Econ 103 Ch 7 Ideal economy has low unemployment low inflation and rapid growth of output per worker Employed person is 16 who works for money more than 15 w o pay or has a job but temporarily absent Unemployed person is 16 who is not working is available for work and has looked for jobs past 4 weeks Frictional unemployment is due to short run job skill matching problems Structural unemployment is due to changes in the structure of the economy that result in significant loss of jobs in certain industries Cyclical unemployment is the increase in unemployment that occurs during recessions and depressions Natural rate of unemployment is unemployment that occurs as a normal part of the functioning of the economy Sometimes frictional structural unemployment Hysteresis unemployed for extended periods of time During a recession the duration of unemployment increases Most important economic cost of recession is loss of output that could be produced Natural Rate of Unemployment frictional unemployment rate structural unemployment rate Labor force of employed of unemployed Labor force participation rate the percentage of the working age non institutionalized population in the labor force Discouraged Workers Individuals who are not currently working and for whatever reason have stopped actively seeking work The discouraged worker effect lowers the unemployment rate A price index that is computed each month by the Bureau of Labor Statistics using a bundle of goods and services that represents the market basket is the consumer price index A price index for products at all stages in the process is the producer price index GDP deflator price index that pertains to all goods and services produced in the economy The producer price index is used as a wholesale price index CPI tends to overestimate the extent of inflation because it uses a fixed market basket and ignores substitution of lower priced items for higher priced items Unlike GDP deflator CPI represents a typical basic of consumer goods and includes imports Producer Price Indexes measure price changes for products at all stages in the production process 3 main categories are finished goods intermediate materials and crude materials Unanticipated inflation can hurt creditors Inflation that is higher than expected benefits debtors Inflation that is lower than expected benefits creditors Deflation hurts borrowers Output per worker hour is called labor productivity Part of reason for upward trend in productivity is an increase in the amount of capital per worker If all wages salaries welfare benefits and other sources of income were indexed to inflation inflation may not have negative impacts on people s purchasing power but it will still have harmful negative effects on the economy by increasing administrative costs and inefficiencies Per capita output output per person in the economy Per capita output is smaller than output per worker or productivity All else constant interest rates tend to be higher the greater the risk and the longer to term to maturity Recession is a period during which real GDP declines for at least two consecutive quarters The capacity for long run economic growth for an economy is determined by the size of its labor force its capital stock and productivity of labor and capital