Macroeconomic Measurements,

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ECONOMICS, 5e Roger Arnold
CHAPTER 5 Macroeconomic Measurements, Part I
Prices and Unemployment
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Exhibit 1 Three Major Economic Goals
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MACROECONOMIC VARIABLES

• Price Levels
• The economy's price level refers to a weighted
  average of the prices of its goods and services

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PRICE STABILITY

• INFLATION is an increase in the general price
  level over time
• DEFLATION is a decrease in the general price
  level over time

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INFLATION AND PURCHASING POWER

• If prices on average rise
• a given income buys fewer goods and services.
• inflation decreases the purchasing power of the
  dollar.

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MEASURING THE PRICE LEVEL

• Measures of the Price Level
• The consumer price index measures the average
  nominal prices of goods and services that a
  typical family living in an urban area buys

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Consumer Price Index

• The CPI is calculated by the Bureau of Labor
  Statistics (BLS, http//www.bls.gov).
• The representative group of goods chosen is
  called the Market Basket.
• To calculate the CPI we need the total dollar
  expenditure in the current year and the base
  year.
• The base year is a benchmark year that serves as
  that basis of comparison for prices in other
  years.

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CPIs Basket
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Calculating the CPI

• CPI (current expenditure/base expenditure) X
  100
• Current expenditure the total dollar
  expenditure on market basket in current year
• Base expenditure the total dollar expenditure
  on market basket in base year

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Exhibit 2 Computing the Consumer Price Index
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THE INFLATION RATE

• Inflation rate
• CPI (t) - CPI (t-1) x 100
• CPI (t-1)

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US Inflation
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COMPUTE THE INFLATION RATE USING THE FOLLOWING

• CPI 1997 159.1
• CPI 1996 156.9
• formula (CPI 97 - CPI 96 / CPI 96) X 100
• 159.1-156.9 / 156.9 2.2/156.9 .014
• .014 X 100 1.4

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USING THE CPIREAL vs. NOMINAL INCOME

• NOMINAL INCOME - money income measured in current
  period dollars

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USING THE CPIREAL vs. NOMINAL INCOME

• REAL INCOME - money income adjusted for changes
  in the price level
• real Y nominal Y x 100
• CPI (t)

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Are you keeping up with inflation?

• Income in 2000 40,000
• Income in 1999 35,000
• CPI in 2000 120
• CPI in 1999 100
• Real income 1999 35,000/100 x 100 35,000
• Real income 2000 40,000/120 x 100 33,334
• Real income is falling 33,334 lt 35,000

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MEASURING THE PRICE LEVEL

• Other Measures of the Price Level
• The producer price index is a weighted average of
  the prices of inputs that producers buy to make
  final goods

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MEASURING THE PRICE LEVEL
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MACROECONOMIC VARIABLES

• Price Levels
• The GDP price deflator equals nominal GDP divided
  by real GDP
• Nominal GDP measures the current dollar value of
  the economy
• Real GDP measures output valued at constant
  prices
• Nominal GDP Real GDP X GDP price deflator
• Real GDP Nominal GDP / GDP price deflator

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MEASURING THE PRICE LEVEL

• Limitations of Price Indexes
• Index and other measures are imperfect and have
  limitations
• Ignores such things as changes in quality,
  technological advances, and other factors that
  alter results
• People substitute other goods when prices rise

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SUBSTITUTION BIAS

• To avoid a potential bias created by ignoring
  consumer substitutions the US moved to a
  CHAIN-WEIGHTED index in Dec. 1995

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Exhibit 5 Breakdown of the U.S. Population and
the Labor Force
SOURCE U.S. Department of Labor, Bureau of
Labor Statistics.
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EMPLOYED

• Worked at least 1 hour in a wage/salary paying
  position
• Owned his/her own business
• Worked 15 hrs. per week in family business or
  farm as unpaid worker
• absent due to illness, strike, or vacation

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UNDEREMPLOYMENT

• Workers are classified as employed
• If they worked as little as one hour for pay
  during the survey week and
• Even if they are over qualified for the work
• The reported rate of unemployment may be
  understated due to underemployment

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UNEMPLOYED

• Did not work in the survey week but willing and
  able to work and actively looked within the last
  4 weeks.
• Laid off and waiting to be called back
• Waiting to report to a job within 30 days

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DISCOURAGED WORKERS

• people who have given up on the job search
  process
• not considered unemployed because they are not
  actively searching for a job
• Cause the reported unemployment rate to
  understate the true unemployment problem because
  they are not included in the labor force

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Phantom Unemployed

• Those who claim to be unemployment, when in fact
  they are not
• May be due to qualify for unemployment benefits
• Cause the reported unemployment rate to overstate
  the true unemployment problem because they are
  not actively seeking work

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THE UNEMPLOYMENT RATE

• people unemployed x 100
• people in labor force

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FIND THE UNEMPLOYMENT RATE

• population is 100 million
• labor force is 50 million
• 45 million are employed

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UNEMPLOYMENT RATE

• U 5m./50m. x 100 10

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Types of Unemployment

• Frictional

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FRICTIONAL UNEMPLOYMENT

• people moving between jobs or into the labor
  force.

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Types of Unemployment

• Frictional
• Structural

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STRUCTURAL UNEMPLOYMENT

• skills and/or location of workers does not match
  available jobs

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Types of Unemployment

• Frictional
• Structural
• Natural

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NATURAL UNEMPLOYMENT

• a certain level of frictional and structural
  unemployment that is considered natural in a
  changing economy (usually 4-6.5)

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U.S. Unemployment, 1958-2002
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FULL EMPLOYMENT

• The full employment rate is when unemployment is
  at its natural rate (not zero).

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Types of Unemployment

• Frictional
• Structural
• Natural
• Cyclical

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CYCLICAL UNEMPLOYMENT

• unemployment due to downturns in overall economic
  activity (recessions)
• ? The difference between the existing
  unemployment rate and the natural unemployment
  rate

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U.S. Unemployment, 1958-2002