Skip to main content
Pearson+ LogoPearson+ Logo
Start typing, then use the up and down arrows to select an option from the list.


Learn the toughest concepts covered in your Macroeconomics class with step-by-step video tutorials and practice problems.

Introducing Economic Concepts

Introducing Concepts - Unemployment and Inflation



Play a video:
Was this helpful?
Alright now I want to introduce two more key concepts for this course that are interrelated unemployment and inflation. So we're gonna talk about them on kind of a high level here, we're just introducing them, but we're gonna go into a lot more detail on both of these topics in later videos. Okay. But here we're just gonna go over the definitions and some key trends related to these uh these two topics. So let's start here with unemployment. What is unemployment? Well obviously it's when people don't have a job, right? But what is our specific definition? It's what when a person is willing to work actively searching for a job but cannot find a job, right? So they're willing and actively searching for a job that's different than someone who's like oh yeah, I'd get a job but you know, I'm just gonna watch some soap operas instead, you know? Yeah yeah yeah, I'll get a job mom, Don't worry, I'm gonna get a job mom gonna get a job, don't worry. Alright, so unemployment were actively searching for work but cannot find a job. So let's look at this trend in our graph here when we talk about the unemployment rate over time. So what we have here, what we've shaded in purple, these purple sections, these are recessions in the economy. Okay, And generally when, when when you get shown a graph like this in a macro economics class, generally they're gonna show you the recession's, they'll do something like this, where they'll highlight in a different color, where the recessions are happening and what do you see happening as a trend throughout all of these recessions, Look what we have as these recessions are happening, What's happening to the unemployment rate, the amount of the percentage of people that are unemployed, right? So notice throughout all of these recessions what is happening to unemployment it is increasing, Right? So the unemployment rate tends to increase during recessions and that should sort of sort of make logical sense. Right? When we talk about, oh no the economy is going through a recession, you know, bad things are happening in the economy. Well, guess what? People can't find jobs that's exactly uh a main definition and a key flag to finding that we're in a recession is that these unemployment rates are increasing. Cool. But notice that even when the recession ended we still had some changes in unemployment that we're still kind of going up. But we have certain rules that mark what a recession is when it starts and ends and we see that it does start to recover and the unemployment does generally decrease outside of the recession. Right. Cool. So um obviously when we talk about unemployment it sounds like a bad thing but why is it a bad thing? Well it's undesirable because when people are unemployed, a nation is not using its most important resource and that is the skills of the citizens. The actual work power of the citizens if they can't find jobs. Well they're not gonna be able to produce anything and it's bad for the nation's economy, right? So the most important resource there is the skill of the citizens putting the citizens to work and when they can't find jobs. Obviously that's not good for the economy. Cool, So let's pause real quick and then we'll discuss a related uh topic of inflation. Let's check it out.


The video is coming soon
Was this helpful?
So I'm sure you've heard the word inflation before. Just like you've heard unemployment before right? What is inflation that's when prices are increasing, right? An increase in overall price levels? So you know five years ago a gallon of milk was two bucks let's say and now it's four bucks. Right inflation. The prices are going up over time. Well in contrast the opposite obviously is deflation which represents an overall decrease in price levels. Okay. But generally what we notice is most of the time we're dealing with inflation there's going to be inflation even during a recession we might still see inflation but we'll see lower levels of inflation. Just like we check out on this graph. So what I have on this graph is I've circled the recessions from the previous graph on this graph. They weren't clearly labeled. So I circled them for our analysis. And what do we see happening in the inflation rate? So when I say an inflation rate um that's what I'm talking about is how much are prices increasing from previous year? Right. If last year things were $1 and this year things are $2. Well that's 100% inflation, right? Prices have doubled. So the inflation right here it generally tends to stick around you know these smaller numbers 100% inflation is pretty serious. Uh So we tend to stick around these these small numbers here when we talk about inflation. So what do we see happening during the recessions? These circled areas of the graph, what we generally see decreases here, right? This decrease, this decrease this decrease in the inflation rate. So what's happening with these the inflation rate during the recession? Well, it's the opposite of the unemployment rate, the unemployment rate is increasing during recessions. Well the inflation rate is decreasing during recessions. Okay, So prices aren't able to climb as much during a recession. Uh Which sort of follows logical sense, right? The economy is going through a recession, things aren't selling, people aren't employed. So those price levels start to drop uh following all of these same characteristics. And notice we did have a point of deflation here as well, right? Where we see that the inflation rate had dropped below zero. So this is deflation right here and this happened actually pretty recently where they measured some deflation back during this last what we call the Great Recession back in 2008, , we actually saw a small period of deflation. Okay, but when we talk about this class, we mostly focus on inflation because that's generally what's happening in the economy is a general increase in prices over time. Okay, so just like unemployment inflation is undesirable. So both things are undesirable. Um But why is inflation undesirable? Well, when you think about your job, right, when you have a job you generally are going to be making kind of a stable wage, maybe you work a part time job while you're in school and let's say you're making 10 bucks an hour, right? You're making 10 bucks an hour at your job. Well if those prices are increasing and you're stuck with your $10 an hour, your wages not increasing at the rate as price levels. Well that $10 isn't worth as much, right? So if income does not rise as quickly as prices, right? If prices are rising and income is not rises rising, well, that's gonna mess up your standard of living, right? Standard of living. Being basically what you can afford. How many luxuries can you afford? Well, if your income is staying stable, but those prices keep going up, you're not gonna be able to afford as much. So that is one of the main problems with inflation here. Cool. So we're gonna go into a lot more detail on both these topics, unemployment and inflation in future videos. But for now just uh these are the main topics to to keep your eye out for, right? We want to know those definitions and kind of how they interact on the graph. Cool. Let's go ahead and move on to the next video.