Lecture #4.

INFLATION
INFLATION
A general increase in prices and fall in the purchasing value of money (Oxford Dictionary)
Inflation is the rate of increase in prices over a given period. Inflation is typically a broad
measure, such as the overall increase in prices or the increase in the cost of living in a country
(https://www.imf.org. January 8, 2022).

What Causes Inflation?

There are three main causes of inflation: demand-pull inflation, cost-push inflation, and built-in
inflation. Demand-pull inflation refers to situations where there are not enough products or
services being produced to keep up with demand, causing their prices to increase.
Cost-push inflation, on the other hand, occurs when the cost of producing products and services
rises, forcing businesses to raise their prices.
Lastly, built-in inflation—sometimes referred to as a “wage-price spiral”—occurs when workers
demand higher wages to keep up with rising living costs. This in turn causes businesses to raise
their prices in order to offset their rising wage costs, leading to a self-reinforcing loop of wage and
price increases (https://www.investopedia.com. January 8, 2022)

What is the Consumer Price Index (CPI)?

The CPI is an indicator of the change in the average retail prices of a fixed basket of goods
and services commonly purchased by households relative to a base year. What are the uses of
CPI? The CPI is most widely used in the calculation of the inflation rate and purchasing power
of the peso. It is a major statistical series used for economic analysis and as a monitoring
indicator of government economic policy. The CPI is also used to adjust other economic
series for price changes. For example, CPI components are used as deflators for most
personal consumption expenditures (PCE) in the calculation of the gross national product
(GNP). Another major importance of the CPI is its use as basis to adjust wages in labor
management contracts as well as pensions and retirement benefits. Increases in wages
through collective bargaining agreements use the CPI as one of their bases (Philippines
Statistics Authority, January 8, 2021).

Formula
 Pg X Qb x 100
CPI =  Pb X Qb

Where: Pg – price of the given year

Qb – quantity of the base year
Pb – price of the base year

PPP =[ 1 / CPI ] x 100

Where: PPP – purchasing power of peso
Ir = CPI – 100%
Ir – inflation rate
Example:
2015
GOOD PRICE QTY
A 10 100
B 20 80
C 15 50
D 5 200
E 4 400

2016
GOOD PRICE QTY
A 11 120
B 18 100
C 14 80
D 6 250
E 5 420

2017
GOOD PRICE QTY
A 12 150
B 19 120
C 14 100
D 8 300
E 3.5 500

Requirements:
1. Compute CPI, Ir and PPP of 2016 using 2015 as base year
2. Compute CPI, Ir and PPP of 2017 using 2015 as base year
3. Compute CPI, Ir and PPP of 2017 using 2016 as base year

1. CPI 2016 (b=2015) = [11 x 100] + [18 x 80] + [14 x 50] + [6 x 200] + [5 x 400] x 100
[10 x 100] + [20 x 80] + [15 x 50] + [5 x 200] + [4 x 400]
= 1,100 + 1,440 + 700 + 1,200 + 2,000 x 100
1,000 + 1,600 + 750 + 1,000 + 1,600
= 6,440 x 100
5,950
= 108.24%
Ir 2016 (b=2015) = 108.24 – 100 = 8.24%
The average increase in prices in 2016 with 2015 as base year is 8.24%.
PPP2016 (b=2015) = 1/108.24 x 100 = 0.92 or 92 centavos
The value of 1 peso in 2016 is 92 centavos using 2015 as base year.
Increase in the level of prices (INFLATION)
Increase inflation = increase in the increase in prices
2015 P 10
2016 P 12 increase by 20%
2017 P 18 increase by 50% therefore, inflation increases.

Decrease inflation = decrease in the increase in prices

2015 P 10
2016 P 12 increase by 20%
2017 P 13.20 increase by 10% therefore, inflation decreases.

DEFLATION – the average level of prices is decreasing.

Lecture #5. UNEMPLOYMENT
Unemployment is a term referring to individuals who are employable and actively seeking a job but
are unable to find a job. Usually measured by the unemployment rate, which is dividing the number
of unemployed people by the total number of people in the workforce, unemployment serves as one
of the indicators of a country’s economic status (https://www.investopedia.com, January 15, 2022).

Types of Unemployment (https://www.yourarticlelibrary.com, January 15, 2022)

1. Structural
The desire to encourage technological progress can cause structural unemployment. For example,
when workers find themselves obsolete due to the automation of factories or the use of artificial
intelligence.
2. Institutional
Institutional unemployment arises from institutional policies that affect the economy. These can
include governmental programs promoting social equity and offering generous safety net benefits,
and labor market phenomena, such as unionization and discriminatory hiring.
3. Frictional
Some unemployment may be unavoidable by policymakers entirely, such as frictional
unemployment, which is caused by workers voluntarily changing jobs or first entering the
workforce. Searching for a new job, recruiting new employees, and matching the right worker to
the right job are all a part of it.
4. Cyclical
Cyclical unemployment is the fluctuating type of unemployment that rises and falls within the
normal course of the business cycle. This unemployment rises when an economy is in a recession
and falls when an economy is growing. Therefore, for an economy to be at full employment, it
cannot be in a recession that’s causing cyclical unemployment.
5. Seasonal
Seasonal unemployment occurs when people are unemployed at particular times of the year when
demand for labour is lower than usual. Seasonal unemployment refers to a temporary window of
time where the number of available employment opportunities decreases.
6. Disguised
Disguised unemployment exists when part of the labor force is either left without work or is
working in a redundant manner such that worker productivity is essentially zero. It
is unemployment that does not affect aggregate output.
7. Social Unemployment

UNDEREMPLOYMENT
Underemployment is calculated by dividing the number of underemployed individuals by the total
number of workers in a labor force.

