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CHAPTER OUTLINE

7. Unemployment, Inflation, and Long-Run Growth. CHAPTER OUTLINE. Unemployment Measuring Unemployment Components of the Unemployment Rate The Costs of Unemployment Inflation The Consumer Price Index The Costs of Inflation Long-Run Growth Output and Productivity Growth

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CHAPTER OUTLINE

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  1. 7 Unemployment, Inflation, and Long-Run Growth CHAPTER OUTLINE Unemployment Measuring Unemployment Components of the Unemployment Rate The Costs of Unemployment Inflation The Consumer Price Index The Costs of Inflation Long-Run Growth Output and Productivity Growth Looking Ahead

  2. Unemployment Measuring Unemployment employedAny person 16 years old or older (1) who works for pay, either for someone else or in his or her own business for 1 or more hours per week, (2) who works without pay for 15 or more hours per week in a family enterprise, or (3) who has a job but has been temporarily absent with or without pay. unemployedA person 16 years old or older who is not working, is available for work, and has made specific efforts to find work during the previous 4 weeks.

  3. Unemployment Measuring Unemployment not in the labor forceA person who is not looking for work because he or she does not want a job or has given up looking. (Automatic Exclusions: Young, Military, Institutionalized Excluded by choice: Home makers, Students, Elderly, marginal workers) labor forceThe number of people employed plus the number of unemployed. labor force = employed + unemployed population = labor force + not in labor force

  4. Unemployment Measuring Unemployment unemployment rateThe ratio of the number of people unemployed to the total number of people in the labor force. labor force participation rateThe ratio of the labor force to the total population 16 years old or older.

  5. A person not looking for work, because he or she either does not want a job or has given up looking, is classified as: a. Unemployed. b. Not in the labor force. c. In the labor force but not currently employed. d. In the labor force participation rate, but not in the labor force.

  6. A person not looking for work, because he or she either does not want a job or has given up looking, is classified as: a. Unemployed. b. Not in the labor force. c. In the labor force but not currently employed. d. In the labor force participation rate, but not in the labor force.

  7. Unemployment Measuring Unemployment

  8. NOW YOU TRY:Computing labor statistics Use the above data to calculate • the labor force • the number of people not in the labor force • the labor force participation rate • the unemployment rate U.S. adult population by group, May 2009 Number employed = 140.57 million Number unemployed = 14.51 million Adult population = 235.45 million

  9. Unemployment Components of the Unemployment Rate Unemployment Rates for Different Demographic Groups

  10. Unemployment Components of the Unemployment Rate Unemployment Rates in States and Regions

  11. Unemployment Components of the Unemployment Rate Discouraged-Worker Effects discouraged-worker effectThe decline in the measured unemployment rate that results when people who want to work but cannot find jobs grow discouraged and stop looking, thus dropping out of the ranks of the unemployed and the labor force.

  12. When an unemployed worker becomes discouraged about finding work and stops looking, the unemployment rate will: a. Rise. b. Fall. c. Remain unchanged. d. Increase only if the worker falls out of the labor force.

  13. When an unemployed worker becomes discouraged about finding work and stops looking, the unemployment rate will: a. Rise. b. Fall. c. Remain unchanged. d. Increase only if the worker falls out of the labor force.

  14. Unemployment Components of the Unemployment Rate The Duration of Unemployment

  15. Unemployment The Costs of Unemployment Some Unemployment Is Inevitable When we consider the various costs of unemployment, it is useful to categorize unemployment into three types: • Frictional unemployment • Structural unemployment • Cyclical unemployment

  16. Unemployment The Costs of Unemployment Frictional, Structural, and Cyclical Unemployment frictional unemploymentThe portion of unemployment that is due to the normal turnover in the labor market; used to denote short-run job/skill matching problems. structural unemploymentThe portion of unemployment that is due to changes in the structure of the economy that result in a significant loss of jobs in certain industries. natural rate of unemployment The unemployment rate that occurs as a normal part of the functioning of the economy. Sometimes taken as the sum of frictional unemployment rate and structural unemployment rate. cyclical unemploymentUnemployment that is above frictional plus structural unemployment.

  17. Unemployment The Costs of Unemployment Social Consequences The costs of unemployment are neither evenly distributed across the population nor easily quantified. The social consequences of the Depression of the 1930s are perhaps the hardest to comprehend. Few emerged from this period unscathed. At the bottom were the poor and the fully unemployed, about 25 percent of the labor force. Even those who kept their jobs found themselves working part-time. Many people lost all or part of their savings as the stock market crashed and thousands of banks failed.

  18. Inflation The Consumer Price Index consumer price index (CPI) A price index computed each month by the Bureau of Labor Statistics using a bundle that is meant to represent the “market basket” purchased monthly by the typical urban consumer.

