Ch 21 - Unemployment, Inflation

Monday, January 23, 2012

11:42 PM

    Working-age population

    The total number of people age 15 years and older

    Labour force

    The sum of employed and the unemployed

    Unemployment rate

    Labour force participation rate

    Employment-to-population ratio

    Marginally attached worker

    Person who currently is neither working nor looking for work but want job when available

    Discouraged worker

    Marginally attached worker who has stopped looking for a job

    Frictional unemployment

    From normal labour turnover

    Structural unemployment

    From changes in technology or international competition

    Cyclical unemployment

    From business cycle though and peak.

    Natural unemployment

    Only frictional and structural

    Full employment

    Unemployment rate = natural unemployment rate (no cyclical)


    Important Price Level & Inflation


    Price level

    The average level of prices and the value of money

    Inflation rate

    The annual percentage change in the price level


    Inflation is a problem because

    • Redistributes income and wealth
    • Diverts resources from production



    An rapidly increasing inflation rate




    Consumer Price Index (CPI)

    Measures the average of the prices paid by urban consumers for a "fixed" basket of goods/services

    Reference base period

    CPI = 100 for the first period

    Calculating the CPI



    Construct the CPI

    1. Select CPI basket
    1. Conduct price survey
    1. Use prices and the basket to calculate CPI


    Inflation rate


    Biased CPI


    New goods

    New goods that replace old goods in basket (iPod vs. CD player)

    Quality change

    Quality improvements that lead to price changes are wrongly considered as inflation

    Commodity substitution

    Does not consider consumer's substitutions for goods in basket

    Outlet substitution

    Outlets undervalue certain goods


      • Distorts private contracts
      • Increase government outlays
      • Inaccurate estimates of real earnings




    GDP implicit price deflator

    Core inflation rate

    CPI inflation rate exluding volatile elements (food/fuel)




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