Economic Fluctuations and Inflation 10 03 2013 Employment Potential GDP output Define as The maximum sustainable level of output This amount equals about 3 growth per year Actual GDP can be greater or less than Potential GDP Full Employment The Normal rate of unemployment the amount due to job shopping and imperfect information The sustainable employment level is 95 The Labor market Labor force the number of people age 16 and up who are considered employed OR unemployed Employed you currently have a job Unemployed you are o 1 actively looking for a job or o 2 you and waiting to return to a previous job EX Retired people are considered to be not in the labor market if you are working or volunteering WITHOUT pay you are also not included In order to be considered unemployed you must have searched for work in the last 4 weeks If you are NOT in the labor force you are NOT working and NOT looking to have a job o EX a full time student retired people a homemaker Labor Force population rate the fraction of adult population that IS in the labor force o Over time women have been participation MORE in the labor force while men have been participation LESS Unemployment rate the percentage of the labor force that is unemployed 16 19 o The highest rate of people who are unemployed are men age o The minimum wage causes the unemployment rate to increase especially for young workers people with little to no experience o The NBEA officially dates the start and end of a recession Labor Market Equations Labor force participation rate Labor force adult population o Percent of people in the labor force Unemployment rate unemployed labor force o Fraction of labor force w o a current job Employment population ratio employed adult population o People that are employed Three types of unemployment Frictional Structural Cyclical Frictional Unemployment Caused by constant changed in the labor market Imperfect information Search activities Workers have the skills to fill an opening EX students that are fresh out of college CAN preform the actions but do not have Experience so they cannot get a job o This occurs when you re trying to find the best fit job for you usually short term Structural Unemployment caused by changed in the basic characteristics of the economy Some jobs become rare New jobs are created Workers do NOT have the skills to complete a job EX people who work at record stores or people who created MP3 players Have been replaced by iPods People with structural employment can go to the government and apply for unemployment benefits They are usually given financial compensation o This benefit can only last up to 99 weeks o Problem decreases the incentive to get back to work Cyclical Unemployment due to recessions and inadequate demand for labor Overall unemployment rate rises during a recession Unemployment is inversely related to output If less people are buying less needs to be created meaning that there is a bunch of excess workers causing many to be fired during this recession Natural Rate of Unemployment The normal unemployment rate due to frictional and structural unemployment In the U S it is about 5 Structural Frictional Natural Natural doesn t necessarily mean good Employed unemployed or not in the labor force Everyone is Inflation Decline in the purchasing power of money o Rising prices o Rising wages cents Low rates of inflation accompany low variation in the inflation rate High rates of inflation tend to be quite variable o When your grandparents say In my day a bagel was 25 o They don t account for inflation o Items cost more for us now but the average salary is much higher now than it was a long time ago Inflation occurs because of government printing money The more there is the less its worth Stagflation high unemployment low or no economic growth Unanticipated inflation Surprise to most When inflation is high and variable impossible to predict accurately Can lead to a recession Cannot predict therefore can not attempt to conserve Anticipated inflation Expected by most people Can accurately predict Can not really lead to a recession very low chance Actions are based off of predictability of an event Why is lots of inflation bad Reduces investment goals o If you cant predict for the future you wont make long term o Would you invest if you knew that your money could instantly drop severely in value o Change in inflation changes results of long term projects Distorts information and relative prices o Some prices change quickly others change slowly o Less efficient allocation of resources o People go out and spend without thinking because they know that their money will be less valuable the next day its if things are getting cheaper Less productive use of resources o People spend more time and money to react to predictions in inflation rates o Menu and shoe leather costs Menu changing price tags and creating new ones Shoe leather cost to walk into a bank and take out your money because you re scared to leave it in Creating an Environment for Growth and Prosperity 10 03 2013 Per Capita GDP Income per person If real GDP grows faster than population the standard of living will rise so what is effected by this growth o Diet o Medical care o Education o Clean air and water o Leisure Small growth rates differences have BIG impacts over time Economic Growth is Important Rule of 70 if a variable grows at a rate of x percent per year 70 x will approximate the years required for the variable to double For example is economic growth is at 10 than every 2 years the economic growth will double GDP growth rate 10 7 5 2 1 Years to double 70 10 7 70 7 10 70 5 14 70 2 35 70 1 70 Key source of economic growth o 1 Gains From Trade Trade allows Specialization division of labor Mass production Consumption of a wide variety or goods Trade restrictions reduce living standards o 2 Entrepreneurial Discovery Entrepreneurs take risks Ideas that increase the value of resources and create products Ideas that take resources away from more valuable uses result in a loss Technological advancements improve the quality of life Wait a minute don t computers and machines destroy jobs Jobs themselves don t lead to economic growth Create value not just work Ex is the government paid half the people to dig holes and half the people to refill the holes there would be no economic growth leaving us nowhere better Someone has to make the machines that will be replacing a worker so jobs are just being passed around not
View Full Document
Unlocking...