Who is in the labor force?Above 16 years oldAble and willing to workNot institutionalized (jail, hospitals)Not in militaryNot included: Retirees, stay at home spouse, full-time students…Unemployment = Unemployed X100Labor forceWhat are the 3 types of unemployment?1. Frictional UnemploymentTemporarily Unemployed or being between jobsa. Are qualified workers with transferable skills but they aren’t working. (example- college grads looking for jobs)Seasonal Unemploymentb. A specific type of frictional unemployment which due to time of year and nature of the jobi. Example- Professional Santa clause, Alaskan fishers2. Structural Unemploymenta. Changes in the structure of the labor force make some skills obsoleteb. Workers do not have transferable skillsi. Example- VCR repair man, carriage wheel makerTechnological Unemploymenta. type of structural unemployment where auto man and machinery replace. (example- robots take over a human job)3. Cyclical Unemploymenta. Unemployment from recessioni. Example-workers laid off during recession, restaurant owners fire waiters after months of poor sales due to recessionThey make up the natural rate of unemployment (NRU), we are at full employment if we have only the natural rate of unemployment.Unemployment means no cyclical unemployment.Unemployment and Inflation Who is in the labor force? - Above 16 years old- Able and willing to work - Not institutionalized (jail, hospitals) - Not in militaryNot included: Retirees, stay at home spouse, full-time students… Unemployment = Unemployed X100 Labor forceWhat are the 3 types of unemployment? 1. Frictional Unemployment Temporarily Unemployed or being between jobs a. Are qualified workers with transferable skills but they aren’t working. (example- college grads looking for jobs)Seasonal Unemploymentb. A specific type of frictional unemployment which due to time of year and nature of the job i. Example- Professional Santa clause, Alaskan fishers 2. Structural Unemployment a. Changes in the structure of the labor force make some skills obsolete b. Workers do not have transferable skills i. Example- VCR repair man, carriage wheel maker Technological Unemployment a. type of structural unemployment where auto man and machinery replace. (example- robots take over a human job) 3. Cyclical Unemployment a. Unemployment from recession i. Example-workers laid off during recession, restaurant owners fire waiters after months of poor sales due to recession They make up the natural rate of unemployment (NRU), we are at full employment if we have only the natural rate of unemployment. Unemployment means no cyclical unemployment. 4-6 Percent is normal therefore 4-6 percent unemployment= full employment It can be misdiagnosed because of disgruntled workers, part-time workers, race/ageinequalities, and illegal labor.Inflation What is inflation? - Rising general level of prices - Inflation reduces the purchasing power of money When inflation occurs, each dollar of income will buy fewer goods and servicesthan beforeGDP Deflator measures the prices of all goods produced which is how we measure Inflation People who are UnaffectedPeople with salaries or pensions that have a Cost-of-Living-Adjustment (COLA)• When the CPI increases, their benefits automatically increase the same amount.What are interest rates? Why do lenders charge them? Who is willing to lend me $100 at an interest rate of 100%? •If the nominal interest rate is 10% and the inflation rate is 15%, how much is the REAL interest rate?• Real Interest Rates-• The percentage increase in purchasing power that a borrower pays. (adjustedfor inflation)• Real = nominal interest rate - expected inflation• Nominal Interest Rates- • the percentage increase in money that the borrower pays not adjusting for inflation.• Nominal = Real interest rate + expected inflationExample #1:• You lend out $100 with 20% interest. Inflation is 15%.• A year later you get paid back $120. What is the nominal and what is the real interest rate?• Nominal interest rate is 20%. Real interest rate was only 5%• In reality, you get paid back an amount with less purchasing power. Example #2:• You lend out $100 with 10% interest. Prices are expected to increased 20%. In a year you get paid back $110. What is the nominal and what is the real interest rate?• Nominal interest rate is 10%. Real interest rate was only –10%In reality, you get paid back an amount with less purchasing power.3 causes of inflation 1. The Government Prints TOO MUCH Money (The Quantity Theory)• Governments that keep printing money to pay debts end up with hyperinflation.• There are more “rich” people but the same amount of products.• Result: Banks refuse to lend and GDP falls2. DEMAND-PULL INFLATIONDEMAND PULLS UP PRICES!!!• Demand increases but supply stays the same. What is the result?• A Shortage driving prices up• An overheated economy with excessive spending but same amount of goods.3. COST-PUSH INFLATIONHIGHER PRODUCTION COSTS Increases PRICES.Increasing costs force producers to increase prices. Usually the result of a supply shockExamples: Hurricane Katrina destroyed oil refineries and causes gas prices to go up.Capital (Financial) AccountThe Capital Account measures the purchase and sale of financial assets abroad.Purchases of things that stay in the foreign country.Examples: – US company buys a hotel in Russia– A Korean company sells a factory in Ohio– Australian company owns local MallCurrent AccountThe Current Account is made up of three parts:1. Trades in Goods and Services (Net Exports)- Difference between a nation’s exports of goods and services and its imports of goods and servicesEx: Toys imported from China, US cars exported to Mexico 1. Investment Income- income from the factors of production including payments made to foreign investors. Ex: Money earned by Japanese car producers in the US1. Net Transfers- Money flows from the private or public sectorsEx: donations, aids and grants, official assistance CPI_ The most commonly used instrument for measuring consumer inflation is the Consumer Price IndexHere is how it works:• The base year is given an index of 100• To compare, each year is given an index # as well• 1997 Market Basket: Movie is $6 & Pizza is $14 • Total = $20 (Index of Base Year = 100)• 2005 Market Basket: Movie is $8 & Pizza is $17• Total = $25 (Index of )GDP Deflator vs. CPI The GDP deflator