2. The GDP deflator Definition: –GDP deflator = nominal GDP/real GDP A by-product of measuring real GDP Provides a measure of “average” prices in the economy Sometimes called implicit price deflator

3. Example: Calculating the GDP Deflator

4. A measure of the inflation rate Inflation rate: the percent change in the deflator from one period to the next (P t - P t-1 )/P t-1 stated in percent (1.128 - 1.126)/1.126 =.002 or.2 percent At an annual rate this is.8 percent as stated in the WSJ news story

7. Recap of our discussion of GDP Enough now to read and do “critical thinking” about the typical news story But remember that GDP is not perfect misses things: Home Work (two words), underground economy not the only measure of well-being For international comparisons, we must take account of exchange rates and “purchasing power” differences in different countries

8. Consumer price index (CPI) based on a fixed market basket of goods and services that a “typical” person purchases How much more does that market basket cost this year than last year? –Answer (in percentage terms) is the inflation rate using the CPI –Example 50 cartons of milk, 300 cookies –1998: 2.00x50 + 1x300 = 400 –1997: 1.50x50 +.5x300 = 225 –400/225 = 1.78: inflation rate would be 78%

9. CPI Inflation Bias Many complain that the CPI gives an upward biased measure of inflation –misses quality improvements – market basket changes indexing social security makes this an important public policy issue –commission chaired by Michael Boskin of Stanford found the bias was about 1 percent (maybe larger)

10. How do inflation rates based on the CPI and GDP deflator compare?

11. Unemployment Rate A major economy-wide labor market indicator cyclical frictional and structural concept of natural unemployment rate –natural does not mean “good”

12. As stated in this WSJ article, the October unemployment rate is to be released tomorrow

13. Other Economy-Wide Labor Market Indicators Employment (total number of jobs) Labor Force Participation Rate Employment-To-Population Ratio

15. Unemployment data are collected by the U.S. Department of Labor Let’s take a look at the DOL web page to see what’s happening You can enter through Econ1 web page

16. Employment to Population Ratios

17. unemployment Three types of unemployment

18. Duration of Unemployment

19. International Comparisons of Unemployment Rates (1996)

20. Preview of Coming Attractions Next Four Lectures: Long Run Fundamentals and Economic Growth –Labor (Ch 21) partly covered already –Capital (Ch 22) try to read for next lecture –Technology (Ch 23) –Money (Ch 24) Then Economic Fluctuations Then Economic Policy

21. End of Lecture