Chapter Outline

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(No Transcript)
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Introduction
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Chapter Outline

• Unemployment
• Inflation
• Changing Inflation and Unemployment Business
  Fluctuations

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Did You Know That...

• Although the United States is considered a highly
  advanced industrialized nation, less and less of
  its employment is involved in manufacturing?
  Where are all the jobs being created?

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Unemployment

• Question
• Who are the unemployed?
• Unemployment
• The total number of adults (aged 16 years or
  older) who are willing and able to work and who
  are actively looking for work but have not found
  a job

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Unemployment

• Question
• What are the costs of unemployment?

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Unemployment

• Answer
• Lost Output
• Early 1990s unemployment rate was 7
• Factory output was 80 of potential
• Lost output was 4 of total production or 275
  billion of goods and services that could have
  been produced
• Personal Psychological Impact

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Unemployment

• Question
• How would you show the cost of unemployment on a
  production possibilities curve?

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Production Possibilities
Capital Goods
Consumer Goods
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A Century of Unemployment
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Cyberspace ExampleReducing Unemployment Using
Cyberspace

• Question
• How can cyberspace reduce unemployment?

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Cyberspace ExampleReducing Unemployment Using
Cyberspace

• Consider a Typical Job Search
• Ask friends
• Help wanted ads
• Submit resumes to prospective employers
• Headhunters
• Government employment agency
• Knocking on doors

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Cyberspace ExampleReducing Unemployment Using
Cyberspace

• Searching for a Job on the Web
• E-mail addresses for resumes
• Scanning resume electronically
• Net employment agencies
• Web site CareerMosaic

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Unemployment

• In April, 1998 the unemployment rate was 4.3.
• Question
• How is the unemployment rate calculated?

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Unemployment

• The unemployment rate is the percentage of the
  labor force that is unemployed

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Unemployment

• Labor Force
• Individuals aged 16 years or older who either
  have jobs or are looking and available for jobs

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Unemployment

• 137.24 5.86 131.38
• U.S., millions of people as of April 1998

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Adult Population
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Internet Activity

• To learn more about the labor force and
  unemployment click the Labor button below.

Labor
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The Logic of the Unemployment Rate
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Unemployment

• The Arithmetic Determination of Unemployment
• Job Leavers Job Finders
• Unemployment rate is unchanged
• Job Leavers Job Finders
• Unemployment rate increases

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Internet Exercise

• Visit the Miller Web site to learn more about
  unemployment.

Miller
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Unemployment

• Stocks
• The quantity of something (unemployed) measured
  at a point in time
• Flow
• A quantity measured over time (job leavers, job
  finders)

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Visualizing Stock and Flows
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Unemployment

• Unemployment Categories
• 1) Job loser
• 2) Reentrant
• 3) Job leaver
• 4) New entrant

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Unemployment

• Job Loser
• An individual whose employment was involuntarily
  terminated or who was laid off
• 40-60 of the unemployed

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Unemployment

• Reentrant
• An individual who has worked a full-time job
  before but left the labor force and has now
  reentered it looking for a job
• 20-30 of the unemployed

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Unemployment

• Job Leaver
• An individual who voluntarily ended employment
• Less than 10 to around 15 of the unemployed

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Unemployment

• New Entrant
• An individual who has never worked a full-time
  job for two weeks or longer
• 10-13 of the unemployed

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Unemployment

• Duration of Unemployment
• 37.1 -- one month
• 31.8 -- two months
• 16.3 -- longer than six months
• Average duration -- 15.2 weeks over the last
  decade

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Unemployment

• Question
• What is likely to happen to the duration of
  unemployment during a downturn in the economy?

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Unemployment

• Discouraged Workers
• Individuals who have stopped looking for a job
  because they are convinced they will not find a
  suitable one
• Question
• How does the existence of discouraged workers
  bias the unemployment rate?

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Internet Activity

• To learn more about discouraged workers click the
  button below.

Discouraged
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Unemployment

• Labor Force Participation Rate
• The proportion of working-age individuals who are
  employed or seeking employment

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Labor ForceParticipation Rates by Sex
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Unemployment

• Question
• Is there an economic explanation for the increase
  in the female labor force participation rate?

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Unemployment

• The Major Types of Unemployment
• 1) Frictional
• 2) Seasonal
• 3) Structural
• 4) Cyclical

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Unemployment

• Frictional Unemployment
• Results from the fact that workers must search
  for appropriate job offers

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Unemployment

• Seasonal Unemployment
• Results from the seasonal pattern of work in
  specific industries

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Unemployment

• Structural Unemployment
• Results from fundamental changes in the structure
  of the economy

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Unemployment

• Cyclical Unemployment
• Results from business recessions that occur when
  aggregate (total) demand is insufficient to
  create full employment.

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Unemployment

• Question
• Does full employment mean that everybody has a
  job?

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Unemployment

• Full Employment
• An arbitrary level of unemployment that
  corresponds to normal friction in the labor
  market

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Unemployment

• Full Employment, Wage Rigidity, and Wait
  Unemployment
• The official definition of full employment has
  changed over the years.

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Unemployment

• Wait Unemployment
• Unemployment that is caused by wage rigidities
  resulting from minimum wages, unions, and other
  factors

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Unemployment

• Question
• Does a increase in the unemployment rate
  necessarily mean there has been a decrease in the
  employment?

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Quick Quiz

• The four unemployment categories are ________,
  ________, ________, and __________.

