1. The Macroeconomy: Unemployment, Inflation, and Deflation
ECON 151 – PRINCIPLES OF MACROECONOMICS
Chapter 7:
The Macroeconomy: Unemployment, Inflation, and Deflation
Materials include content from Pearson Addison-Wesley which has been modified by the instructor and displayed with permission of the publisher. All rights reserved.

2. Unemployment Unemployment
Total number of adults (aged 16 years or older) willing and able to work and who are actively looking for work and have not found a job

3. Unemployment (cont'd) Civilian Labor Force
Individuals aged 16 years or older who either have jobs or who are looking and available for jobs; the number of employed plus the number of unemployed

4. Employment & Unemployment Calculations
Total Population (A)
Less Institutionalized Population
Non-Institutionalized Population
Less Not in Work Force
Total Workforce (B)
Less Military
Civilian Workforce (C)
Less Employed
Unemployed (D)
Labor Force Participation Rate = (B) / (A)
Unemployment Rate = (D) / (C)

5. Unemployment (cont'd) Costs of unemployment Lost output
During early 2000s, unemployment rate rose by 2 percentage points
Factory output was 80% of potential
Lost output was $200 billion of goods and services that could have been produced
Personal psychological impact

6. Figure 7-1 More Than a Century of Unemployment
Source: U.S. Department of Labor, Bureau of Labor Statistics

7. Figure 7-2 Adult Population

8. Unemployment (cont'd)
The unemployment rate is the percentage of the measured labor force that is unemployed.

9. Unemployment (cont'd) Labor force = The employed + The unemployed
152.7* =
Unemployed
Labor force
Unemployment rate =
x 100 =
x 100 = 4.8%
7.3
152.7
*U.S., millions of people; as of 2007

10. Unemployment (cont'd) Stock Flow
The quantity of something, measured at a given point in time—for example, an inventory of goods
Flow
A quantity measured over time, such as the income you make per year, or the number of individuals fired every month

11. Unemployment (cont'd) Categories of individuals without work Job loser
Reentrant
Job leaver
New entrant

12. Unemployment (cont'd) Job Loser
An individual whose employment was involuntarily terminated or who was laid off
40–60% of the unemployed

13. Unemployment (cont'd) Reentrant
An individual who has worked a full-time job before but left the labor force and has now reentered it looking for a job
20–30% of the unemployed

14. Unemployment (cont'd) Job Leaver An individual who voluntarily quit
10 to 15% of the unemployed

15. Unemployment (cont'd) New Entrant
An individual who has never worked a full- time job for two weeks or longer
10 to 15% of the unemployed

16. Unemployment (cont'd) Duration of unemployment
More than a third of job seekers find work within one month.
Approximately another third find employment within a second month.
About a sixth are still unemployed after six months.
Average duration is just over 15 weeks throughout the last 15 years.

17. Unemployment (cont'd) Discouraged Workers Question
Individuals who have stopped looking for a job because they are convinced they will not find a suitable one (no longer in work force)
Question
How does the existence of discouraged workers bias the unemployment rate?

18. Unemployment (cont'd) Unemployed Labor force x 100
Question
How does the existence of discouraged workers bias the unemployment rate?
Unemployed
Labor force
Unemployment rate =
x 100 =
x 100 = 4.8%
7.3
152.7
Assume that there are 3 million discouraged workers. =
x 100 = 6.6%
10.3
155.7

19. Unemployment (cont'd) Labor Force Participation Rate
The proportion of non-institutionalized working-age individuals who are employed or seeking employment

20. The Major Types of Unemployment
Frictional
Structural
Cyclical
Seasonal

21. The Major Types of Unemployment (cont'd)
Frictional Unemployment
Results from the fact that workers must search for appropriate job offers
This takes time, so they remain temporarily unemployed

22. The Major Types of Unemployment (cont'd)
Structural Unemployment
Results from a poor match of workers’ abilities and skills with current requirements of employers

23. The Major Types of Unemployment (cont'd)
Cyclical Unemployment
Results from business fluctuations that occur when aggregate (total) demand is not at a level that would result in full employment
Can be positive or negative

24. The Major Types of Unemployment
Seasonal Unemployment
Results from the seasonal pattern of work in specific industries
Adjustments are made to offset the effects of seasonal unemployment so that meaning comparisons can be made between different periods of the year. This adjustment is needed in order to assess the affects of the other types of unemployment.

25. Full Employment and the Natural Rate of Unemployment (cont'd)
An arbitrary level of unemployment that corresponds to “normal” friction in the labor market

26. Full Employment and the Natural Rate of Unemployment (cont'd)
The unemployment rate that is estimated to prevail in the long-run macroeconomic equilibrium
Should not reflect cyclical unemployment
When seasonally adjusted, the natural rate should include only frictional and structural unemployment.

