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Macroeconomics Final Exam - Chapter 5

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  • Unemployment Problems

    • Lost income and production

    • Lost Human Capital

  • Working Age Population...

    People in the Labour Force

    1. Employed

    2. Unemployed

      • Temporary Layoff

      • Looking For a Job (4 Weeks)

      • New Job Starting in 4 Weeks

    People Not in the Labour Force

  • Unemployment Rate

    # of Unemployed/ Labour Force x100

  • Involuntary Part time

    # Involuntary Part-Time Workers/ Labour Force x100

  • Employment Rate

    Employment/ Working Age Population x 100

  • Labour Force Participation Rate

    Labour Force / Working Age Population x100

  • Not Counted as Unemployed

    Discouraged Searchers

    • not working or looking

    • available and wants to work

    Long-Term Future

    • starts a job starting in more than 4 week

    Part-Time Wanting Full

  • Frictional Unemployment

    • arises from normal labour market turnover

    • short term

    • good

  • Structural Unemployment

    • Changes in technology and foreign competition

    • More permanent

    • Healthy

  • Cyclical Unemployment

    • Higher than normal unemployment at a business cycle trough and lower at a business cycle peak

    • bad for economy

  • Natural Unemployment

    Key Factors

    Frictional + Structural

    when cyclical = 0

    • at full employment when unemployment rate = natural unemployment rate

    Factors

    • age distribution of the population

    • the scale of structural change

    • the real wage rate

    • unemployment benefits

  • Output GDP > 0

    Expansion

  • Output GDP<0

    Crisis

  • Output Gap

    Real GDP - Potential GDP

  • Price Level

    • average level of prices and the value of money

    Rising

    • inflation

    Falling

    • deflation

  • Consumer Price Index

    CPI

    • measures the average of the prices paid by urban consumers for a "fixed" basket of consumer goods and services

    Reference base period = 100

  • Calculating CPI

    1. Find the cost of the CPI basket at base period prices

    2. FInd the cost of the CPI basket at current period prices

    3. Calculate the CPI for the current period

    CPI = ( Cost of basket at current-period prices) / ( Cost of basket at base period prices) x 100

  • Inflation Rate

    the percentage change in the price level from one year to the next

    Inflation rate = [(CPI this year - CPI last year) / CPI last year] x 100

  • Biased CPI

    1. New Good Bias

    2. Quality Change Bias

    3. Commodity Substitution Bias

    4. Outlet Substitution Bias

    Consequences

    • distorts private contracts

    • increases government outlays

  • Alternative Measures of the Price Level

    GDP deflator = (Nominal GDP / Real GDP) x 100

    • broader measure

  • Core Inflation Rate

    • Excludes the volatile prices to reveal the inflation trend

  • Real Wage Rate

    Real Wage Rate = (Nominal Wage Rate / GDP deflator) x 100