Chapter 9: Unemployment (Lecture 2)

Front 1

What is the long-term "best criterion" for macroeconomic success?

Back 1

Real GDP/Capita

Front 2

Define: unemployed

Back 2

A worker who currently has no work, is available, but who has not received it in the past month.

Front 3

Define: labor force

Back 3

The sum of employed and unemployed people in an economy

Front 4

Define: unemployment rate. Formula? Given employment rate?

Back 4

The percentage of unemployed workers in the labor force.

Unemployment/Labor Force = 1 - employment rate

Front 5

Define: discouraged workers

Back 5

Workers who currently has no work and is available, but who isn't actively looking for it in the past month.

Front 6

Define: labor force participation. Formula

Back 6

The percentage of the working population that compromises the labor force.

Labor force/Working Population

Front 7

What are two ways the unemployment rate can be under/overstated?

Back 7

Understated: if the a portion of the labor force becomes discouraged because they are no longer counted.

Overstated: part-time workers are considered "employed"; and therefore overstate it.

Front 8

What are the three types of unemployment

Back 8

1. Frictional

2. Structural

3. Cyclical

Front 9

Define: frictional unemployment

Back 9

The short-term unemployment which arises from matching jobs to workers

Front 10

Is eliminating frictional unemployment a good act? Why, or why not?

Back 10

No, because it promotes economic efficiency: it ensures a good match between a job and worker attributes.

Front 11

Define: structural unemployment

Back 11

The unemployment which arises from a persistent mismatch between jobs and worker skills.

Front 12

Define: cyclical unemployment

Back 12

Unemployment which arises from economic recessions: businesses which are laying off workers to decrease costs.

Front 13

When does cyclical unemployment get eliminated?

Back 13

During business expansions.

Front 14

Define: full employment

Back 14

When the cyclical unemployment is zero, or the remaining unemployment are the frictional and the structural ones.

Front 15

Define: natural rate of unemployment

Back 15

The sum of the frictional and the structural unemployments

Front 16

How can unemployment rate be increased?

Back 16

1. Unemployment insurance programs (increases time for frictional unemployment)

2. Wage laws (if above market level, then surplus)

3. Unions

4. Efficiency Wages

Front 17

Define: efficiency wages

Back 17

Above-market wages to increase worker productivity

Front 18

Define: price level and the inflation rate.

Back 18

Price Level: the average prices of goods and services in the economy

Inflation Rate: the annual percentage change rate of the price level

Front 19

Define: consumer price index (CPI)

Back 19

An index which measures the average change of a typical suburban household of four paying for an goods and services

Front 20

What are the biases of the CPI?

Back 20

1. Substitution Bias: Assumption that the same quantity of goods will be bought; violates the law of demand

2. Quality Bias: price increase are not caused fully by inflation, but by quality improvements

3. Product Bias: slow updates of the basket of goods

4. Outlet Bias: locations of buying of the basket of goods

Front 21

Define: Producer Price Index (PPI)

Back 21

An average of the prices received by producers of goods and services at all stages of the production.

Front 22

How can dollar-value be adjusted for inflation?

Back 22

The dollar value of the desired base year * the ratio of the current year's CPI with the base year's CPI.

Front 23

Define: nominal variables

Back 23

Variables which are not adjusted for inflation

Front 24

How does one get the real variable from a nominal one using an index? E.g. inflation.

Back 24

Nominal/Price Index

Front 25

What is the formula for calculating the real interest rate? What is the requirement for this?

Back 25

Real = Nominal - Inflation.

Inflation rates are low.

Front 26

What is a societal effect of inflation?

Back 26

Distribution of income and wealth; some are contracted which are stated in nominal terms and are set for the long-term.

Front 27

Define: menu costs

Back 27

The cost of a firm changing its nominal prices.

Front 28

If interest rates are higher due to inflation, what is the effect on borrowing and lending?

Back 28

The borrower may gain at the expense of the lender due to non-optimal adjustments for inflation.

Front 29

How can redistribution of wealth occur?

Back 29

During inflationary periods, those on fixed-income will lose purchasing power. It can also occur due to inaccurate adjustments for inflation for those who are not in fixed-income.

Front 30

Define: underemployed

Back 30

Highly skilled workers working in low-paying or low-skilled jobs, or part-time workers who wish to work full time.

Front 31

Why would firms lend during deflation?

Back 31

As real interest rates are higher.

Real = nominal - inflation.

Front 32

What is the effect of counting the military for the calculation of employment?

Back 32

Unemployment: decrease as the labor force increases while unemployed does not change

Both the labor force participation and the employment-participation ratio would increase as adding the same amount to both the numerator and the denominator for a fraction less than one will increase it.

Front 33

Formula: obtaining a real variable from a nominal one using an index.

Regarding the price index, in what year is the real variable expressed in?

How is the change in economic variables calculated?

Back 33

Nominal Variable / Price Index * 100

The base-year's value.

% change in the real variables.

Front 34

Formula: CPI and inflation rate

Back 34

Expenditures of the current year / expenditures of the base year, holding quantities constant.

Inflation rate = % change in year to year CPI.