WHAT ARE EFFECTS OF ECONOMIC GROWTH?

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”?

≥ 16 years with a job

Must work 1 hour per week

≥ 16 years w/o a job

Actively searching for a job

EMPLOYED UNEMPLOYED

How do you calculate…

# unemployed

_______________________

# of people in the labor force

% of working age population in labor force

Unemployment RateLabor Force Participation Rate

LABOR FORCE INDICATORS (2005)

4 TYPES OF UNEMPLOYMENT

Frictional Voluntarily between jobs

College graduates PBJ is healthy and natural!

Structural Mismatch of skills

Don’t have technologyskills

4 TYPES OF UNEMPLOYMENT

Cyclical Increases during a recession Decreases during an expansion

Seasonal Changes due to weather

Unemployment and Recessions

The average unemployment rate was 5.9%

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.

CPI and Inflation

How do we measure Prices?

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?

How do we Calculate CPI?

Cost of CPI @ current priceCost of CPI basket @ base

price

x 100

CPI (a) =50/50=

100

CPI(b)=

70/50x 100

= 140

Inflation is the gradual increase of prices (from CPI)

Inflation

CPI in current year CPI in previous year

CPI in previous year

x 100Inflation rate =

$$$ Types of Inflation $$$

Demand Pull Inflation: Excess demand for products causing

shortages “Too much money chasin’ too few goods!”

Cost Push Inflation: Inward Supply Shifts

Caused by high input costs 1970s high price of oil

The effects of inflation…

Hurt Unaffected Helped

•Fixed income receivers

•Savers

•Lenders

* Decrease in purchasing power

Flexible income receivers

Borrowers

To protect against inflation:

Lenders add an inflation premium: Nominal interest rate = real interest rate +

expected inflation Firms add the COLA

Changes with inflation Real income = nominal income/ price index