Macroeconomics Chapter 5: Prices And Unemployment

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Macroeconomics focuses on

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1. Macroeconomics Problems
2. Macroeconomics Theories
3. Macroeconomics Policies
4. Different Views On How the Economy Works

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Macroeconomic Problems

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1. High inflation rate
2. High unemployment rate
3. High interest rates
4. Low economic growth

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Three Macroeconomic Organizational Categories

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1. P-Q category
2. Self-regulating-Economic Instability category
3. Effective-Ineffective category

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Three Macroeconomic Organizational Categories

1. P-Q category

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the relationship between price level (P) and the real GDP (Q).

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Three Macroeconomic Organizational Categories

2. Self-Regulating-Economic Instability category

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how well, or badly, the economy performs when left to it's own mechanisms.

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Three Macroeconomic Organizational Categories

3. Effective-Ineffective category

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the effectiveness or ineffectiveness of fiscal policy and monetary policy.

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Real GDP

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the value of the entire output produced annually within a country's borders, adjusted for price changes.

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Fiscal Policy

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changes in government expenditures and/or changes in taxes to achieve particular macroeconomic goals.

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Monetary Policy

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changes in the money supply, or the rate of growth of the money supply, to achieve particular macroeconomic goals.

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Price Level

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a weighted average of the prices of all goods and services.

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Price Index

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a measure of the price level.

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Consumer Price Index (CPI)

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a widely cited index number for the price level; the weighted average of the prices of specific set of goods and services purchased by a typical household.

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Consumer Price Index (CPI):

Base Year

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the year chosen as a point of reference or basis of comparison for prices in other years; a benchmark year.

The base year always has a CPI of 100.

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Consumer Price Index (CPI):

equation

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CPI = (total dollar expenditure on market basket in current year / total dollar expenditure on market basket in base year) x 100

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Consumer Price Index (CPI):

equation for percentage change in prices

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percentage change in prices = [(CPI later year - CPI earlier) / CPI earlier year] x 100

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Inflation

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an increase in the price level.

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Nominal Income

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the current-dollar amount of a person's income.

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Real Income

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nominal income adjusted for price changes.

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Real Income equation

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Real Income = (Nominal Income / CPI) x 100

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Today's Salary equation

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Salary in today's (current) dollars = Salary earlier year x (CPI current year / CPI earlier year)

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For purposes of employment, the United States can be divided into two groups:

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1. Those who are a) under 16 years of age; b) in the armed forces; c) institutionalized--in a prison, mental institution, or home for the aged.

2. All others in the population, which is called the civilian non-institutionalized population.

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The civilian non-institutionalized population can be divided into two groups:

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1. those in the civilian labor force

2. those not in the civilian labor force

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Unemployment Rate

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the percentage of the civilian force that is unemployed.

Unemployment rate = number of unemployed persons / civilian labor force

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Employment Rate

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the percentage of civilian non-institutional population that is employed.

Employment rate = number of employed persons/civilian non-institutional population

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Labor Force Participation Rate

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the percentage of the civilian non-institutional population that is in the civilian labor force.

Labor force participation rate = civilian labor force/civilian non-institutional population.

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Reasons For Unemployment

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1. Job Loser - fired or laid off

2. Job Leaver - quit

3. Reentrant - hasn't worked for some time and is reentering the labor force

4. New Entrant - never had a job, is looking for a job

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Discouraged Worker

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an unemployed individual who gives up looking for a new job and is no longer counted as part of the civilian work force and thus not considered unemployed.

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Types of Unemployment

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1. Frictional Unemployment
2. Structural Unemployment
3. Natural Unemployment

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Types of Unemployment

1. Frictional Unemployment

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unemployment owing to the natural frictions of the economy, which is changed by changing market conditions and is represented by qualified individuals with transferable skills who change jobs.

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Types of Unemployment

2. Structural Unemployment

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unemployment due to structural changes in the economy that eliminate some jobs and create other jobs for which the unemployed are unqualified.

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Types of Unemployment

3. Natural Unemployment

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Unemployment caused by frictional and structural factors in the economy.

Natural unemployment rate = Frictional unemployment rate + Structural unemployment rate.

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Full Employment

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the condition that exists when the unemployment rate is equal to the natural employment rate.

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Cyclical Unemployment

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the difference between the unemployment rate and the natural unemployment rate.

Cyclical unemployment rate = unemployment rate - natural unemployment rate.