1. Starting a Macro Model Lecture 11
Dr. Jennifer P. Wissink
©2018 Jennifer P. Wissink, all rights reserved.
September 27, 2018 1

2. i>clicker question
Which one of the following individuals is considered unemployed according to the way the US calculates their official unemployment statistics?
John, who works without pay for 30 hours per week in the family owned tax accounting business.
Jill, who works 2 hours a week at Walmart as a greeter.
Rose, who is currently a full time student at Cornell and working 60 hours a week on her studies to please her parents.
Leyton, a former NFL football player just released from his contract who is now actively searching for some other job while taking a night class at TC3 (the local community college). His resume states, “Put me in coach, I’m ready to play!”
Lucy, a female with a Ph.D. in physics who decides to stay home and take care of her children until they go to kindergarten.

3. What does Actively Looking for a Job Mean?
People are classified as unemployed if they do not have a job, have actively looked for work in the prior 4 weeks, and are currently available for work. Actively looking for work may consist of any of the following activities: Contacting…
An employer directly or having a job interview
A public or private employment agency
Friends or relatives
A school or university employment center
Submitting resumes or filling out applications
Placing or answering job advertisements
Checking union or professional registers
Some other means of active job search
Passive methods of job search do not have the potential to connect job seekers with potential employers and therefore do not qualify as active job search methods. Examples of passive methods include attending a job training program or course, or merely reading about job openings that are posted in newspapers or on the Internet.
Workers expecting to be recalled from temporary layoff are counted as unemployed whether or not they have engaged in a specific job seeking activity. In all other cases, the individual must have been engaged in at least one active job search activity in the 4 weeks preceding the interview and be available for work (except for temporary illness).
Source:

4. TABLE 7.1 Employed, Unemployed, and the Labor Force, 1950–2014
(1)
(2)
(3)
(4)
(5)
(6)
Population 16 Years Old or Over (Millions)
Labor Force (Millions)
Employed (Millions)
Unemployed (Millions)
Labor Force Participation Rate (Percentage Points)
Unemployment Rate (Percentage Points)
1950
105.0
62.2
58.9
3.3
59.2
5.3
1960
117.2
69.6
65.8
3.9
59.4
5.5
1970
137.1
82.8
78.7
4.1
60.4
4.9
1980
167.7
106.9
99.3
7.6
63.8
7.1
1990
189.2
125.8
118.8
7.0
66.5
5.6
2000
212.6
142.6
136.9
5.7
67.1
4.0
2010
232.8
153.9
139.1
14.8
64.7
9.6
2014
247.9
155.9
146.3
62.9
6.2
Note: Figures are civilian only (military excluded).
Source: Economic Report of the President, 2015 and U.S. Bureau of Labor Statistics.

5. Components of the Unemployment Rate
Unemployment Rates for Different Demographic Group TABLE 7.2 Unemployment Rates by Demographic Group, 1982 and 2015
Years
November 1982
March 2015
Total
10.8
5.5
White
9.6
4.7
Men
20+
9.0
4.4
Women
8.1
4.2
Both sexes
16–19
21.3
15.7
African American
20.2
10.1
19.3
10.0
16.5
9.2
49.5
25.0
Source: U.S. Bureau of Labor Statistics. Data are seasonally adjusted.

6. Components of the Unemployment Rate
TABLE 7.3 Regional Differences in Unemployment, 1975, 1982, 1991, and 2010
1975
1982
1991
2003
2010
U.S. avg.
8.5
9.7
6.7
6.0
9.6
Cal.
9.9
7.5
12.4
Fla.
10.7
8.2
7.3
5.1
11.5
Ill.
7.1
11.3
10.3
Mass.
11.2
7.9
9.0
5.8
Mich.
12.5
15.5
9.2
N.J.
10.2
6.6
5.9
9.5
N.Y.
8.6
7.2
6.3
N.C.
6.5
10.6
Ohio
9.1
6.4
6.1
10.1
Tex.
5.6
6.9
6.8

7. Components of the Unemployment Rate (1 of 3)

8. Unemployment Rates from Around the World

9. Types of Unemployment
Frictional unemployment: the portion of unemployment that is due to the normal working of the labor market; used to denote short-run job/skill matching problems.

10. Types of Unemployment
Structural unemployment: the portion of unemployment that is due to changes in the structure of the economy that result in a significant loss of jobs in certain industries.

11. Types of Unemployment
Cyclical unemployment: the increase in unemployment that occurs during recessions & depressions.
Unemployment created during the swings in the business cycle.