• The four types of unemployment are ________,
  ________, ________, and _______.

frictional
job loser
seasonal
structural
job leaver
reentrant
cyclical
new entrant
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Inflation

• Inflation
• An upward movement in the average level of prices
• Deflation
• A downward movement in the average level of prices

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Inflation

• Purchasing Power
• The value of money for buying goods and services
• Varies with prices and income

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Inflation

• Nominal Value
• Price expressed in todays dollars
• Real Value
• Value expressed in purchasing power

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Inflation

• Question
• Is a 30 second ad during the Super Bowl really 25
  times more expensive today (1.25 million)
  compared to 1967 (50,000)?

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Inflation

• Answer
• Depends on what has happened to the price level
  and the size of the audience during this time
• Prices Fourfold increase
• Audience Doubled

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Inflation

• Analysis
• Adjusting for viewership and inflation the cost
  per viewer is less than four times what it was in
  1967 -- not 25 times.

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Inflation

• Measuring Inflation
• Price Index
• The cost of todays market basket of goods
  expressed as a percentage of the cost of the same
  market basket during a base year

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Inflation

• Market Basket
• Representative bundle of goods and services
• Base Year
• The point of reference for comparison of prices
  in other year.

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Calculating a Price Indexfor a Two-Good Market
Basket
1986 Cost of 1998 Cost of Market Price Market
Price Market Basket per Basket per Basket
at Commodity Quantity Unit in 1986 Unit 2000
Prices
Corn 100 bushels 4 400 8 800 Microcomputers 2
500 1,000 450 900 Totals 1,400 1,700
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Inflation

• Real World Price Indexes
• Consumer Price Index (CPI)
• A statistical measure of a weighted average of
  prices of a specified set of goods and services
  purchased by wage earners in urban areas

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Inflation

• Consumer Price Index
• Market basket is based on a consumer expenditure
  survey
• Methodology Problems
• Substitution effect and the fixed quantity index
• Quality changes
• New products

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Internet Exercise

• Visit the Miller Web site to learn more about the
  CPI.

Miller
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Inflation

• Real World Price Indexes
• Producer Price Index (PPI)
• A statistical measure of a weighted average or
  prices of commodities that firms purchase from
  other firms

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Inflation

• Producer Price Index
• Generally for non-retail markets
• Used as a leading indicator of the CPI
• PPIs for
• Food materials
• Intermediate goods
• Finished goods

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Inflation

• Real World Price Indexes
• GDP Deflator
• A price index measuring the changes in prices of
  all new goods and services produced in the economy

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Inflation

• GDP Deflator
• Broadest measure
• Not based on a fixed market basket

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Inflationary Periodsin U.S. History
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Internet Activity

• To learn more about updating the Consumer Price
  Index click CPI below.

CPI
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Inflation

• Anticipated Versus Unanticipated Inflation
• The effects of inflation on individuals depends
  upon which type of inflation exists.

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Inflation

• Anticipated Inflation
• The rate of inflation that the majority of
  individuals believe will occur
• Unanticipated Inflation
• Inflation that comes as a surprise to individuals
  in the economy.

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Inflation

• Inflation and Interest Rates
• Nominal Rate of Interest
• The market rate of interest expressed in todays
  dollars
• Real Rate of Interest
• The nominal rate minus the anticipated rate of
  inflation

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Inflation

• Real Interest Rate
• 1982 -- Home Mortgage
• Nominal Interest Rate 15
• Increase in the price of housing of 25
• Real Rate 15 - 25 -10

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Inflation

• Real Interest Rate
• 1998 -- Home Mortgage
• Nominal Interest Rate 6.5
• Increase in the price of housing of 2
• Real Rate 6.5 - 2 4.5
• Question
• Which scenario is the best for the lender? the
  borrower?

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Inflation

• Does Inflation Necessarily Hurt Everyone?
• Inflation affects different people differently.
• Unanticipated Positive Inflation
• Creditor loses
• Debtor gains

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Inflation

• Protecting Against Inflation
• Cost-of-living adjustments (COLAs)
• Clauses in contracts that allow for increases in
  specified nominal values to take account of
  changes in the cost of living

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Inflation

• The Resource Cost of Inflation
• Repricing, or menu, cost of inflation
• The cost associated with recalculating prices and
  printing new price lists when there is inflation

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Changing Inflation and Unemployment Business
Fluctuations

• Business Fluctuations
• The ups and downs in economywide economic
  activity
• National income
• Employment
• Prices

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Changing Inflation and Unemployment Business
Fluctuations

• Expansion
• A business fluctuation in which overall business
  activity is rising at a more rapid rate than
  previously or at a more rapid rate than the
  overall historical trend for the nation

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Changing Inflation and Unemployment Business
Fluctuations

• Contraction
• A business fluctuation during which the pace of
  national economic activity is slowing down

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Changing Inflation and Unemployment Business
Fluctuations

• Recession
• A period of time during which the rate of growth
  of business activity is consistently less than
  its long-term trend or is negative
• Depression
• An extremely severe recession

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The Typical Course of Business Fluctuations
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National BusinessActivity, 1880 to Present
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Changing Inflation and Unemployment Business
Fluctuations

• Explaining Business Fluctuations External Shocks
• War
• Weather patterns
• Oil shock

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Issues and ApplicationsDo We Need to Worry About
Deflation?

• Debtors would lose if the deflation was
  unanticipated.
• Dont confuse deflation with falling relative
  prices
• Question
• How could you protect yourself against deflation?

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Issues and ApplicationsDo We Need to Worry About
Deflation?

• Visit the Miller Web site to learn more about
  this topic.

Miller