Transcript Unemployment and Inflation i.e. two evils of the economy will be
Unemployment and Inflation i.e. two evils of the economy will be discussed.
Component Parts GDP
Consumption Investment Government Spending Exports- Imports (Net Exports)
C+I+G+(X-M) = GDP
GDP to 2009 2
nd
quarter
Why does growth matter?
Allows wages and incomes to rise.
Standard of living increases Takes the pressure of scarce resources… (why?)
Macroeconomic Problems
High inflation rate High unemployment rate High interest rates Low economic growth or stagnation
Macroeconomic Policies
Fiscal Policy deals with changes in government expenditures and/or taxes. to achieve particular macroeconomic goals.
Monetary Policy deals with. changes in the money supply, or the rate of growth of the money supply, to achieve particular macroeconomic goals.
The Idealized Course of Business Fluctuations
What are component parts of GDP?
?
Consensus among Economists says swings due to: Changes in REAL levels of output and employment brought about by changes in levels of TOTAL SPENDING.
Spending Businesses no longer produce at current level Output, employment and income fall In reverse… the opposite results.
Important economic fact:
As the economy gets close to FULL EMPLOYMENT It is more difficult to obtain further gains in REAL OUTPUT.
Continued increasing levels of spending bring about INFLATION
SRAS L E V E L I P R C E GDP QF LRAS AD
Countries Compare
Countries can assess the growth of other countries for means of: 1) 2) 3) Foreign investment Trade potential Currency stabilization
What will we focus on?
This will focuses on
and inflation.
economic growth, the business cycle, unemployment
When is a person “unemployed”?
What are the costs of unemployment?
-When will money not buy as much?
What is the labor force?
The
labor force
includes all persons over age sixteen who are either working for pay or actively seeking paid employment.
People who are not employed or are not actively seeking work are
not
considered part of the labor force.
When is a person “unemployed”?
What are the costs of unemployment?
What is unemployment?
To make full use of available production capacity, the labor force must be fully employed.
Unemployment
is the inability of labor force participants to find jobs.
How is unemployment measured ?
U.S. Census Bureau surveys about 60,000 households a month to determine how many people are actually unemployed.
A person is considered unemployed if he or she is not employed and is actively seeking a job.
The
unemployment rate
is the proportion of the labor force that is unemployed.
Unemployment rate = number of unemployed people labor force
Bureau Labor Statistics determines perimeters for unemployment.
Persons over 16 are considered employed IF:
They worked at all for pay or profit even if for an hour Worked 15 hours or more w/out pay in a family-operated enterprise.
Have a job which they did not work during (survey week) due to illness, vacation, industrial disputes, bad weather, time off or personal reasons.
BLS Continued
Persons are considered
unemployed IF: (during the survey week) Do not have a job Are available for work Have actively looked & looked for work during past four weeks (this requirement is very weak…)
Reason for unemployment
How long a person remains unemployed is affected by the nature of the joblessness.
Job leavers Job losers Re-entrants New entrants
What happens if you can’t find work…….
If unemployment persists… workers often give-up looking. Discourage workers are not counted as part of the unemployment problem after they give up looking for a job.
Some people are forced to take any job available which means…no longer unemployed, but now “underemployed.”
How could one be underemployed?
Underemployment
exists when people seeking full-time paid employment, work only part time, or are employed at jobs below their capability.
Underemployed
workers represent labor resources that are not being fully utilized.
Unemployment Cont.
Seasonal unemployment
be an example?
is the unemployment due to seasonal changes in employment or labor supply. What would At the end of each season, thousands of workers must go searching for new jobs, experiencing seasonal unemployment in the process.
Three basic kinds of unemployment:
1.
Frictional Unemployment
Frictional unemployment
market.
is the brief periods of unemployment experienced by people moving between jobs or into the labor Frictional unemployment differs from other unemployment in three ways: Demand is there Frictionally unemployed have the skills required Job search relatively short
3 Kinds of Unemployment Cont .
2.
