Measuring Inflation and Unemployment Flashcards
Inflation
Increase in prices in economy and decrease in the purchasing power of money. Measures an increase in the cost of living
How people protect themselves against inflation?
They demand higher wages, invest in assets вклады that earn interest or increase in value over time. Cash doesn’t protect money against inflation
Does Treasury inflation-protected security pay fixed interest?
Yes, it does
What can cause inflation?
Demand factors, supply shocks and government policy
Price level
It is the average of current prices across the entire spectrum of goods and services. Absolute level of a price index, whether it is the consumer price index (CPI, retail price), the producer price index (PPI, wholesale prices), GDP deflator.
Rate of inflation
The percentage increase in prices over a 12-month period
Disinflation
Reduction in the rate of inflation
Deflation
Decline in overall prices throughout the economy
What is used to measure the inflation?
Consumer price index CPI, producer price index PPI and GDP deflator
Consumer price index CPI
Index of the average prices paid by urban consumers CPI-U and urban wage earners and clerical workers CPI-W for a clerical basket of consumer goods and services. CPI=(market basket cost in current period/market basket cost in base period)x100
Market basket
Selection of goods that are constantly purchased and sold
What does cost of living index compare?
It compares the cost of maintaining the same standard of living in the current and base periods
Cost of goods index
Meadow the average change over time in the prices paid by urban consumers
What does Bureau of labour statistics (BLS) include?
Consumer expenditure survey, telephone point of purchase survey and census data данные переписи to measure changes in consumer prices
What formula is used to calculate the percentage change in price?
% change in price = ((CPI in current year/CPI in original year)х100)-100
What isn’t included in CPI?
Public goods (national defence spendings), environment, homeland security, life expectancy, crime rates, climate change, product substitution
Why does CPI tend to overstate inflation?
Fixed market basket = Product substitution, quality improvements, new products
Personal consumption expenditures
Another measure of inflation. Uses a system that adjust the weights for different categories of goods and uses actual sales data
Producer price index PPI
Index of the average prices received by domestic producers for their output. It measures the net revenue accruing начисляющийся to a representative firm for a specific products. Excise taxes are excluded. Rebate offers or zero-interest loans are included. The products measured are the same from month to month, so PPI has same problems as CPI (quality changes, deleted products, manufacturers existing the industry)
Rebate option
A partial refund of the cost of an item
GDP deflator
Index of the average prices for all goods and services, including consumer goods, investment goods, government goods and exports
For what are price indexes used?
For escalating and deflating. They protect people’s wages as well as from spikes in prices
Escalation
Persistent rise in the price of the specific goods due to combination of inflation, supply/demand, environment and so on
Deflation
Adjusting some current value (nominal value) (declining) for the impact of inflation creating real value.
What formula is used to calculate the real value?
Real value = nominal x (base year index (GDP deflator)/current year index)
Hyperinflation
High rate level of inflation. Is caused by an excess of government spendings over tax revenues (high deficit) coupled with the printing of money to finance these deficits
What does BLS report?
It reports 3 major monthly numbers: size of the labour force, number of people employed, numbers of unemployed
How to calculate an unemployment rate?
Unemployment rate = numbers of unemployed people/labor force
People are counted as employed if:
They have performed any work at all for pay or profit deriving the survey week
Unpaid family workers
Work more or 15 hours a week on a family enterprise. Counted as employed too
People are counted as unemployed if:
They do not have a job but are available for work and seek it for previous 4 weeks
Labour force participation rate
Percentage of the adult noninstitutionalised population that is in the labour force
Unemployment statistics include:
Gauging the state of the economy, determining the divergence of supply and demand, assessing оценивание the distribution of unemployment and the extent to which people are suffering from being out of work
Marginally attached workers
Portion of marginally attached workers who have given up actively looking for work and are not counted as unemployed. Can be affected by recession and family duties
Underemployed workers
Workers who are forced to take up jobs that do not fully utilise their education, skills and so on.
Why do employers keep wages above the market equilibrium?
To reduce turnovers, boost morale, increase employees’ productivity. These efficiency wages give employees an incentive to work
Frictional unemployment
Result from workers who voluntarily quit their jobs to search for better positions or are moving to new jobs but may take several days or weeks before they can report to their new employers
Structural unemployment
Unemployment caused by changes in the structure of the consumers’ demand or technology. Demand falls - skills of workers are not needed. Associated with extended periods of unemployment
Cyclical unemployment
Unemployment which results from changes in the business cycles and where policymakers can have the greatest impact by keeping the economy on a solid growth path
Natural rate of unemployment
Level of unemployment at which price and wage decisions are consistent последовательные. Level at which actual rate = people’s inflationary expectations and where cyclical unemployment is 0. Calculated by adding frictional and structural unemployment
Nonaccelerating inflation rate of unemployment NAIRU
Unemployment rate most consistent with a low level rate of inflation. Inflationary pressures are at their minimum
Four key markets
Labor, financial, capital, output. Affect job growth
What happens if increase in GDP is the same as an increase in GDP deflator?
There is no an increase in real output
Overstated inflation
When the price of a product increases substantially, consumers tend to substitute lower-priced alternatives. CPI overstate inflation because it comprises substitute and quality biases. Real earnings look smaller because they are adjusted for that level of inflation
Understated inflation
Quality adjustments cause inflation to be understated. They may account for improvements in standard of living, but the consumer doesn’t pay lower prices
How to find new value (salary for example)?
New salary=old x CPI in current year/CPI in base year
Misery index
An informal measure of the state of an economy generated by adding together its rate of inflation and rate of unemployment
Jobless recovery
GPD increases with no increase in employment
How to calculate an inflation rate?
Inflation rate = (current CPI/previous CPI x 100) - 100 or rate of inflation = ((CPI current period-CPI previous period)/CPI previous period)x100