27. Inflation and Deflation
A sustained increase in the average of all prices of goods and services in an economy
Deflation
A sustained decrease in the average of all prices of goods and services in an economy

28. Inflation and Deflation (cont'd)
Purchasing Power
The value of money for buying goods and services
Varies with prices and income

29. Inflation and Deflation (cont'd)
Nominal value
Price expressed in today’s dollars
Real value
Value expressed in purchasing power, adjusted for inflation

30. Measuring the rate of inflation
Price Index The cost of today’s market basket of goods expressed as a percentage of the cost of the same market basket during a base year
Market Basket Representative bundle of goods and services
Base Year The point of reference for comparison of prices in other years
Price index =
 100
Cost today of market basket
Cost of market basket in base year

31. Table 7-1 Calculating a Price Index for a Two-Good Market Basket

32. Inflation and Deflation (cont'd)
Real-world price indexes
Consumer Price Index (CPI)
Producer Price Index (PPI)
GDP deflator
Personal Consumption Expenditure (PCE)

33. Inflation and Deflation (cont'd)
Consumer Price Index (CPI)
A statistical measure of a weighted average of prices of a specified set of goods and services purchased by wage earners in urban areas
Market basket of goods and services of typical consumer

34. Inflation and Deflation (cont'd)
Producer Price Index (PPI)
A statistical measure of a weighted average of prices of goods and services that firms produce and sell
Used as a short-run leading indicator (before CPI)
PPIs for
Foodstuffs
Intermediate goods
Finished goods

35. Inflation and Deflation (cont'd)
GDP Deflator
A price index measuring the changes in prices of all new goods and services produced in the economy
Broadest measure of prices; reflects both price changes and the public’s market responses to those price changes

36. Inflation and Deflation (cont'd)
Personal Consumption Expenditure (PCE) Index
A statistical measure of average price using annually updated weights based on consumer spending
Primary inflation index used by the Federal Reserve

37. Figure 7-4 Inflation and Deflation in U.S. History
Source: U.S. Department of Labor, Bureau of Labor Statistics

38. Anticipated versus Unanticipated Inflation
To determine who is hurt by inflation we distinguish between the two types.
The effects of inflation on individuals depend upon which type of inflation exists.

39. Anticipated versus Unanticipated Inflation (cont'd)
The inflation rate that we believe will occur
Unanticipated Inflation
Inflation at a rate that comes as a surprise

40. Anticipated versus Unanticipated Inflation (cont'd)
Inflation and interest rates
Nominal Rate of Interest
The market rate of interest expressed in today’s dollars
Real Rate of Interest
The nominal rate of interest minus the anticipated rate of inflation

41. Anticipated versus Unanticipated Inflation (cont'd)
Real interest rate
Nominal interest rate = 10%
Expected inflation rate = 6%
Real rate = 10% – 6% = 4%

42. Anticipated versus Unanticipated Inflation (cont'd)
Inflation affects people differently
Unanticipated inflation
Creditors lose
Debtors gain

43. Anticipated versus Unanticipated Inflation (cont'd)
Protecting against inflation
Cost-Of-Living Adjustments (COLAs)
Clauses in contracts that allow for increases in specified nominal values to take account of changes in the cost of living

44. Anticipated versus Unanticipated Inflation (cont'd)
The resource cost of inflation
Repricing or Menu Cost of Inflation
The cost associated with recalculating prices and printing new price lists when there is inflation

45. Changing Inflation and Unemployment: Business Fluctuations
The ups and downs in business activity throughout the economy

46. Changing Inflation and Unemployment: Business Fluctuations (cont'd)
Expansion
A business fluctuation in which the pace of national economic activity is speeding up
Contraction
A business fluctuation during which the pace of national economic activity is slowing down

47. Changing Inflation and Unemployment: Business Fluctuations (cont'd)
Recession
A period of time during which the rate of growth of business activity is consistently less than its long-term trend or is negative
Depression
An extremely severe recession

48. Figure 7-5 The Idealized Course of Business Fluctuations

49. Figure 7-6 National Business Activity, 1880 to the Present

50. Changing Inflation and Unemployment: Business Fluctuations (cont'd)
Leading Indicators
Events that have been found to occur before changes in business activity
Economic downturns often follow
Reduction in the average workweek
Rise in unemployment insurance claims
Decrease in prices of raw materials
Drop in the quantity of money circulating

51. End of Chapter 7 Chapter 7:
ECON 151 – PRINCIPLES OF MACROECONOMICS
Chapter 7:
The Macroeconomy: Unemployment, Inflation, and Deflation
Materials include content from Pearson Addison-Wesley which has been modified by the instructor and displayed with permission of the publisher. All rights reserved.