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Econ 104 Introduction to Economics February 11 2014 Chapter 12 Continued Exam 2 will consist of Chapter 12 as well Real v Nominal GDP Real Nominal is just keeping prices fixed This is what we are worried about usually when prices go up it is not real We want GDP to increase BUT we want to know how much it increased due to more stuff being produced and sold as opposed to how much it increased just because prices went up To check if GDP went up real you interchange P1 into P2 do the calculations and then see if it went up If it did then it was real If it didn t the answer is nominal Steps to Calculate Real GDP Need a base year Substitute the price of the base year into the other years prices That is your Real GDP Nominal and Real are the same in base year 17 1 Trillion Nominal GDP 15 9 Trillion using 2009 Dollars Real GDP 7 02 increase in prices since 2009 Current Value of GDP Deflator GDP Deflator One way we measure inflation Use real and nominal GDP as a key measure of inflation Nominal in a Year divide by Real in Same Year X multiply 100 396 6470 Nominal 1 237 X 100 123 7 5230 Real Overall prices increased 23 7 from the BASE year Three Macro Variables GDP Growth Output Inflation Price Levels Unemployment Unemployment 419 Unemployment current rate 6 6 One year ago 7 9 Two years ago 8 2 The targeted rate of unemployment is NOT zero rather 5 or 6 unemployment is natural 4 Types of Unemployment 417 420 Unemployment Certain professions demand for labor seasonal o Agriculture construction teacher etc So it s natural to see unemployment at times from these industries Frictional Unemployment At any point in time some people are looking for jobs and some firms are looking for people In a fluid labor market matching workers with jobs takes time Structural Unemployment A mismatch between workers and the skills requirements of the jobs As the economy changes we produce different goods services Persons who were employed in the now outdated industries lose jobs Cyclical Unemployment Unemployment caused by a recession Simply a case of too few jobs around Insufficient demand for goods services creates insufficient demand for labor Bad kind we do not want Structual Frictional Seasonal 5 or 6 Natural Rate of Unemployment Cyclical 1 or 2 Demand related unemployment All of this 6 6 Current unemployment Bureau of Labor Statistics BLS calculates this Part of the Department of Labor 6 6 is the percentage of the labor force that is currently unemployed According to BLS and How They Calculate 3 Categories Employed o 145 22 Million people are employed Looked in past 4 weeks unemployed o 10 24 Million people are unemployed Not in labor force o 91 45 million people because they are not in labor force o This category is just gone ignored Labor force Employed and Unemployed Unemployed DIVIDED BY Labor Force Employed Unemployed of Unemployment Marginally Attached Workers 2 6 Million People Have looked for work sometime in the past year but not in the past 4 weeks Discourage Workers 837 000 included in Marginally Attached A subset of marginally attached Gave up looking because they believe there are no job Working Part Time of Economic Reasons 7 3 Million counted as employed Better measure is Calculates U6 A Broader Picture Unemployed 10 2 M Marginally Attached 2 6 M Part Time for Economic 7 3 Divided by labor force marginally attached 155 5 2 6 158 1 Million 20 1 DIVIDED BY 158 1 12 7 Also known as U6 U3 v U6 situation U3 is the standard measure reported by the BLS U6 is a broader measure that some feel gives a more accurate picture of the employment o Unemployed o Marginally attached o Working part time for economic reasons Labor Force Participation Rate 409 Of all the people who could be in the labor force how many ARE in the labor force o Who could be in the labor force Everyone 16 or over not in prison and hospital Everyone 16 or over that I not in the hospital or prison 246 9 M How many are in the labor force 155 5 M Labor force participation rate 63 Unemployment Rate Unemployed DIVIDED BY Labor Force Labor Force Participation Rate Labor Force DIVIDED BY Who Could Be In Labor Force In Class Game PRIME EXAMPMLE 1 Loretta Large Lungs Not in Labor Force 2 Bobby Ray RayBob Employed 3 Junior Senior Unemployed 4 Daisy Senior Not in Labor Force 5 Crystal Pistol Employed 6 Petey Pistol Not in the Labor Force 7 Ronny Donny Employed 8 Lonny Donny Employed 9 Dr BS Employed 5 Employed 3 Not in Labor Force 1 Unemployed Answers for Game Unemployment Rate 16 Labor Force Participation Rate 66 7 Why Does Unemployment Exist Chapter 13 Efficiency Wages Wages paid that exceed the going market wage to keep workers happy productive and efficient 422 o Idea is Employees have more to LOSE if they lose their job Improves attendance productivity and reduce shrinking Increases Firm s Profitability Example Sprint Henry Ford and 5 a Day Labor Unions are another reason the wages might be above the market wage 422 o Labor union membership is down since the 1950 s o Labor unions fight for a better atmosphere and experience for the workers Minimum Wage Price Board No detectable employment losses from the kind of minimum wage increases we have seen in the US o It does not affect unemployment Unemployment Insurance paying people not to work or when they are out of work o It does not affect all of unemployment If we took unemployment insurance away our unemployment would go down BUT not by a lot unemployment would still exist o Acts as a safety net that some people could take advantage of Chapter 13 Inflation continual rise in the overall price level Deflation continual fall in the price level Generally see inflation hardly ever see deflation How We Measure Inflation GDP Deflator Consumer Price Index GDP Deflator since 2009 7 just under 2 each year Consumer Price Index CPI 423 Calculated by Bureau of Labor Statistics Released every month Measures how prices change over time Used to implement cost of living adjustments to things like paychecks union contracts social security etc Measures the price of a set of things that ordinary households purchases on a regular basis this set is called a market basket Market Basket set of goods and services that the CPI examines the price of o Is weighed to reflect the portion of peoples incomes that is spent on each type of thing o 3 Main Items We Spend Money On Housing 42 Transportation 17 Food and Bev 15 CPI is Calculation 44 44 MULTIPLY 100 100 46 44 MULTIPLY BY ORIGINAL 100 104 5 4 5 CPI in the

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