Chapter 6 Macroeconomics Measurements Prices and Unemployment PDF

Chapter Six Macroeconomic Measurements, Part I: Prices and Unemployment Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or po...

Chapter Six Macroeconomic Measurements, Part I: Prices and Unemployment Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1  Icebreaker 1. The class will be broken up into pairs of students. 2. Each pair of students will discuss the question. − Scenario: You have $2000 in cash that you want to save for retirement, so you decide to put it in a time capsule to dig up in 40 years. Why is this a good idea or bad idea? − One month after you bury the capsule, you are laid off from your job with no chance of new employment any time soon. What do you do? 3. Then one person from each pair will share a one sentence answer to the class. Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2  Chapter Objectives By the end of this chapter, you should be able to: Calculate the CPI, given pricing and consumption data on a fixed basket of goods. Calculate the annual inflation rate for a specified year, given CPI data. Calculate the unemployment rate for an economy. Categorize the type of unemployment in a given scenario as structural, frictional, or cyclical Explain why a natural rate of unemployment exists. Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3 Measuring the Price Level Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4  Using the CPI to Compute the Price Level 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 − 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 Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 5  Market Basket 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 Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6  Computing the CPI Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 7  Inflation and the CPI Inflation: An increase in the price level 𝐶𝑃𝐼𝑡 − 𝐶𝑃𝐼𝑡−1 %∆𝑖𝑛𝑃𝑟𝑖𝑐𝑒𝑠 = 𝑥100 𝐶𝑃𝐼𝑡−1 Activity: Choose any 2 adjacent years and calculate the inflation rate. Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 8  Inflation and the CPI Activity: Calculate the inflation rate between 1999 and 2000. 𝐶𝑃𝐼𝑡 −𝐶𝑃𝐼𝑡−1 Inflation = %∆𝑖𝑛𝑃𝑟𝑖𝑐𝑒𝑠 = 𝑥100 𝐶𝑃𝐼𝑡−1 172.2−166.6 %∆𝑖𝑛𝑃𝑟𝑖𝑐𝑒𝑠 = 𝑥100 166.6 5.6 %∆𝑖𝑛𝑃𝑟𝑖𝑐𝑒𝑠 = 𝑥100 166.6 %∆𝑖𝑛𝑃𝑟𝑖𝑐𝑒𝑠 = 3.36 Homework: Calculate the inflation rate between 2020 and 2021. (Do it before the next class) Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 9  Nominal Income and Real Income Nominal Income: The current dollar amount of Activity: a person’s income Using the CPI from the Real Income: Nominal income adjusted for chosen 2 years from the price changes previous slide, calculate the 𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐼𝑛𝑐𝑜𝑚𝑒 real income if the salary is 𝑅𝑒𝑎𝑙 𝐼𝑛𝑐𝑜𝑚𝑒 = 𝑥100 𝐶𝑃𝐼 $50,000 in the first year and Case 1: Keeping up with inflation $52,000 in the second year. − Real income stays constant What happened: Case 1, Case 2: Not keeping up with inflation Case 2, or Case 3? − Real income falls Case 3: More than keeping up with inflation − Real income rises Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 10  Nominal Income and Real Income CPI in 1999 = 166.6 Activity: CPI in 2000 = 172.2 Using the CPI from the Nominal income in 1999 = 50,000 chosen 2 years from the Nominal income in 2000 = 52,000 previous slide, calculate the 𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐼𝑛𝑐𝑜𝑚𝑒 real income if the salary is 𝑅𝑒𝑎𝑙 𝐼𝑛𝑐𝑜𝑚𝑒 = 𝑥100 $50,000 in the first year and 𝐶𝑃𝐼 $52,000 in the second year. 50,000 What happened: Case 1, 𝑅𝑒𝑎𝑙 𝐼𝑛𝑐𝑜𝑚𝑒 𝑖𝑛 1999 = 𝑥100 = 30,012.00 Case 2, or Case 3? 166.6 52,000 Homework: Using the CPI for 𝑅𝑒𝑎𝑙 𝐼𝑛𝑐𝑜𝑚𝑒 𝑖𝑛 2000 = 𝑥100 = 30,097.44 2020 and 2021 that you have 172.2 Case 3: More than keeping up with inflation calculated, what has happened to Real Income? − Real income rises Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 11 Converting Dollars from One Year to Another ′ 𝐶𝑃𝐼𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑒𝑎𝑟 𝑆𝑎𝑙𝑎𝑟𝑦 𝑖𝑛 𝑡𝑜𝑑𝑎𝑦 𝑠 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑑𝑜𝑙𝑙𝑎𝑟 = 𝑆𝑎𝑙𝑎𝑟𝑦 𝑖𝑛 𝑒𝑎𝑟𝑙𝑖𝑒𝑟 𝑦𝑒𝑎𝑟𝑥 𝐶𝑃𝐼𝑒𝑎𝑟𝑙𝑖𝑒𝑟 𝑦𝑒𝑎𝑟 Activity: − First minimum wage was $0.25 in 1938 when the CPI was 14.1 − What would this minimum wage be in 2021? CPI for 2021 = 269.195 269.195 𝑆𝑎𝑙𝑎𝑟𝑦 𝑖𝑛 𝑡𝑜𝑑𝑎𝑦 ′ 𝑠 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑑𝑜𝑙𝑙𝑎𝑟 = 0.25𝑥 = 4.77 14.1 Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12  Knowledge Check 1a The base year is the year A. that serves a reference point or benchmark. B. the unemployment rate was highest. C. in which prices are lowest. D. in which prices are highest. Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 13  Knowledge Check 1b If the CPI was 245 in 2015 and 200 in 2014, what is the inflation rate? A. 45% B. 81.6% C. 36.8% D. 22.5% Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 14  Knowledge Check 1c The price of a first class ticket on the Titanic was $3,650 in 1912 and the CPI that year was 9.0. If the CPI in 2015 was 250, what would be the approximate price of a first class ticket on the Titanic be equivalent to in 2015 dollars? A. $131 B. $101,389 C. $97,739 D. $30,254 Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 15 Measuring Unemployment Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 16  Who are the Unemployed? The total population is categorized accordingly: Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 17  Unemployment Rate Unemployment Rate: Percentage of the civilian labor force that is unemployed 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑢𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 − 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡 𝑟𝑎𝑡𝑒 = 𝐶𝑖𝑣𝑖𝑙𝑖𝑎𝑛 𝐿𝑎𝑏𝑜𝑟 𝐹𝑜𝑟𝑐𝑒 Employment Rate: Percentage of the civilian noninstitutional population that is employed 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 𝑝𝑒𝑟𝑠𝑜𝑛𝑠 − E𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡 𝑟𝑎𝑡𝑒 = = 𝐶𝑖𝑣𝑖𝑙𝑖𝑎𝑛 𝑛𝑜𝑛𝑖𝑛𝑠𝑡𝑖𝑡𝑢𝑡𝑖𝑜𝑛𝑎𝑙 𝑝𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 − Labor Force Participation Rate (LFPR): Percentage of the civilian population that is in the civilian labor force 𝐶𝑖𝑙𝑖𝑣𝑖𝑎𝑛 𝐿𝑎𝑏𝑜𝑟 𝐹𝑜𝑟𝑐𝑒 − LFPR = 𝐶𝑖𝑣𝑖𝑙𝑖𝑎𝑛 𝑛𝑜𝑛𝑖𝑛𝑠𝑡𝑖𝑡𝑢𝑡𝑖𝑜𝑛𝑎𝑙 𝑝𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 18  Reasons for Unemployment Unemployed person falls into one of four categories: − Job loser: The person was employed and was fired or laid off − Job leaver: The person was employed and quit (resign) − Reentrant: This person was previously employed, hasn’t worked for some time, and is currently reentering the labor force − 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 Discouraged workers: Persons who did not find a job, get discouraged, and stop looking; they are not counted as unemployed (even though they are unemployed) Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 19  Types of Unemployment Frictional Unemployment Structural Unemployment Cyclical Unemployment Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 20  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 (this type of unemployment is normal in a growing economy) Structural Unemployment: Unemployment due to structural changes in the economy that eliminate some jobs and create others for which the unemployed are unqualified (tech change/automation, change in the structure of the economy from agricultural to manufacturing) Natural Unemployment: Unemployment caused by frictional and structural factors in the economy − Natural unemployment rate = frictional unemployment rate + structural unemployment rate Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 21  Types of Unemployment Cyclical Unemployment: Unemployment that is due to the fluctuations in production/output a type of unemployment that occurs when the demand for goods and services in an economy is insufficient to support full employment It occurs during periods of slow economic growth or economic contraction When demand for goods and services decreases, companies lay off workers to cut costs Cyclical unemployment causes the total unemployment rate to rise during recessions and fall during economic expansions Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 22  Full Employment Full Employment: The condition that exists when the unemployment rate is equal to the natural unemployment rate Cyclical Unemployment Rate: The difference between the unemployment rate and the natural unemployment rate Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 23  Knowledge Check 2a In an economy with a population of 70 million persons, 35 million are employed as civilians and 3 million are not employed but are both actively looking for a job and available for work. The unemployment rate in this economy is approximately A. 7.9% B. 8.6% C. 4.3% D. 10.1% Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 24  Knowledge Check 2b The frictional unemployment rate is 3 percent, the structural unemployment rate is 3.3 percent, and the (actual) unemployment rate is 6 percent. It follows that the natural unemployment rate is _____ percent and the cyclical unemployment rate is _____ percent. A. -0.3%; 6.3% B. 9%; -0.3% C. 6.3%; -0.3% D. 0.3%; 6.3% Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 25  Knowledge Check 2c To an economist, the term full employment means that the (actual) unemployment rate is equal to A. zero. B. the cyclical unemployment rate. C. the structural unemployment rate. D. the natural unemployment rate. Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 26  Chapter Summary Now that the lesson has ended, you should have learned how to: Calculate the CPI, given pricing and consumption data on a fixed basket of goods. Calculate the annual inflation rate for a specified year, given CPI data. Calculate the unemployment rate for an economy. Categorize the type of unemployment in a given scenario as structural, frictional, or cyclical Explain why a natural rate of unemployment exists. Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 27