Topic 2 - Inflation and Unemployment Flashcards
What is unemployment
- Refers to people who are willing and able to work but don’t currently have a job
Why is unemployment a serious problem
- Lost income and production
- Fall in human capital
What is human capital
- Refers to the knowledge and skills of workers that have economic value
Why is unemployment harmful to human capital
- The longer the spell of unemployment the more human capital will be lost
- Unemployed workers are not actively using a large portion of their knowledge and skills
What does the Labour Force Survey (LFS) provide
- Provides a detailed picture of UK unemployment at the national and regional level
How does the LFS divide the population into 2 groups
- Working-Age population: the number of people aged 15-64 who are not in prison, hospital or some other form of institutional care
- People under 16 or in institutional care
How is the working-age population divided into 2 groups
- Workforce (Economically Active): Have a job or are willing and able to take a job
- Economically Inactive: Do not want a job
What is the textbook definition of unemployment
- A person must be available for work within 2 weeks and 1 of the next 3
- Without work but seeked work in the last 4 weeks
- Waiting to start a new job in 30 days
- Waiting to be called back to a job from which they were laid off
What three labour market indicators do the Office for National Statistics (ONS) calculate
- The unemployment rate
- The employment rate
- The economic activity rate
What is the unemployment rate and how is it calculated
- The % of the workforce that is unemployed
- Unemployment Rate = (Number unemployed / Workforce) x 100
What is the employment rate and how is it calculated
- The percentage of the working-age population who have jobs
- Employment Rate = (Number employed / Working-age population) x 100
What is the economic activity rate and how is it calculated
- The percentage of the working-age population who are economically active
- Economic Activity Rate = (Workforce / Working-age population) x 100
What are the 4 different types of unemployment
- Frictional Unemployment: Between jobs or searching for a new job
- Structural Unemployment: Technology or competition changes the skills to perform jobs or their location
- Cyclical Unemployment: Changes in unemployment linked to the stages of the business cycle
- Natural Unemployment: Unemployment that arises when cyclical unemployment is zero. Either structural or frictional
What is inflation
- A sustained rise in the price level over time
How is inflation calculated
- ((P - Ppast) / Ppast) * 100
What do inflation and deflation indicate
- Inflation: Demand > Production
- Deflation: Demand < Production
Why is low inflation desirable
- The inflation tax
- Redistribution of wealth
- The danger of deflation
What is inflation tax
- The real value of savings decrease
- High inflation erodes purchasing power
How does is redistribution of wealth affected by inflation
- Inflation redistributes wealth from lenders to borrowers
- If you owed £2000 and there was high inflation you would owe less
Why is deflation dangerous
- If prices are falling, consumption and investment get postponed
- This can mean economic stagnation
What are the two main measures of UK household inflation
- Retail Prices Index (RPI)
- Consumer Prices Index (CPI)
How is the retail price index calculated
- Find the cost of the basket at base-period prices
- Find the cost of the basket at current-period prices
- Calculate the price index
- Index = 100 x (current prices / base prices)
What is the GDP Deflator and how is it calculated
- An index of the prices of all the items in GDP
- Includes goods and services in I and G
- GDP Deflator = 100 x (Nomial GDP / Real GDP)
- Only includes goods and services produced domestically
What is the condition for hyperinflation and its affect
- Inflation is 50% or more per month
- Money loses value rapidly and economy grinds to a halt
How do we calculate Inflation from the GDP deflator
- ((GDP Deflator year 2 - GDP Deflator year 1) / GDP Deflator year 1) * 100
How is the number of people in the workforce calculated
- Employed + Unemployed
Do CPI and RPI include house prices
- Neither CPI or RPI include house prices
- RPI includes the costs of home ownership not prices directly
