Lec 2 - Jobs & Inflation

Question 1

Consumer Price Index Definition

Answer 1

The average prices paid by consumers for a ‘fixed’ basket of consumer goods and services.

Question 2

The Negative Effects of Unemployment

What are the three main negative effects?

Answer 2

• Loss of human capital: prolonged unemployment destroys human capital which permanently damages a person’s job prospects.
• Loss of income: whatever the duration, the loss of income is devastating for those who bear it; employment benefits are intended to create a safety net but cannot fully replace lost wages for those who it does apply to.
• Loss of production

Question 3

Labour Force Survey Purpose

Answer 3

The Office for National Statistics conducts a monthly population survey of age and labour market status used to describe the changing anatomy of the UK workforce.

Question 4

Labour Force Survey Categories

Answer 4

• The non-working-age population: number of people aged under 16, over 64 years, or are in institutional care.
• The working-age population: number of people aged 16 to 64 years, who are not in institutional care.

The working-age population is then divided into two further groups:
• Economically active: people who have a job or are willing and able to take a job.
• Economically inactive: people who do not want a job or are not looking for a job.

Question 5

Economically inactive definition

Answer 5

People who have not sought work within the last four weeks and/or are unable to start work within the next two weeks.

Question 6

Unemployed Definition

Answer 6

Someone who is in one of three categories:
• Without work, but has made specific efforts to find a job within the previous four weeks
• Waiting to be called back to a job from which he or she has been laid off
• Waiting to start a new job within 30 days
Does not include people without a job who are making no effort to find work.

Question 7

Labour Market Indicators

Answer 7

• The unemployment rate
• The employment rate
• The economic activity rate

Question 8

Unemployment Rate Formula

Answer 8

(number unemployed ÷ workforce) x 100

Question 9

Employment Rate Formula

Answer 9

• The employment rate = (number employed ÷ working-age population) x 100
Over the last forty years, the employment rate increased slightly from about 59 percent to about 60 percent.

Question 10

Economic Activity Rate Formula

Answer 10

(workforce ÷ working-age population) x 100

Question 11

Problem with Unemployment rate

Answer 11

The official measure is imperfect due to its exclusions:
• Discouraged workers: people who are available and willing to work but stopped actively looking for a job because they believe that no jobs are available.
o The ‘unemployed + discouraged’ measure is only slightly higher than the official measure.
• Others who want a job: economically inactive individuals who are willing to work but stopped actively looking for a job because they are not available to start a job in the next 2 weeks.
o The ‘want a job’ rate is the sum of the unemployed, discouraged and others who want a job.

Question 12

Types of Unemployment

What are the three types of unemployment?

Answer 12

• Frictional unemployment
• Structural unemployment
• Cyclical unemployment

Question 13

Frictional Unemployment Definition

Answer 13

This type of unemployment arises from normal labour market turnover.
The creation and destruction of jobs requires that unemployed workers search for new jobs.
Increases in the number of people entering and re-entering the workforce and increases in unemployment benefits raise frictional unemployment.
This is a permanent and health phenomenon in a dynamic growing economy.

Question 14

Structural Unemployment Definition

Answer 14

This type of unemployment arises from changes in technology and competition that change the skills needed to perform jobs or the locations of jobs.
Structural unemployment lasts longer than frictional unemployment due to the requirement to retrain or relocate.
This can become a serious long-term problem.

Question 15

Cyclical Unemployment Definition

Answer 15

Higher than normal unemployment at a business cycle trough and lower than normal unemployment at a business cycle peak.
This type of unemployment arises from the economy being in recession, which causes a worker laid off and is then rehired when the expansion begins.

Question 16

Natural Unemployment Definition

Answer 16

Unemployment that arises from frictions and structural change when there is no cyclical unemployment.

Question 17

Natural Unemployment Rate Definition

Answer 17

Unemployment rate when the economy is at full employment.
The natural unemployment rate changes over time and is influenced by many factors:
• The age distribution of the population
• The scale of structural change
• The real wage rate
• Unemployment benefits

Question 18

Price Level Definition

Answer 18

The average level of prices and the value of money.

Question 19

Inflation Definition

Answer 19

A persistently rising price level.

Question 20

Deflation Definition

Answer 20

A persistently falling price level.

