In this chapter we explored the two most important problems that market economies face unemployment and inflation. Economists have devised specific definitions and specialized tools to define and measure both unemployment and inflation. Policymakers keep close watch on both because of their negative effects on society's standard of living. | Chapter 13 Unemployment and Inflation: Can We Find a Balance? Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 13- What Is Unemployment? Not in the Labor Force Labor Force Unemployed Potential Labor Force Population LFPR = # people in labor force # in potential labor force population UR = # people unemployed # people in labor force Click 1: black vertical line, Labor Force, Not in the Labor Force Click 2: LFPR Click 3: Unemployed Click 4: UR 13- Unemployment in a Market Economy Employment per unit of time Wage rates D D S S e0 e e1 w w1 Click 1: w1, horizontal dashed line, vertical dashed lines, e0 and e1 13- Types of Unemployment Frictional Unemployment Structural Unemployment Cyclical Unemployment Full Employment Unemployment Rate 13- Annual Unemployment Rate 1960-2008 Data stored in a datasheet Click 1: red line 13- What Is Inflation? Inflation – a continuing rise in the general level of prices Dynamic, self-sustaining Suppressed inflation How Is Inflation Measured? The inflation rate between year 0 and year 1 is calculated as follows: If CPI in year 0 = 100 and CPI in Year 1 = 108, then: Inflation Rate in Year 1 = 108 – 100 * 100 = 8% 100 Inflation rate in year 1 = CPI in Year 1 – CPI in Year 0 * 100 CPI in Year 0 13- 13- Price Indexes Consumer Price Index (CPI) = cost-of-living index Implicit price deflator 13- Year 0 1 P Cost P Cost 40 lbs grapes $ $ $ $ 120 Knitting Needles $ $ $ $ Cost of Market Basket $ $ Constructing the Consumer Price Index How the Consumer Price Index Is Calculated Choose a Base Year Index = Cost of Market Basket year i * 100 Cost of Market Basket in base year Index(Year 0) = ($200/$200) * 100 = 100 Index(Year 1) = ($216/$200) * 100 = 108 13- 7 Problems in Measuring the Cost of Living Typical household Substitution bias Introduction of new goods Unmeasured quality . | Chapter 13 Unemployment and Inflation: Can We Find a Balance? Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 13- What Is Unemployment? Not in the Labor Force Labor Force Unemployed Potential Labor Force Population LFPR = # people in labor force # in potential labor force population UR = # people unemployed # people in labor force Click 1: black vertical line, Labor Force, Not in the Labor Force Click 2: LFPR Click 3: Unemployed Click 4: UR 13- Unemployment in a Market Economy Employment per unit of time Wage rates D D S S e0 e e1 w w1 Click 1: w1, horizontal dashed line, vertical dashed lines, e0 and e1 13- Types of Unemployment Frictional Unemployment Structural Unemployment Cyclical Unemployment Full Employment Unemployment Rate 13- Annual Unemployment Rate 1960-2008 Data stored in a datasheet Click 1: red line 13- What Is Inflation? Inflation – a continuing rise in the general level of prices .
