Chapter 8

CHAPTER
6
MACRO
ECONOMIC
MEASUREMENTS,
ECONOMICS
Roger A. Arnold • Thirteenth Edition
PART I: PRICES
AND
©2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or
UNEMPLOYMENT
duplicated, or posted to a publicly accessible website, in whole or in part.
©Sashkin/Shutterstock
6-1 Measuring the Price Level
6-2 Measuring Unemployment
2
©2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©SashkinShutterstock
6-1 Measuring the Price Level (1 of 7)
• There is a difference between price and the price level

• The word price refers to a single price, such as the price of
apples
• Price Level: A weighted average of the prices of all goods and
services
• Price Index: A measure of the price level
• 6-1a Using the CPI to Compute the Price Level
• Consumer Price Index (CPI): The weighted average of prices
of a specific set of goods and services purchased by a typical
household; a widely cited index number for the price level
• Base Year: The year chosen as a point of reference or basis of
comparison for prices in other years; a benchmark year
3
• 6-1a Using the CPI to Compute the Price Level (cont)

• Economists measure the price level by constructing a price index
like the CPI
• The CPI is based on a representative group of goods and services
called the market basket, purchased by a typical household; it
includes 8 major categories:
– 1. food and beverages
– 2. housing
– 3. apparel
– 4. transportation
– 5. medical care
– 6. recreation
– 7. education and communication
– 8. other goods and services
4

• To simplify our discussion, our market basket has only 3
goods: 10 pens, 5 shirts, and 3 pairs of shoes
• (Exhibit 1)
– We multiply the quantity of each good (column 1) by its
current-year price (column 2) to compute the current-year
expenditures on each good (column 3)
– By adding the dollar amounts in column 3, we obtain the total
dollar expenditure for the current year, $167
– To find the total expenditure in the base year, we multiply the
quantity of each good (column 1A) by its base-year price
(column 2A) and add all those products (column 3A); this
gives us $67
5
EXHIBIT 1
Computing the Consumer Price Index
6

• To find the CPI, we use the formula:
• The current-year CPI for our tiny economy is 249

• Exhibit 2 shows the CPI for the US for 1960-2016
• When we know the CPI for various years, we can compute
the percentage change in prices:
7
EXHIBIT 2
CPI, 1960-2016
8
• 6-1b Inflation and the CPI

• Inflation: An increase in the price level
• Real Income: Nominal income adjusted for price changes
• Nominal Income: The current dollar amount of a person’s
income
• The inflation rate is the positive percentage change in the
price level on an annual basis
– When you know the inflation rate, you can find out whether
your income is keeping up with, not keeping up with, or more
than keeping up with inflation (real income)
9
• 6-1c The Core PCE Index

• Besides the CPI, there is the core PCE index
• The core PCE is defined as personal consumption
expenditures (PCE) prices excluding food and energy prices
• The core PCE price index measures the prices paid by
consumers for goods and services without the volatility
caused by movements in food and energy prices to reveal
underlying inflation trends
• The base year for the core PCE index is 2009 (Exhibit 3)
10
EXHIBIT 3
Core PCE index, 2009-2019
11
• 6-1d Converting Dollars from One Year to Another

• Was $10,000 a good salary in 1960? That depends on what
it could buy; economists convert a past salary into today’s
salary by using this formula:
• Assume today’s CPI is the same as the most recent CPI in

Exhibit 2; using this formula, we get
12
6-2 Measuring Unemployment (1 of 8)
• Every month, the government surveys thousands of

households to gather information about labor market
activities; it uses the information from the survey to derive the
number of Americans who are unemployed
• 6-2a Who Are the Unemployed?
• The total population of the U.S. can be divided into two
broad groups (Exhibit 4)
• One group consists of persons who are (1) under 16 years of
age, (2) in the armed forces, or (3) institutionalized
13
EXHIBIT 4
Breakdown of the U.S. Population and the Labor Force
14
• 6-2a Who Are the Unemployed? (cont)