Structural Unemployment
Structural unemployment
is the unemployment caused by a mismatch between the skills (or location) of job seekers and the requirements (or location) of available jobs.
Periods between jobs will be lengthened when the unemployed lack the skills that employers require.
3 Kinds of Unemployment Cont .
3.
Cyclical Unemployment
Cyclical unemployment
unemployment attributable to the lack of job vacancies – i.e., to an is the
inadequate level of aggregate demand.
Cyclical unemployment occurs when there are simply not enough jobs to go around.
FED Statistics 2009
More Than a Century of Unemployment
Source: U.S. Department of Labor, Bureau of Labor Statistics
OKUN’S Law
Okun’s Law Arthur Okun quantified the relationship between the shortfall in real output and unemployment.
High unemployment in 1992 left the U.S. $240 billion short of its production possibilities — a loss of $920 of goods and services for every American.
Labor Force? Okun’s Law
Slow Growth….
The economy must grow at least as fast as the labor force to avoid cyclical unemployment.
Relationship between the shortfall in output and unemployment .
When you have unemployment of any significance, your economy will have reduced output. Ratio accepted today is 1% of unemployment yields 2% less output.
A 2/1ratio then allows economists to put a $$$ amount on the cost of unemployment to the economy.
Think about this!
Unemployment = 5% (NARU) Unemployment = 8% (x 2 = 16% less production) Unemployment = 25% (depression era x 2) = 50% less production!
Today (2009) = 9.7 x 2 =19.4% less
So… what is full employment?
Full
employment is not the same as
zero
unemployment.
The economy strives to reach its potential which means that full employment is essential .
When the actual rate of
unemployment
exceeds the natural rate, the actual output of the economy will fall below its potential.
Resources are underutilized (inside production possibility curve.)
Full Employment
The condition that exists when the unemployment rate is equal to the natural unemployment rate.
Full Employment
AS LRAS AD
Full Employment Act of 1946
The Full-Employment Goal In the Employment Act of 1946, Congress committed the federal government to pursue a goal of “maximum” employment.
Congress didn’t specify what the rate of unemployment should be.
Congress creates confusion
First attempt to define “full employment” came about 1960- Council of Advisors decided that full employment meant “watching prices” …..
Rising prices they said would signal that full employment was being reached.
considered overly optimistic.
when the economy expanded.
unemployment.
*** believed inverse relationship unemployment/inflation In 1970-80 Full employment potential was Unemployment rates stayed far above 4% even Inflation began to accelerate at higher levels of
Confusion Continued
The redefinition of full employment goal needed to be addressed.
Needed to realize more youth and women in the labor force Needed to acknowledge the increased transfer payments Needed to acknowledge the structural changes in demand (for such things as technology and trade) old industries were not in such demand (steel, textiles, auto)\ Most economists say 5% today
Humphrey-Hawkins Act of 1978
This Act was passed to require the Federal Reserve to maintain a 4% rate of unemployment without inflation while holding the inflation to a goal of 3% by implementing monetary policy where needed.
Fiscal policy might undo this law, but it is still a focus of the Fed and the Fed has to report to Congress twice a year on the health of the American economy.
Natural Rate of Unemployment NARU
NARU = the difference between full employment and 100% employment. A level of unemployment that will not trigger inflation. i.e. this figure will not bid up wages.
The natural rate of unemployment is not a temporary high or low… it is a rate that is sustainable into the future.
Depression Unemployment
Our greatest failure occurred during the Great Depression, when as much as one-fourth of the labor force was unemployed.
The Historical Record
Unemployment rates fell dramatically during World War II — the civilian unemployment rate reached a rock bottom 1.2 percent.
Since 1950, unemployment rate has fluctuated from a low of 2.8 percent during the Korean War (1953) to a high of 10.8 percent during the 1981-82 recession.
From 1982 to 1989, unemployment fell, but shot up again in the 1990-91 recession.
