ECO 201 Ch 6 Macroeconomic Measurements Prices and Unemployment 1 Measuring the Price Level There is a difference between price and price level price refers to a single price price level a weighted average of the prices of all goods and services a Computing the Price Level Using CPI price index a measure of the price level consumer price index CPI the weighted average of prices of a specific set of goods and services purchased by a typical household a widely cited index number for the price level Based on a representative group of goods called the market basket purchased by a typical household 8 Major Categories Food Housing Apparel Transportation Medical Care Recreation Education and Communication Other Goods and Services base year the year chosen as a point of reference or basis of comparison for prices in other years a benchmark year The CPI in the base year is always 100 CPI Market basket in current year Market basket in base year x 100 When we know the CPI of various years we can compute the percentage change in prices Change in P CPI later year CPI earlier year CPI earlier year x 100 b Inflation and the CPI inflation an increase in the price level inflation rate positive percentage change in the price level on an annual basis real income nominal income adjusted for price changes Real Income Nominal Income CPI x 100 nominal income the current dollar amount of a person s income c GDP Implicit Price Deflator unlike CPI is based on all goods and services produced in an economy d Converting Dollars from One Year to Another Salary in today s dollars Salary earlier year x CPI current year CPI earlier year 2 Measuring Unemployment a Who Are the Unemployed Total population is divided into 2 groups Anyone under 16 yrs in the armed forces or institutionalized Everyone else known as civilian noninstitutional population has 2 groups Not in labor force not working not looking for work retired Civilian labor force employed or unemployed b The Unemployment and Employment Rates unemployment rate the percentage of the civilian force that is unemployed Unemployment Rate U Number of unemployed persons Civilian labor force employment rate the percentage of the civilian noninstitutional population that is employed Employment Rate E Number of employed persons Civilian noninstitutional population labor force participation rate the percentage of the civilian noninstitutional population that is in the civilian labor force Labor Force Participation Rate LFPR Civilian labor force Civilian noninstitutional population c Common Misconceptions About the Unemployment and Employment Rates U E do NOT equal 100 because the denominator of U is not the same as the denominator of d Reasons for Unemployment U is of of the civilian labor force E is of the civilian noninstitutional population which is a larger number than the civilian labor force An unemployed person may fall into one of 4 categories Job Loser fired or laid off most of unemployed Job Leaver quit their job Reentrant was previously employed didn t work for some time is currently reentering the labor force New Entrant never had a full time job for more than 2 weeks and is now looking for a job Unemployed persons Job Losers Job Leavers Reentrants New entrants E 1 ECO 201 Ch 6 Macroeconomic Measurements Prices and Unemployment e Discouraged Workers To be an unemployed person you have to meet certain conditions one of which is that you have to be actively looking for work A discouraged worker is the same as an unemployed person because neither has a job but they aren t the same for calculating the unemployment rate Since discouraged workers aren t counted some economists consider the unemployment rate to be biased downward f Types of Unemployment frictional unemployment unemployment that is due to the natural friction in the economy and that is caused by changing market conditions and represented by qualified individuals with transferable skills who change jobs UF Number of frictionally unemployed persons Civilian labor force A dynamic changing economy like that of unemployment the US always has frictional Many economists believe that the basic cause of frictional unemployment is imperfect or incomplete information which prevents individuals from leaving one job and finding another instantly Has transferable skills structural unemployment unemployment due to structural changes in the economy that eliminate some jobs and create others for which the unemployed are unqualified US Number of structurally unemployed persons Civilian labor force Most economists argue that structural unemployment is largely the consequence of automation labor saving devices and long lasting shifts in demand Do NOT have transferable skills natural unemployment unemployment caused by frictional and structural factors in the economy Natural Unemployment UN UF US g The Natural Unemployment Rate and Full Employment A dynamic changing economy can never have full unemployment reported unemployment of 0 due to the frictional and structural changes that continually occur full employment the condition that exists when the unemployment rate is equal to the natural unemployment rate The economy can be operating at full employment and some people will be unemployed h Cyclical Unemployment cyclical unemployment the difference between the unemployment rate and the natural unemployment rate Cyclical Unemployment Rate UC U UN 2