1. Chapter 4: Unemployment and Inflation

2. Business cycle
Pattern of rising and falling real GDP

3. Business cycle

4. Leading indicators Change before real GDP changes
Often provide false indicators of the start of a recession

5. Coincident indicators
Tend to change at the same time as real GDP

6. Lagging indicators
Tend to change after real GDP

7. Unemployment Unemployment = # unemployed / labor force
Labor force = noninstitutionalized residents 16+ years of age who are:
Working, or
Actively seeking work
Labor force (and unemployment statistic) does not include those who are discouraged and have stopped looking for work

8. Unemployment rate
may understate the cost of unemployment to society due to:
underemployment, and
discouraged workers.
May overstate the cost of unemployment due to:
the underground economy

9. Types of unemployment
Seasonal – recurring seasonal pattern of unemployment (voluntary unemployment)
Frictional – short-term movement between jobs and during first job search (search unemployment) (voluntary unemployment)
Structural – due to technological change and/or changing patterns of labor demand (involuntary)
Cyclical – due to business cycle (involuntary)

10. Costs of unemployment GDP gap = potential real GDP – actual real GDP
Potential real GDP = GDP that occurs if unemployment rate = natural rate (no cyclical unemployment)
Social and psychological costs

11. Unemployment statistics
Unemployment rate is usually higher for women
Teenagers have the highest unemployment rates
Nonwhites have higher unemployment rates

12. Inflation
Sustained increase in the average level of prices

13. Costs of inflation Arbitrary redistribution of income and wealth
Higher transaction costs
Creditors and debtors are affected by unexpected changes in the inflation rate
Real interest rate = nominal interest rate minus inflation rate
Unexpected inflation harms creditors and benefits debtors

14. Types of inflation Demand-pull inflation Cost-push inflation
Structural inflation (wage-price spiral)

15. Hyperinflation
Extremely high rate of inflation

16. Inflation
The inflation rate is measured by changes in the Consumer Price Index (CPI).
The CPI is an index that measures the quarterly changes in the prices of a selected weighted basket of consumer goods and services.
The basket includes a wide range of goods and services purchased by households, such as food, alcohol and tobacco, clothing and footwear, housing, health, transport, communication, recreation and education.
Inflation Rate = (CI-PI)/PI * 100

17. What are the major causes of inflation in the Australian economy?
Outline two factors that contributed to the reduction in the inflation rate in the Australian economy during the 1990s.
Why is the underlying rate of inflation seen by economists as a better measure of inflation than the headline inflation rate?
Describe two economic factors that could determine the future level of inflation in the economy.