In…2002…unemployment was circa 5.7% In…2004…unemployment was circa 6.5% February, 2005… 5.4% September, 2005….5.1% February, 2006….. 4.8% January, 2007…….4.6% October, 2007…….4.7% October, 2008…….6.1% February, 2009 …..7.6% July, 2009 ………. 9.5% September 2009….9.7%
New Jobs
The new jobs of tomorrow will require increasing levels of education and skill.
And, new type skills no doubt.
Old Skills
As the skills gap widens, structural unemployment increases.
The
skills gap
is the gap between skills required for emerging jobs and the skills of workers.
What about the other evil?
Inflation and Deflation
Inflation A sustained increase in the average of all prices of goods and services in an economy Deflation A sustained decrease in the average of all prices of goods and services in an economy
Looking at the past
In 1923, prices in Germany rose a trillion times over.
Prices in Russia, Bulgaria, and some other nations have witnessed a tenfold increase in a year.
In the 1990’s the U.S. inflation rate has risen 1 to 4 percent a year.
Inflation…is bad…is bad..is bad!
What is inflation?
A continuing rise in the
average level of prices
.(it costs more to purchase the typical “bundle” of goods and services that is produced or consumed or both.) Bottom line: Too many $$$$ chasing too few goods.
The CPI is based on what it costs an average family to live.
Just think… Inflation enables us to live in more expensive neighborhoods without having to move
Inflation is bad… see???
Shortened Time Horizons
During the German hyperinflation, workers were paid two or three times a day so that they could buy goods in the morning before prices increased in the afternoon.
Speculation
People may be encouraged to withhold resources from the production process, hoping to sell them later at higher prices.
Bracket Creep
Under our progressive tax system, taxes go up when prices rise.
Savings, investment, and work effort decline.
Inflation discussion
Notice we said an increase in the
Average Level
change in any specific price… of prices. Not a Statisticians calculate the average then look for changes in the average. The Consumer Price Index for All Urban Consumers (CPI U) decreased 0.4 percent in August, before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The August level of 219.086 (1982-84=100) was 5.4 percent higher than in August 2007. A decline in average prices = deflation.
Relative price means an increase in the price of apples (relative to other fruits) apples cost more than pears.
.
Inflation does not make
ALL persons
worse off.
Nominal Income vs. Real Income
What is the difference between nominal income and real income.
Nominal = income you receive in a particular period Real income = what you can use for purchasing stuff.
***If you nominal income does not change and there is an increase in the average level of prices….. You cannot buy as much “stuff.” If the number of dollars you receive every year is always the same, your nominal income doesn’t change- but your real income will rise or fall with price changes.
Another rule:
If you put your money into savings and keep it there rather than spending it, and inflation comes along… your money in savings will not buy as much as it would prior to the wave of inflation that hit.
Uncertainty and Misconception
Money Illusion
Even people whose nominal incomes keep up with inflation often feel oppressed by rising prices.
They feel cheated when they discover that their higher nominal wages don’t buy additional goods.
Uncertainty
One of the most immediate consequences of inflation is uncertainty.
Uncertainties created by changing price levels affect consumption and production decisions.
Inflation discussion
Uncertainty on the part of the consumer in trying to outguess the price of goods and services.
If consumers or producers postpone or cancel their expenditure plans, the demand for g & s will fall. Eventually production falls, and unemployment occurs…
What Causes Inflation?
Nearly all economists believe that rapid expansion in the supply of money is the cause of inflation.
What happens if incomes go up to keep pace with inflation?
Bracket creep
is the movement of taxpayers into higher tax brackets (rates) as nominal incomes grow.
Deflation Dangers
Deflation
— a falling price level — might not make people happy either.
Deflation reverses the redistributions caused by inflation. (Example: people today – upside down on their houses.)
Speculations from consumption and production
If you expect prices to rise, it makes sense to buy things now for resale later.
People may be encouraged to withhold resources from the production process, hoping to sell them later at higher price As such behavior becomes widespread, production declines and unemployment rises.
