18 What is inflation? What is unemployment? What is the Phillips curve and what does it hypothesize about the relationship between unemployment and inflation? Has the Phillips curve hypothesis held during different time periods? How did regression analysis help you to evaluate the Phillips curve hypothesis? Have students explain the different strengths correlation between the decades. © Council for Economic Education