Chapter Topics

 Inflation
 Unemployment
 Inflation
 Inflation - a quantitative measure of the rate at
which the average price level of a basket of
selected goods and services in an economy
increases over some period of time.
 It is the rise in the general level of prices
where a unit of currency effectively buys less
than it did in prior periods.
 Often expressed as a percentage, inflation thus
indicates a decrease in the Purchasing
Power of a nation’s currency.
• The loss of purchasing power effectively
raises the cost of living which slows
economic growth.
 Inflation - Causes
 Demand-Pull Inflation – when the overall
demand for goods and services in an economy
increases more rapidly than the economy’s
production capacity.
• Think of the demand curve shifting right and
supply staying the same. Price rises.
• An Increase in the money supply by the
Federal Reserve can also stimulate demand
and lead to rising prices.
 Cost-Push Inflation – when the cost of inputs
increases on the seller side. This would include
labor, raw materials, etc.
 Built-In Inflation – when prices rise, workers
demand higher wages to maintain their standard
of living. The higher wages result in even higher
prices in a Wage Price spiral
_________________.
Deflation and Causes
 Deflation - a sustained decrease in the average price level of a basket of
goods and services over some period of time, with the inflation rate falling
below 0%.
• Often characterizes contraction/recession.
• Hurts businesses who can’t cover input costs and then eliminate jobs to
maintain profitability.
 Causes of deflation
• Decrease in the money supply.
• Decrease in the total demand for goods and services (“aggregate
demand”).
• Advance in Technology – Falling prices can happen naturally if the
output of the economy grows faster than the money supply. Advances
in technology lead to increased productivity, lower costs and lower
prices. (This is more about falling prices in a particular industry as
opposed to a fall in the general price level.)
• Example - In 1980, the average cost of one gigabyte of data was
$437,500; by 2010, the average cost was three cents. This
reduction caused the prices of manufactured products that use this
technology to also fall significantly.
 Consumer Price Index
 Consumer Price Index (CPI) – Probably the most widely cited
index number for the price level; the weighted average of prices of
a specific set of goods and services purchased by a typical urban
household.
 Compiled monthly (CPI-U)
 CPI uses a base year, or the year chosen as a point of reference
or basis of comparison for prices in other years; a benchmark year.
 “Base year” will always have a CPI of 100.
 “core inflation” can be measure by screening out food and
energy.
 Computing the
Consumer Price Index
 CPI and the Rate of Inflation
 The CPI number can be used to calculate
the rate of inflation.
 Sample problem –
 In 2015, the CPI was 237.0 and in 2016
the index was 240.0. What was the
percentage change in prices from 2015 to
2016? Answer = 1.27%
 Use the equation below for these
problems.
 Consequences of
Unemployment
 Loss of production – for the economy.
 Loss of income – for the economy and for individuals and families.
 Loss of Human capital – not learning, gaining new experiences on the
job.
 Loss of opportunity, particularly for the young – idleness, not gaining
experience, getting that foot on the economic ladder.
 Erosion of skills and setback in wages for the long-term unemployed.
 Societal Stagnation and malaise as huge swaths of the population are
no longer producing.
 Personal and social consequences – addiction, domestic abuse,
divorce, mental illness.
 Calculating Unemployment
 From the total population, they screen out persons who are (1) under 16 years of age, (2) in the
armed forces, or (3) institutionalized (in a prison, mental institution, or home for the aged).
 What remains is called the Civilian Non-institutional population.
 Unemployed vs. Employed
 definition of an unemployed worker –
• All persons who do not have jobs.
• Are available for work.
• Have actively looked for work in the last four weeks.
• Were temporarily laid off and are waiting to be called back to a job.
 definition of an Employed worker –
• Did any work for pay or profit during the survey reference week.
• Did at least 15 hours of unpaid work in a family-operated business.
• Persons who were temporarily absent from their regular jobs
because of illness, vacation, bad weather, industrial dispute or
various personal reasons.
 definition of a discouraged worker –
• Person who does not have a job, is available for work, is willing to
work, but has quit trying to find work.
Calculate the Unemployment and Employment
Rates
 Unemployment Rate - The percentage of the civilian labor force that
is unemployed:
Number of unemployed persons
U = -------------------------------------------- X 100
Civilian labor force
 Employment Rate - The percentage of the civilian noninstitutional
population that is employed:

Number of employed persons

E = ----------------------------------------------- X 100
Civilian noninstitutional population
 Labor Force Participation Rate
 Labor force participation rate (LFPR) - The percentage of the civilian
noninstitutional population that is in the civilian labor force:
Civilian labor force
LFPR = --------------------------------------------- x 100
Civilian noninstitutional population
 Types of Unemployment
 Frictional - qualified individuals with transferable
skills who change jobs.
• Seeking a better opportunity
• Part of normal labor turnover
• Increases in a good labor market
 Structural - structural changes in the economy
that eliminate some jobs and create other jobs for
which the unemployed are unqualified.
• Often driven by technological advance
• Workers have a skills gap; need re-training
 Seasonal – when particular jobs are only available
at certain times of the year.
 Cyclical – revolves around the phases of the
business cycle.
• The difference between the actual, real-world
unemployment rate and the natural
unemployment rate.
• If the actual rate is 6% and the natural rate is
4%, then the cyclical rate is 2%.
 Natural Rate of Unemployment and Full
Employment
 The unemployment rate is never “0.”
 There is always some level of both frictional
and structural unemployment – even in a
healthy, growing economy.
 Natural rate of unemployment - the sum of
both frictional and structural unemployment.
Natural Unemployment Rate =
Frictional + Structural
 Natural unemployment rate is thought to be
anywhere from 4-5%.
 Economists now reassessing that number
given that we were below 4% before
coronavirus.
 Full employment - When the actual, real-
world unemployment rate is equal to the
natural unemployment rate.
Summary Unemployment Rates