Question 21

Uses of Price Level

What are the two main uses of price level?

Answer 21

• Measure the inflation rate or the deflation rate.

* Distinguish between money values and real values of economic variables.

Question 22

Problems with Unpredictable Inflation/Deflation

What are the four main problems?

Answer 22

• Redistributes income
• Redistributes wealth
• Lowers real GDP and employment
• Diverts resources from production

Question 23

Hyperinflation Definition

Answer 23

An extreme form of inflation where the rate exceeds 50% per month, that grinds the economy to a halt and society to a collapse.

Question 24

Effects of Hyperinflation

What are the four common effects?

Answer 24

• Workers are paid more frequently and spend as soon as money is received
• Prices are adjusted continuously
• Only short run exists: no savings, no lending, no investment
• The economic system collapses

Question 25

Consumer Price Index Definition

Answer 25

The average prices paid by consumers for a ‘fixed’ basket of consumer goods and services.

Question 26

Constructing the CPI

What are the three stages involved in constructing the CPI?

Answer 26

1. Select the basket
2. Conduct a monthly price survey
3. Calculate the price index

Question 27

Selecting the CPI Basket

Answer 27

The CPI basket is selected to be representative of all the types of consumer item bought by an average household in the UK.
The idea is to make the relative importance of the items in the CPI basket the same as that in the average household’s budget.

Question 28

Calculating the Price Index

Answer 28

1. Find the cost of the basket at base-period prices.
2. Find the cost of the basket at current-period prices.
3. Calculate the price index for the base period and for the current period.
   CPI = (Cost of basket at current-period prices ÷ Cost of basket at base-period prices) x 100

Question 29

Alternative Price Indexes

Answer 29

The CPI has been measuring UK price level since 1997, replacing the Retail Price Index. This index is based on expenditure by private households, residents of institutions and tourists.

The RPI and the CPI differ in the scope of the basket of goods and services covered and the weights placed on the items.

The RPI compares the cost of the typical basket of goods consumed in period 1 to the cost of a basket of goods typically consumed in period 2.

Question 30

GDP Deflator Definition & Formula

Answer 30

An index of the prices of all the items in GDP. It is thus appropriate for macroeconomics because it is a comprehensive measure of the cost of the real GDP basket of goods and services.
(Nominal GDP ÷ Real GDP) × 100.

Question 31

Purpose of CPI

Answer 31

The major purpose of the CPI is to measure inflation.

The inflation rate is the percentage change in the price level from one year to the next.

Question 32

Types of Inflation

Answer 32

High inflation: when the price level rises rapidly.
Low inflation: when the price level rises slowly.
Negative inflation: when the price level falls.

Question 33

Biased Price Indexes

What are the four price biases?

Answer 33

• New goods bias: New products are not introduced into the index until they are commonplace items.
• Quality change bias: Quality improvements occur every year.
• Substitution bias: People switch to buying cheaper goods.

Question 34

Consequences of Biased Price Indexes

What are the three consequences?

Answer 34

• Distorts private contracts
• Increases government outlays
• Might lead to inappropriate monetary policy decisions by the Bank of England

Question 35

Aggregate Hours Definition & Purpose

Answer 35

Aggregate hours: the total number of hours worked by all the people employed, both full time and part time, during a year.
Labour is measured in hours rather than in jobs.
Fluctuations in aggregate hours and average hours per worker line with the business cycle.

Question 36

Real wage rate and price level rise

Answer 36

If the price level rises and the money wage rate does not change, the real wage rate decreases and the quantity of goods and services that an hour of work can buy decreases.

Question 37

Aggregate hours and average weekly hours per person in the UK
(How have these two changed since 1963?)

Answer 37

Since 1963 in the United Kingdom, aggregate hours have varied over the business cycle but have not shown a strong trend.
Average weekly hours per person has decreased over time.

Question 38

What is the smallest and most stable source of unemployment?

Answer 38

Job leavers.

Question 39

Trough definition

Answer 39

The lower turning point of a business cycle when an expansion begins.

Question 40

Business cycle definition

Answer 40

The pattern of irregular upward and downward movements in production and jobs.

Question 41

Inflation rate formula

Answer 41

Inflation rate = [(CPI this year – CPI last year) ÷ CPI last year] x 100