There are two types of underemployment: Visible underemployment is underemployment in

which an individual works fewer hours than is necessary for a full-time job in their chosen field.
Due to the reduced hours, they may work two or more part-time jobs in order to make ends meet.

The second type of underemployment is invisible underemployment. It refers to the

employment situation in which an individual is unable to find a job in their chosen field.
Consequently, they work in a job that is not commensurate with their skill set and, in most cases,
pays much below their customary wage.

What Is Full Employment?

Full employment is an economic situation in which all available labor resources are being used in
the most efficient way possible. Full employment embodies the highest amount of skilled and
unskilled labor that can be employed within an economy at any given time
(https://www.investopedia.com, January 15, 2022).
True full employment is an ideal—and probably unachievable—situation in which anyone who is
willing and able to work can find a job, and unemployment is zero. It is a theoretical goal for
economic policymakers to aim for rather than an actually observed state of the economy. In
practical terms, economists can define various levels of full employment that are associated with
low but non-zero rates of unemployment.

Labor Force (LF) – 15 to 60 years old population.

Labor Force Participants (LFP) – LF who are willing and able to work.
Fully Employed (FE) – LFP who work at least 40 hours per week.
Unemployed (U) – LFP who are willing and able to work but cannot find work.
Underemployed (UnD) – LFP who work less than 40 hours per week.
Labor Force Rate (LFR) = [15 to 60 years old population / total population] x 100
Labor Force Participation Rate (LFPR) = (LFP / LF) x 100
Fully Employed Rate (FER) = [FE / LFP] x 100
Unemployment Rate (UR) = [U / LFP] x 100
Underemployment Rate (UnDR) = [UnD / LFP] x 100
Principle: FER + UR + UnDR = 100%
LFP = FE + U + UnD
Example:
Total population = 50 million
LF = 30 million
LFP = 20 million
FE = 15 million
UnDR = 5%
Compute:
1. LFR 2. LFPR 3. FER 4. UnD 5. UR 6. U
Lecture #6. Nominal and Real Wages
The purpose of nominal wage is simply to provide an individual with an expected dollar
amount they will receive for their work within a given time frame from an employer. In contrast,
the purpose of real wage is to help individuals determine how a dollar amount's value changes in
response to changing inflation rates (Investopedia, February 18,2022).

When applying for jobs, it's important to review salaries and compare them against relative living
expenses for your area. Understanding the difference between nominal wage and real wage can help
you evaluate your potential earnings. By researching types of wages and what they mean for your
overall income, you can make important decisions about which opportunities to pursue. In this
article, we define nominal wage and real wage, demonstrate why it's important to understand the
differences, provide key differences between the two and guide you through the process of
calculating your real wage.

What is Nominal Wage?

Nominal wage, or money wage, is the literal amount of money you get paid per hour or by salary.
For example, if your employer pays you $12.00 an hour for your
work, your nominal wage is $12.00. Similarly, if your employer pays you a salary of
$48,000 a year, then your nominal wage would be $48,000. Another way to define nominal wage is
wages measured as current dollars. Current dollars refer to a
person’s income amount without considering how inflation rates will affect it.

What is Real Wage?

Real wage, or adjusted wages, is the amount of pay a person can expect to receive after factoring in
the current inflation rate. For example, if a person's nominal wage is $12.00, their real wage is above
or below that amount depending on the current inflation rate. In this situation, a low inflation rate
would mean that a person's $12.00 per hour wage could get them more than if they had a $12.00 pay
rate during a high inflation period.

Real Wage (RW) = Nominal Wage (NW)

CPI
NW = RW x CPI
CPI = (NW / RW) x 100
Example:
NW2018 =P 15,000/month
NW2023 =P 20,000/month
CPI2023 b= 2018 = 150%

RW 2023 b=2018 = P 20,000/150% = P 13,333.33/month

NW 2023= 22,500 = 15,000 x 150%

RW 2023 b=2018 = 22,500 / 150% = 15,000

Example:
Year CPI NW (per month)
1995 100% Php 10,000
1996 105 12,000
1997 112.50 15,000
1998 120 20,000
1999 125 22,000
Compute the RW from 2000 to 2004
RW 2000(b=2000) = 10,000/100% = Php 10,000
RW 2001(b=2000) = 12,000/105% = Php 11,428.57
RW 2002(b=2000) = 15,000/112.50% = Php 13,333.33
RW 2003(b=2000) = 20,000/120% = Php 16,666.67
RW 2004(b=2000) = 22,000/125% = Php 17,600

Year CPI NW (per month) CPI b= 1996 RW (per

month)b=1996
1995 100% Php 10,000 95.24 10,499.79
1996 105 12,000 100% 12,000
1997 112.50 15,000 107.14% 14,000.37
1998 120 20,000 114.29% 17,499.34
1999 125 22,000 119.05% 18,479.63

NEW CPI with new base year = (old CPI / new base yr CPI) x 100
CPI 1996 (base yr= 1996) = (105 / 105) x 100 = 100%
CPI 1995 (base yr = 1996) = (100 / 105) x 100 = 95.24%
CPI 1997 (base yr = 1996) = (112.5/105) x 100 = 107.14%
CPI 1998 (base yr = 1996) = (120/105) x 100 = 114.29%
CPI 1999 (base yr = 1996) = (125/105) x 100 = 119.05%

RW 1995 (base yr= 1996) = 10,000/0.9524 = 10,499.79

RW 1996 (base yr= 1996) = 12,000/100% = 12,000
RW 1997 (base yr= 1996) = 15,000/107.14% = 14,000.37