• The second group is called the civilian noninstitutional
population
– This group can be divided into two groups: persons not in the
labor force and persons in the civilian labor force (economists
refer to this latter group as “the civilian labor force”
– Persons not in the labor force are neither working nor looking
for work
– Persons in the civilian labor force are either employed or
unemployed
15
• 6-2b The Unemployment Rate and the Employment Rate

• Unemployment Rate: The percentage of the civilian force
that is unemployed: Unemployment rate+ Number of
unemployed persons Civilian Labor force
• Employment Rate: The percentage of the civilian
noninstitutional population that is employed: Employment
rate = Number of employed persons Civilian
noninstitutional population
• Labor Force Participation Rate (LFPR): The percentage
of the civilian population that is in the civilian labor force:
LFPR = Civilian Labor force Civilian noninstitutional
population
16
• 6-2c Common Misconceptions About the Unemployment and

Employment Rates
• Many mistakenly think that if the unemployment rate is 7%,
the employment rate must be 93%, assuming they total
100%
• But they do not add to 100% because each has a different
denominator:
– The unemployment rate is a percentage of the civilian labor
force
– The employment rate is a percentage of the civilian
noninstitutional population, a larger number
17
• 6-2d Reasons for Unemployment

• An unemployed person may fall into one of four categories:
• 1. Job loser: The person was employed and was fired or
laid off
• 2. Job leaver: The person was employed and quit
• 3. Reentrant: This person was previously employed, hasn’t
worked for some time, and is currently reentering the labor
force
• 4. New entrant: This person has never held a full-time job
for two weeks or longer and is now in the civilian labor
force looking for a job
18
• 6-2e Discouraged Workers

• An unemployed person must meet certain conditions, one of
which is that he is actively looking for work
• Those who do not find a job, who get discouraged and stop
looking are not counted as “unemployed;” they are
discouraged
• Some economists think that, because discouraged workers are
not counted, the unemployment rate is biased downward, and
doesn’t really give us a good fix on the “real” unemployment
problem in society
19
• 6-2f Types of Unemployment

• Frictional Unemployment: Unemployment that is due to
the national so-called frictions in the economy and that is
caused by changing market conditions and represented by
qualified individuals with transferable skills who change jobs
• Structural Unemployment: Unemployment due to structural
changes in the economy that eliminate some jobs and create
others for which the unemployed are unqualified
• Natural Unemployment: Unemployment caused by frictional
and structural factors in the economy; Natural unemployment
rate = Frictional unemployment rate + Structural
unemployment rate
20
• 6-2g The Natural Unemployment Rate and Full Employment

• Full Employment: The condition that exists when the
unemployment rate is equal to the natural unemployment
rate
• 6-2h Cyclical Unemployment
• Cyclical Unemployment Rate: The difference between the
unemployment rate and the natural unemployment rate
21
EXHIBIT 5
Various Unemployment Rates
22
EXHIBIT 6
Unemployment Rates According to Education, Race, and Ethnicity
1990-2016 (part 1 of 2)
23
EXHIBIT 6
Unemployment Rates According to Education, Race, and Ethnicity
1990-2016 (part 2 of 2)
24

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CHAPTER

6-2 Measuring Unemployment

• There is a difference between price and the price level

• 6-1a Using the CPI to Compute the Price Level (cont)

• 6-1a Using the CPI to Compute the Price Level (cont)

Computing the Consumer Price Index

• 6-1a Using the CPI to Compute the Price Level (cont)

• The current-year CPI for our tiny economy is 249

• 6-1b Inflation and the CPI

• 6-1c The Core PCE Index

Core PCE index, 2009-2019

• 6-1d Converting Dollars from One Year to Another

• Assume today’s CPI is the same as the most recent CPI in

• Every month, the government surveys thousands of

Breakdown of the U.S. Population and the Labor Force

• 6-2a Who Are the Unemployed? (cont)

• 6-2b The Unemployment Rate and the Employment Rate

• 6-2c Common Misconceptions About the Unemployment and

• 6-2d Reasons for Unemployment

• 6-2e Discouraged Workers

• 6-2f Types of Unemployment

• 6-2g The Natural Unemployment Rate and Full Employment

Various Unemployment Rates

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