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)

 

 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

 

Hyperinflation

An rapidly increasing inflation rate

 

CPI

 

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
2. Conduct price survey
3. 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
Consequences	Distorts private contracts Increase government outlays Inaccurate estimates of real earnings

 

Alternatives

 

GDP implicit price deflator
Core inflation rate	CPI inflation rate exluding volatile elements (food/fuel)