Measuring Inflation
Measuring inflation serves two purposes: Gauges the average rate of inflation.
Identifies its principal victims.
Consumer Price Index (CPI)
The CPI is the most common measure of inflation.
The
consumer price index
services.
(
CPI
) is a measure (index) of changes in the average price of consumer goods and
Macroeconomic Measures - Prices
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) - A widely cited index number for the price level; the weighted average of prices of a specific set of goods and services purchased by a typical household.
How to measure rate of inflation
Measuring the Rate of Inflation Market Basket Representative bundle of goods and services Base Year The point of reference for comparison of prices in other years
Macroeconomic Measures - Prices
Base Year - The year chosen as a point of reference or basis of comparison for prices in other years; a benchmark year.
Computing the Consumer Price Index
Consumer Price Index (CPI)
By observing the extent of price increases, we can calculate the inflation rate.
The
inflation rate
is the
annual percentage rate of increase
in the average price level.
Changes in Prices
Percentage change in prices = Current year - later year later year x100 later year In 2005 the CPI was 195.3; in 2006 the index was 201.6. What was the percentage change in prices from 2005-2006?
Click below for answer.
3.22 %
Here’s a little hint if you forget…C-L/L
CPI determined
Calculates the inflation rate
Market basket of goods
and services (same each year.)
Bureau of Labor Statistics
determines cost in 85 cities by shopping 184 items.
19,000 stores visited and 60,000 landlords,renters and homeowners surveyed each
month Statistics released each month.
Yearly average compiled.
CPI expressed in base year ’82-84
Constructing the CPI
The
base period
the time period used for comparative analysis — the basis of indexing, for example, of price changes.
is
Shopping for CPI
CPI is constructed by identifying a typical bundle of goods that the average consumer buys. This bundle stays the same each year. The base year is changed periodically. The base year used is ’82-’84 and prior to that it was ’63.The price level in the base period is designated as 100.
The market basket (bundle) can be changed if BLS research shows that the “average” consumer no longer is purchasing that good or service.
Each item in the bundle is weighted percent wise in the market basket figures.
The Market Basket
Housing 32.6% Transportation 19.0% Food 13.6% Insurance and pensions 9.3% Clothing 4.7% Miscellaneous 10.5% Entertainment 5.1% Health care 5.3%
What is the difference?
So………if it cost you $225 in 2002 to buy the same bundle of goods that you bought in 1983, you would be paying 225% more for the same “stuff.” Look at the inflationary costs of: cars, health care, housing, (house 4 bedrooms, 2 baths, in Highland Park in 1960 cost approximately $30,000.) (Today?????)
Calculations
Rate of Inflation = index will rise.
% of PI(price index) from one year to the next.
When prices are rising, on average, the price i = This year’s PI – Last year’s PI 100) Last year’s PI x100 If price index this year was 220 compared to 200 last year, the inflation rate would equal 10% 220 – 200 200 x 100 = 10 Formula hint: c-l/l x 100 (current-last/last x
Let’s try another calculation
In 2008 – CPI measured 215.3
In 2004 – CPI measured 188.9
What was the rate of inflation from 04 – 08?
Ans. 13.9
Is there a safety shield against inflation ?
Answer: not much!!!
But Congress has passed the Cost-of living adjustment (COLA) provision for those receiving Social Security Checks. Checks are indexed each January…in the amount equal to inflation the previous year.
If inflation was 3% then the checks are adjusted accordingly.
Unions also negotiate for this COLA in their pay proposals…
Bankers in business to make a profit.
Some bankers build in that same philosophy Adjustable-rate mortgage (ARM) stipulates an interest rate that changes during the term of the loan.
Actually, banks build the inflation factor into all their loans…the number of points depends on many variables we will discuss later.
The
real interest rate
is the nominal interest rate minus the anticipated inflation rate.
Inflation and Deflation (cont'd)
Real-world price indexes Consumer Price Index (CPI) Producer Price Index (PPI) GDP deflator Personal Consumption Expenditure (PCE)
What is stagflation?
