ECON CH 7 Flashcards
inflation
an increase in the overall price level
deflation
is a decrease in the overall price level
price indexes
used to measure overall price level
GDP deflator
is the price index that measure the overall price of all goods and services produced in the economy
consumer price index (CPI)
is the price index that measure the overall price of a “market basket” purchased monthly by a typical consumer (is computed each month by the bureau of labor stats)
the CPI market basket shows
it shows how a typical consumer divides his or her money among various goods and services. most of a consumers money goes toward housing, transportation, food, and beverages.
five steps to calculate CPI and inflation rate
- fix the “basket” (determine the quantities in the basket)
- find the prices
- compute the baskets cost
- choose the base year and compute the CPI in any year
- calculate the inflation rate
CPI in a year equation
cost of basket in that year divided by cost of basket in base year x100
the three main PPI categories
- finished goods
- intermediate materials
- crude materials
how can inflation change purchasing power
- if income rise by the same percentage as price rise, then the purchasing power stays constant and people are not hurt by inflation
- but, people living on fixed incomes (not incomes or incomes adjusted for inflation) are hurt by inflation
- if incomes of some groups of people rise by less than prices rise, then the purchasing power declines and those people are hurt by inflation
the costs of inflation
- inflation creates administration costs and inefficiencies
- during inflation, people need more cash
- misallocation of resources
- creates instability in the business environment
the economic costs of inflation: increased business risk and slower economic growth
unanticipated inflation increases the risk and cost associated with investments in the economy. this discourages firms from investing and reduces the long-run rate of growth in the economy
unemployment
the most frequent discussed symptom of recessions
social costs of unemployment
- suicides
- homicides
- more people going to mental institutions
- more going to prisons
- more deaths
- increases in domestic violence and homelessness
BLS divides the AP into 3 groups
- employed
- unemployed
- not in the labor force
unemployment rate
the ratio of the number of people unemployed to the number of people in the labor force
u-rate equation
unemployed divided by labor force x100
labor force participation rate
the ratio go the labor force to the total adult population
LF-rate equation
LF divided by AP x100
an employed person is any adult person who either (3)
- works for pay
- works without pay
- has a job
an unemployed person is any adult person who (2)
- does not have a job
2. has been looking for work in the last four weeks
unemployment rate is
an aggregate (an average)
discouraged worker
people who would like to work but have given up looking for jobs
- classified NLF
- lowers the U rate by about 1%
not in the labor force (NLF)
an adult person who is not looking for work, b/c they either do not want a job or has given up looking for a job
sue lost her job, and begins looking for a new one
- u-rate rises
- the labor market is worsening
- the u-rate is telling the truth
jon has been out of work since last year, becomes discouraged, stops looking for work
- u-rate falls
- labor market worse
- u-rate not accurate
sam lost 80,000 job, and takes part-time job at mcdonalds until he finds a better job
- u-rate unchanged
- labor market worse
- u-rate not accurate
three types of unemployment
- frictional
- structural
- cyclical
frictional unemployment (GOOD)
is the portion of unemployment that is due to the normal working of the labor market
-short-term job/skill matching problems
structural unemployment (GOOD)
is the portion of unemployment due to structural changes in the economy that result in a significant movement of jobs from industries to others
-long-term job/skill adjusting problems
cyclical unemployment (BAD)
is in an increase in unemployment that occurs during recessions and depressions
-short-term job/skill
natural rate of unemployment
is the unemployment that occurs as a normal part of the functioning of the economy
-the sum of frictional and structural
economic costs of unemployment
the loss of goods and services not being produced
social costs of unemployment
- large number of people living in poverty
- personal and social ills: anxiety, depression, deterioration of psych and physical health, suicide, etc
recession
production goes down and unemployment goes up
business cycle
is the cycle of short-run ups and downs in an economy or deviations of output and employment away from the long-run trend
ideal economy (3)
- stable and rapid output growth 3%
- low unemployment 5%
- decent rate of inflation 2%
NBER convention
a recession is a period in which real GDP declines for at least two consecutive quarters
3 symptoms of a recession
- falling output (decline in real GDP)
- rising unemployment
- low capacity utilization rate
labor productivity equation
total output divided by total number of worker hours
five ways to increase output in long-run output and productivity growth
- add more workers (labor=L)
- add more machines (capital=K)
- increase the length of the work week
- increase the quality of the physical capital (tech advances thru R&D)
- increase the quality of human capital (increase workers education, mental and physical skills)
the upward trend in productivity can be explained by (2)
- an increase in the amount of capital per worker
2. a continuous increase in quality of labor and capital
population=
labor force+not in the labor force
natural rate=
frictional+ structural=5.5%