12. Types of Unemployment
The natural rate of unemployment: the unemployment that occurs as a normal part of the functioning of the economy.
Sometimes taken as: natural rate = frictional + structural

13. Parting Thoughts on Unemployment
Only an aggregate average
Trends in labor force participation
Discouraged worker
Labor force characteristics
Under/Over employment
Search models and transition rates
Duration/Spells of unemployment
UI benefits

14. There are Many Other V.I.P. MACRO Indicators
Income and Product Measures, especially across countries
Gross National Income
Disposable Income
Personal Income
Median Income
Productivity Measures
Output per worker hour
Capital per worker
Capacity utilization rates
Employment Measures
employment
job creation
job destruction
average work week
Final Thoughts
Different numbers tell us different things about the big picture.
Be careful how you use them.
They tell us a lot.
They don’t tell us everything.

15. Interesting(entertaining, even) Listens/Reads
The Audacity of Hopelessness
What's Behind The Rise Of College Tuition?
UC Students Propose Alternative To Tuition Increases
“Under our proposal, students would pay 5 percent of their income for 20 years" following graduation, Locacio says.
The 40 Most Unusual Economic Indicators
Action chart; For whom the jobs toll; The new way of post-recession unemployment in America (very cool set of charts)

16. END OF MATERIAL FOR PRELIM 1
WHEW!!
HINTS:
DON’T pull an “all-nighter”.
READ questions carefully. Highlight or underline each important piece of information.
For the multiple choice: Cover up all the answers and “do” the problem based on the narrative first, then your work will lead you to the correct answer.
For “work” problem: Draw graphs big enough and carefully enough to make it so they can “show” you the way.
Always label BOTH axes right away, it helps remind you of what goes where and what you are doing.
Label any items you put into the graph (like D for demand and S for supply).
Use a contrasting color to help see things.
TRY each problem – at least do something so there is some chance that you might get partial credit for what you did.
Don’t spin your wheels too long on any one problem. Give it your best shot, then move on, then go back to it if there is time.

17. i>clicker questions – prelim 1 practice
Consider the fictional economy of Vinopolis that uses the Vinopolis $dollar as its currency. Vinopolis’ only final output is wine. The base year for Vinopolis is 2015.
In 2019 farmers in Vinopolis sold all their grapes, $5,000 worth, to local vineyards.
The local vineyards used all these grapes and a variety of other inputs to make wine which sold to all the local retail wine stores for a total of $25,000.
The local wine stores shelved and sold all the wine made in 2019 in 2019.
Total wine sales to final consumers equaled $50,000.
Of this $50,000, half the wine was sold to people who are ordinary citizens of Vinopolis and half of the wine was sold to foreign tourists visiting Vinopolis.
Suppose it turns out that consumers in Vinopolis consume lots of imported cheese. Suppose in 2015 a pound of imported cheese sold for $5/pound. In 2019 imported cheese is selling for $10/pound.
How does this change the value of Vinopolis’ 2019 GDP?
Who knows?
GDP stays the same.
GDP will fall.
GDP will rise.
Vinopolis GDP in 2019 is
$25,000
$50,000
$55,000
$5,000
$75,000
Suppose the bureaucrats of Vinopolis report that real 2019 GDP for Vinopolis is $40,000 (the base year is 2015 for Vinopolis). What is the implicit GDP deflator index for Vinopolis for 2019?
100 25
125
1.25 80
This would be
Real GDP
Current GDP

18. Starting a Macro Model
So, how can we analyze the determination of the various macro economic aggregates (that we now know how to calculate)?
How big will GDP be?
How fast will GDP be growing?
Will GDP be big enough to create an acceptable amount of employment? And not too much inflation?
How does the economy adjust to changes in the economic environment?
Can fiscal, monetary or supply side policy matter?
How? Why? 18

19. The Core of Macroeconomic Theory19

20. A Super Simple Model to Get Us Started
Only House Holds (HHs) and Firms and a “Goods & Services” market for now.
No Government yet.
No Exports and Imports yet.
No Money Market yet.
No Inflation yet.
The “Frugal” Economy Model 20

21. A Super Simple Model to Get Us Started
Simple Short Run Business Cycle Model
Traditional core model.
Follows Keynes’ ideas.
Will introduce the role of the government and the international sector soon enough.
Stress is on “Aggregate Desired Expenditures”.
Focus for now on:
An economy that produces a whole bunch of stuff in a given period.
Income is generated by producing all this stuff.
HHs consume some stuff and also save.
Firms make stuff and engage in buying stuff as intermediate goods and final gross investment.
Will add more every week. 21

22. Pay-Day!
Aggregate output (income) (Y) is a combined term used to remind you of the exact equality between aggregate output and aggregate income.
Aggregate income is the total income received by all factors of production in a given period.
Aggregate output is the total quantity of goods and services produced in an economy in a given period. 22