High inflation and high unemployment….
A period during which an economy is experiencing both substantial inflation and either declining or slow growth in output. Economists used to say this would and could never happen… it did in the 80’s Paul Volker entered the scene as Fed chairman and held court on monetary policy.. More of this story later…
CAUSES of inflation
1. Demand pull (too much aggregate demand and not enough aggregate supply.
Cost Push (production costs rise) supply decreases… S S1 S D D1 D
Explanations
Demand pull: Economy producing at capacity Consumers willing and able to buy more goods Can buy goods because of accumulated savings or easy access to credit (refinancing the house, second mortgages in Texas, low interest loans, credit card interest rates low, prime rate very low.) Pull to have more goods and only limited amount of goods available… causes prices to rise!
Hence, a demand-driven rise in average prices or demand-pull
Explanations Continued
Cost Push: When producers have to pay more for inputs (resources for production), the price of the good produced increases.
OPEC- prices of crude escalates any product dependent on crude (including heating costs, increases). News Flash! Winter of 2007-2008 heating home costs rose 22%
Explanation of Dollars in Cost-push
Labor has generally been the most expensive of inputs for production up till
now in our economy.
If wage rates are pushed upward…. The good or service would have an increase in price (longshoreman’s union, pilots,) Note that most of these are union connected. Tech industry workers took about a 50% cut to get jobs in 2002 as opposed to their salaries in 1999. If the Fed releases too much money in the economy (continually pushing down interest rates, the value of that money is not as solid as if there were less circulating… more later on that)
Check the current inflation rate………..
www.inflationdata.com
Another way to measure U.S. economic health
Producer Price Index: The PPIs keep track of average prices received by producers.
October 20, 2005….PPI up highest in 15 years.
3 indices…crude materials, intermediate goods, finished goods.
Identified in monthly surveys just like CPI is.
In SR, while for the prices to be reflected in products we buy.
PPI increases before CPI (takes a little
Is the Growth of GDP real or inflated?
This is the real test!!!!!!! Was there actual increase in production and services or did the prices just skew the GDP statistics when C+I+G was added?
Have to correct GDP for price changes so we can measure actual production.
CPI tells the consumer if they have to spend more dollars to get that loaf of bread… but other measures have to be evaluated.
Still another way to test the health of the U.S. economy
The GDP Deflator…. The broadest price index and covers all output (C+I+G) change. including consumer goods, investment goods and government services. The GDP deflator isn’t a pure measure of price
Its value reflects both price changes AND market responses to those price changes as reflected in new expenditure patterns.
The GDP deflator typically registers a lower inflation rate than CPI and the government watchdogs use this barometer more readily than current CPI
2 3 Year (base Price of good Quantity GDP 1 $10 100 $1,000 Real GDP $1,000 $12 $14 120 140 12x120 = $1,440 10 x 120 = $1,200 14 x 140 = $1,960 10 x 140 = $1,400
Bottom Line
CPI GDP CPI
is designed to measure the impact of price changes on the cost of a goods purchased by households(remember, market basket and only for urban purchasers.) deflator is a broader price index and is designed to measure the change in the average price of the market basket of goods included in GDP (in addition to consumer goods it includes capital goods, & g & s by government.) measures money income of consumers in relation to rising prices (only consumer goods.) typical bundle of
GDP
deflator measures economy wide inflation more g & s included in measurement.
Historical Record Graph
0 4 8 12 20 16 12 8 4
A
Inflation
B
1920 1930 1940 1950 1960 1970 1980 Deflation 1990 2000
What really is the goal of fiscal and monetary planners
?
The CPI’s market basket of goods and services was overhauled in 1998.
Price Stability…..
Major changes in the general level of prices indicate upsets in the economic system.
Prices act as allocators of economic goods, they are the mechanism that determines the answer to the three basic questions, What, How and For Whom.
Prices act as the basic force in a capitalistic economy