chapter 7 Flashcards
Unemployed
not employed and actively seeking work
Employed
working full-time or part-time at a paid job
Work force
employed + unemployed
Unemployment rate formula
(unemployed/labor force) x 100
Labor force participation rate
percentage of working-age population in the labor force (employed or unemployed)
Labor force participation rate formula
(labor force/working-age population) x 100
Involuntary part-time workers
- some workers who are employed part-time would rather have a full-time job, but can’t find one
- they don’t show up on official unemployment rate
Discouraged workers
- those who want to work, but have given up actively searching for jobs
- The number of discouraged workers tends to increase in recessions and decrease in expansions
Unemployment rate and discouraged workers
As the economy beings expanding, the unemployment rate often increases even as the economy is creating more jobs, because previously discouraged workers get encouraged and re-enter the labor force actively seeking work again
Regional differences
the unemployment rate average hides regional differences in unemployment rates across Canada
Types of unemployment
- Frictional Unemployment
- Structural Unemployment
- Seasonal Unemployment
- Cyclical Unemployment
Healthy unemployment types
- Frictional Unemployment
- Structural Unemployment
- Seasonal Unemployment
Frictional Unemployment
- due to normal labor turnover and job search; healthy part of a changing economy
- Caused by workers between or searching jobs
Structural Unemployment
- due to technological change or international competition that makes workers’ skills obsolete
- there is a mismatch between the skills workers have and the skills new jobs require
- Workers who are structurally unemployed need to retrain to find new and different jobs
Seasonal Unemployment
- due to seasonal changes in weather
- Not a problem needing a policy solution
Cyclical Unemployment
- due to fluctuations in economic activity over the business cycle
- Workers who lose their jobs because of contraction in economic activity
- Needs fixing from the government, either monetary or fiscal policy
Natural rate of unemployment (full employment)
unemployment rate at full employment, when there is only frictional, structural and seasonal unemployment (all the healthy types of unemployment)
zero percent cyclical employment
If the economy is at full employment (with no cyclical unemployment) real GDP =
potential GDP
Recessionary Gap
- when the economy contracts and real GDP falls below potential GDP
- There are unemployed inputs, so real GDP is less than potential GDP
Inflationary Gap
- when the economy expands and real GDP temporarily rises above potential GDP
- Inputs are fully employed and the economy is working overtime
- Unemployment rate decreases below the natural rate and more workers are employed, so levels of healthy unemployment drop below normal levels
Inflation
a persistent rise in the average price level and a fall in the value of money
Consumer Price Index
measures the monthly change in prices paid by consumers.
Inflation rate
annual percentage change in the Consumer Price Index
Inflation Rate Formula
((CPI for current year - CPI for previous year)/CPI for previous year) x 100
Core Inflation Rate
inflation rate excluding unpredictable categories
Why is inflation important
- inflation reduces purchasing power of unchanged dollar incomes
- inflation affects the purchasing power of a loan and interest received or paid
- Unpredictable prices discourage planning and investment
Nominal interest rate
observed interest rate; equal to the number of dollars received per year in interest as a percentage of the number of dollars saved
Real interest rate
nominal interest rate adjusted for effects of inflation, calculates the purchasing power you have gained or lost at the end of a loan → more important for making smart saving and investing decisions
Acceptable inflation
Low inflation rate, between 1-3%
Deflation
persistent fall in average prices and a rise in the value of money
Deflation impact on savers
deflation increases the purchasing power of any money you have in the bank, which benefits savers
Deflation impact on borrowers
hurts borrowers because when they pay back loans, they are paying back more valuable dollars (in purchasing power) than the dollars they borrowed
During deflation, asset values
fall
What does inflation rate miss?
- Standard of living vs Cost of living
- Switching to cheaper substitutes
- New and better products
Money (M)
consumers use money income earned in input markets to buy the products and services they want
Velocity of Money
number of times unit of money changes hands during a year
P x Q
nominal GDP, which also equals aggregate income
Quantity theory of money formula
M x V (fixed) = P x Q (fixed)
Quantity theory of money
increase in the quantity of money causes an equal percentage increase in the inflation rate
Relationship between money and inflation
There cannot be inflation in the economy as a whole unless there is an accompanying increase in the quantity of money
Phillips Curve
graph showing an inverse relation between unemployment and inflation
* When the unemployment rate was lower, the inflation rate was higher
* When the unemployment rate was higher, the inflation rate was lower
Demand-pull inflation
rising average prices caused by increases in demand
Downward demand-pull deflation
- Decrease in demand pull prices down
- Decreased demand causes surpluses of unsold products and services, leading businesses to cut prices
Supply shocks
events directly affecting businesses’ costs, prices and supply
Cost-Push Inflation
- rising average prices caused by decreases in supply
- A decrease in supply caused by increasing costs is the key force pushing output prices
- There is also an accompanying increase in the quantity of money
Stagflation
combination of recession (higher unemployment) and inflation (higher average prices)
Two factors that complicate the original (short-run) Phillips Curve
- changes in the natural rate of unemployment
- changes in inflation expectations
