Inflation, Unemployment

1. What are effects of Economic growth? Unemployment and Inflation

2. Basic Laborious terms Labor Force: # of people employed + # of people unemployed Doesn’t include: Students, kids, retired people, the homeless

3. Who’s “employed”? ≥ 16 years with a job Must work 1 hour per week ≥ 16 years w/o a job Actively searching for a job EMPLOYED UNEMPLOYED

4. How do you calculate… # unemployed _______________________ # of people in the labor force % of working age population in labor force Unemployment Rate Labor Force Participation Rate

5. LABOR FORCE INDICATORS (2005)

6. 4 TYPES OF UNEMPLOYMENT Frictional Voluntarily between jobs College graduates PBJ is healthy and natural! Structural Mismatch of skills Don’t have technology skills

7. 4 TYPES OF UNEMPLOYMENT Cyclical Increases during a recession Decreases during an expansion Seasonal Changes due to weather

8. Unemployment and Recessions The average unemployment rate was 5.9%

9. FULL EMPLOYMENT AKA THE NATURAL RATE OF UNEMPLOYMENT When there is no cyclical unemployment Full potential! 4-5%

10. THE NATURAL RATE Cyclical unemployment is shown by the shaded regions.

11. CPI and Inflation How do we measure Prices?

12. Consumer Price Index Measures the average price of goods that urban consumers buy 400 consumer goods and services Can be from abroad http://www.bls.gov/cpi/tables.htm

13. What’s in the CPI?

14. CPI (a) =50/50= 100 Cost of CPI @ current price x 100 Cost of CPI basket @ base price CPI(b)= 70/50 x 100 =140 How do we Calculate CPI?

15. Inflation is the gradual increase of prices (from CPI) Inflation CPI in current year  CPI in previous year x 100 Inflation rate = CPI in previous year

16. $$$ Types of Inflation $$$ Demand Pull Inflation: Excess demand for products causing shortages “Too much money chasin’ too few goods!” Cost Push Inflation: Inward Supply Shifts Caused by high input costs 1970s  high price of oil

17. The effects of inflation…

18. To protect against inflation: Lenders add an inflation premium: Nominal interest rate = real interest rate + expected inflation Firms add the COLA Changes with inflation Real income = nominal income/ price index