  19. 1. Survey consumers to determine composition of the typical consumer’s “basket” of goods 2. Every month, collect data on prices of all items in the basket; compute cost of basket 3. CPI in any month equals How the BLS constructs the CPI

  20. Inflation The Consumer Price Index ▲ FIGURE 7.1 The CPI Market Basket The CPI market basket shows how a typical consumer divides his or her money among various goods and services. Most of a consumer’s money goes toward housing, transportation, and food and beverages.

  21. NOW YOU TRY:Compute the CPI • For each year, compute • the cost of the basket • the CPI (use 2002 as the base year) • the inflation rate from the preceding year Basket: 20 pizzas, 10 compact discs prices: pizza CDs 2002 $10 $15 2003 $11 $15 2004 $12 $16 2005 $13 $15

  22. NOW YOU TRY:Answers to CPI exercise Cost of Inflation basket CPI rate 2002 $350 100.0 n.a. 2003 370 105.7 5.7% 2004 400 114.3 8.1% 2005 410 117.1 2.5%

  23. Inflation The Consumer Price Index

  24. Inflation The Consumer Price Index producer price indexes (PPIs)Measures of prices that producers receive for products at all stages in the production process. The indexes are calculated separately for various stages in the production process. The three main categories are finished goods, intermediate materials, and crude materials, although there are subcategories within each of these categories.

  25. Inflation The Costs of Inflation During inflations, most prices—including input prices like wages—tend to rise together, and input prices determine both the incomes of workers and the incomes of owners of capital and land. So inflation by itself does not necessarily reduce ones purchasing power.

  26. Inflation The Costs of Inflation Inflation May Change the Distribution of Income real interest rateThe difference between the interest rate on a loan and the inflation rate.

  27. The interest rate stated in a loan contract is: a. The real rate of interest. b. The nominal rate of interest minus the rate of inflation. c. The real rate of interest plus the rate of inflation. d. The same as the rate of inflation.

  28. The interest rate stated in a loan contract is: a. The real rate of interest. b. The nominal rate of interest minus the rate of inflation. c. The real rate of interest plus the rate of inflation. d. The same as the rate of inflation.

  29. Inflation The Costs of Inflation Administrative Costs and Inefficiencies There may be costs associated even with anticipated inflation. One is the administrative cost associated with simply keeping up. Public Enemy Number One? Economists have debated the seriousness of the costs of inflation for decades. No matter what the real economic cost of inflation, people do not like it.

  30. Long-Run Growth output growthThe growth rate of the output of the entire economy. per-capita output growthThe growth rate of output per person in the economy. productivity growthThe growth rate of output per worker.

  31. Which of the following is part of an ideal economy? a. Rapid growth of output per worker. b. Low unemployment. c. Low inflation. d. All of the above.

  32. Which of the following is part of an ideal economy? a. Rapid growth of output per worker. b. Low unemployment. c. Low inflation. d. All of the above.

  33. Long-Run Growth Output and Productivity Growth ▲ FIGURE 7.2 Output per Worker Hour (Productivity), 1952 I–2010 I Productivity grew much faster in the 1950s and 1960s than since.

  34. The two features immediately clear when you examine the trend in productivity in the United States over the past fifty years are: a. An upward trend and fairly sizable fluctuations around that trend. b. An upward trend and relatively small fluctuations around that trend. c. A downward trend and fairly sizable fluctuations around that trend. d. A downward trend and relatively small fluctuations around that trend.

  35. The two features immediately clear when you examine the trend in productivity in the United States over the past fifty years are: a. An upward trend and fairly sizable fluctuations around that trend. b. An upward trend and relatively small fluctuations around that trend. c. A downward trend and fairly sizable fluctuations around that trend. d. A downward trend and relatively small fluctuations around that trend.

  36. Long-Run Growth Output and Productivity Growth ▲ FIGURE 7.3 Capital per Worker, 1952 I–2010 I Capital per worker grew until about 1980 and then leveled off somewhat.

  37. Looking Ahead This ends our introduction to the basic concepts and problems of macroeconomics. The first chapter of this part introduced the field; the second chapter discussed the measurement of national product and national income; and this chapter discussed unemployment, inflation, and long-run growth. We are now ready to begin the analysis of how the macroeconomy works.

  38. producer price indexes (PPIs) • productivity growth • real interest rate • structural unemployment • unemployed • unemployment rate • labor force = employed + unemployed • 2. population = labor force + not in labor force • 3. • 4. R E V I E W T E R M S A N D C O N C E P T S consumer price index (CPI) cyclical unemployment discouraged-worker effect employed frictional unemployment labor force labor force participation rate natural rate of unemployment not in the labor force output growth per-capita output growth

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