The economic costs that arise from unempolyment are re-training costs to help workers attain back

their skills, opportunity cost in terms of government expenditure and other external costs to society
due to unemployment such as increased crime and increased health expenditure.

Major measures of the price levels are gdp deflator, Consumer price index and production price
index.

CPI: is the measure of the overall cost of the goods and srvices bought by a typical consumer/
measures the consumer’s typical cost of living. It can be used to calculate inflation rate.

CPI is calculated with a fixed basket of goods and services whereas the GDP deflator uses the current
quantity of goods and services produced in the country.

CPI includes imported goods while GDP does not.

Any capital goods such as machinery and equipment if produced in the country willl be included in
the gdp deflator but in CPI it wont.

CPI is calculated by: 1) fix the “basket” 2) find the prices 3) compute the basket’s cost 4) choose a
base year and compute the index

Cost of basket is calculated by QUANTITY * PRICE

CPI in any year = 100 *( cost of basket in the current year/ cost of basket in base year)

5) compute the inflation rate: inflation rate= ( (CPI this year – CPI last year)/ CPI last year ) * 100%

Higher price of goods will lead the CPI to overestimate the general price level while a decrease will
lead the CPI to underestimate the general price level.

Diff between nominal variable and real variable is that nominal is not correct for inflation while real
is. Nominal variable is a variable measeured in current dollars which means that it is measured using
the actual prices from that year. A real variable is a variable measured in constant dollars, which
means that it is measured using prices from a base year. That is, real variable is adjusted for the
effects of inflation.
Menu costs are costs to firms of changing prices. Retailers are most like to incur high menu costs.

Real interest rate = Nominal interest rate – inflation because it is corrected for inflation.

If inflation rate turns out to be higher than expected then a lender will be at lost while a borrower
will be at a benefit.

Labour force= employed + unemployed

Unemployment rate = (no of unemployed people / labour force) * 100

Labour force participatioin rate = (labour force / total adults working age population) * 100

Working – age population = 201,661

Employment = 127,817

Unemployment = 7,296

Labour force = 127817 + 7296 = 135113

UER = (7296/135113)*100 = 5.4%

Labour force participation rate = 135113/201661 * 100 = 67%

When inflation is higher than expected then the real interest rate in lower