HOW ELSE CAN
YOU MEASURE
AN ECONOMY’S
HEALTH?
Unemployment and Inflation
Basic Laborious terms

Labor Force:
#
of people employed + # of people unemployed
 Doesn’t


include:
Students, kids, retired people, the homeless
Who’s “employed”?
EMPLOYED


≥ 16 years with a job
Must work 1 hour
per week
UNEMPLOYED
≥ 16 years w/o a job
 Actively searching
for a job

How do you calculate…
Unemployment Rate
# unemployed
_______________________
# of people in the labor
force
(unemployed + employed)
Labor Force Participation Rate
# people in labor
force
__________________
total population
LABOR FORCE INDICATORS (2005)
4 TYPES OF
UNEMPLOYMENT

Frictional
 Voluntarily
 College
 PBJ

between jobs
graduates
is healthy and natural!
Structural
 Mismatch
 Don’t
skills
of skills
have technology
4 TYPES OF
UNEMPLOYMENT

Cyclical
 Increases
during a recession
 Decreases during an expansion

Seasonal
 Changes
due to weather
Other workers…
Discouraged Workers

Willing and able to
work, but become so
frustrated that they
stop trying
Dishonest Workers

Claim to be
unemployed in
order to receive
unemployment
benefits even when
they don’t want job
or receive money
elsewhere.
Unemployment and Recessions
The average unemployment rate was 5.9%
What do economists strive for?

Some unemployment is a good thing
 Frictional

unemployment is expected
Too much unemployment is a bad thing
 OKUN’S
LAW: for every one percentage increase
in unemployment rate, output (GDP) falls by 2-3
percentage points
FULL EMPLOYMENT
AKA
THE NATURAL
RATE OF
UNEMPLOYMENT

When there is no cyclical
unemployment
 Full
potential!
 4-5%
THE NATURAL
RATE
Cyclical
unemployment
is shown by
the shaded
regions.
Practice Problems over
GPD/Unemployment

Which of the following are included in the
calculation of GDP? Which category?
A
new stock purchased from Apple
 The money received from babysitting a neighbor
 An IPOD purchased for your mom’s birthday
 The Ford’s leftover on a lot at the end of the year
 The tire used to make your bike
 The government builds a new highway
 Clothing purchased from China
Calculating Unemployment
1.
What is the formula for calculating the
unemployment rate? Labor force participation
rate?
2. If given the following circumstances, what is the
unemployment rate? Labor force participation?
 1000 people (the population)
 475 civilians employed
 200 full-time students
 100 stay-at home parents
 25 active job seekers
The Causes and
Effects
What is occurring in Bolivia in the 1980s?
Why is this occurring?
How does it affect its citizens?
HOW DO YOU
CALCULATE
INFLATION?
The Consumer Price Index
Consumer Price Index

Measures the average price of goods that
urban consumers buy
 400
consumer goods and services
 Can be from abroad
http://www.bls.gov/cpi/tables.htm
What’s in the CPI?
Calculating CPI: Base Year Prices
1. Calculate the total market basket of one year by
multiplying Quantity X 2005 per commodity price, then
adding both commodities together.
2005 MARKET BASKET/BASE YEAR
Commodity
Quantity
2005 per unit price
Total
Oranges
10
$1
$10
Haircuts
5
$8
$40
----
$50
Total cost of Market ---Basket
Calculating CPI: 2006
1.
Calculate the total market basket of 2006 by multiplying
Quantity X 2006 per commodity price, then adding both
commodities together.
2006 MARKET BASKET
Commodity
Quantity
2006 per unit price
Total
Oranges
10
$2
$20
Haircuts
5
$10
$50
----
$70
Total cost of Market ---Basket
How do we Calculate CPI?
Cost of CPI @ current price
x 100
Cost of CPI basket @ base price
Commodity
Quantity
2005 per unit price
Total
Oranges
10
$1
$10
Haircuts
5
$8
$40
----
$50
Total cost of Market ---Basket
How do we Calculate Inflation?
Inflation rate =
CPI current  CPI previous x 100
CPI previous
Inflation = 70-50 = 20 X 100 = 40%
50
50
What’s the Inflation Rate?
Commodity
Quantity
1993 per unit price
1994 per unit price
Food
4 units
$7
$5
Clothing
5 units
$5
$8
Shelter
3 units
$9
$20
1.
2.
3.
4.
What is the market basket total for 1993?
What is the market basket total for 1994?
What is the inflation rate between the two years?
How do you think this inflation would affect people
earning a fixed income?
Inflation
Inflation is the gradual increase of prices (from CPI)
Inflation rate =
CPI in current year  CPI in previous year
CPI in previous year
x 100
The Types and Causes of Inflation $$$

Demand Pull Inflation:
 Rightward
shift of the demand curve
 Excess demand for products causing shortages
 “Too


much money chasing too few goods!”
Caused by printing too much money
Cost Push Inflation:
 Leftward
 Caused

shift of the supply curve
by high input costs
1970s  high price of oil
The effects of inflation…

If there is inflation… these people are affected
in the following ways:
Hurt
Unaffected
Helped
•Fixed income
receivers
Flexible income
receivers
Borrowers
•Savers
•Lenders
* Decrease in
purchasing power
To protect against inflation:

Lenders add an inflation premium:
*Nominal interest rate (what we pay) = real
interest rate + expected inflation

Firms add the COLA (Cost of Living
Adjustment) calculated from the CPI
*Real income= nominal income/price index
What roles do interest rates play in
the health of economies?

Interest Rates: the price of money
 Interest
A
rates can affect the way people behave
high nominal interest rate encourages people to
save more
 A low nominal interest rate encourages people to take
out more loans