ECON 1202 1st Edition Lecture 11 Outline of Last Lecture I. Measuring Unemployment Rate, the Labor Force Participation Rate, and the Employment-Population RatioII. Types of UnemploymentOutline of Current Lecture I. Types of Unemployment (Continued)II. Measuring InflationIII. Using Prices Indexes to Adjust for the Effects of InflationIV. Real vs. Nominal Interest RatesCurrent LectureI. Types of Unemployment (Continued)a. Structural Unemploymenti. This is unemployment that arises from a persistent mismatch between the skills and attributes of workers and the requirements of jobsii. Structural unemployment is associated with longer unemployment spellsiii. Workers who are structurally unemployed may require retraining in order to obtain “modern” jobsb. Cyclical Unemploymenti. This is unemployment caused by a business cycle recession.ii. In normal recoveries after a recession, unemployment due to cyclical factors will fall.These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.iii. When all unemployment is due to frictional and structural factors, we say that the economy is at full employment. This means there will always be some unemployment in the economy. Economists refer to it as the natural rate of unemployment when unemployment consists only of frictional and structural unemployment.iv. The general consensus of economists is that the U.S. natural rate of unemployment is somewhere between 5 and 6 percent.II. Measuring Inflationi. We refer to the percentage increase in the price level from one year to the next as inflationii. Tow commonly-used measures are:1. The Consumer Price Index2. The Producer Price Indexiii. The consumer price index is an average of the prices of the goods and services purchased by the typical urban family of four. 1. To calculate CPI in a given year, we need:a. A basket of goodsb. The cost to purchase the basket of goods in the a base year c. Expenditures in the current year x 100 Expenditures in the base year- Always going to be AT LEAST 100d. The prices in the current year- i.e. The CPI in the current year is the cost to purchase the basket of goods this year, divided bythe cost in the base year. By convention, wemultiply this by 100, so that the CPI in the base year is 100.iv. The producer price index is an average of the prices received by producers of goods and services at all stages of the production process.1. It is conceptually similar to the CPI, in that it uses a basket of goods, but the goods are those used by producers.a. Based on purchases of EVERY LEVEL (final, intermediate, etc.)2. The PPI can give early warning of future movements in consumer prices.a. i.e. 1984in CPI2010in CPI dollars 1984in Valuedollars 2010in Value3. The current standard base “year” for the CPI is an average of 1982-1984 prices.4. Values like wages in current-year dollars are called nominal variables. When we adjust them for inflation, by dividing by the current year’s price index and multiplying by 100, we convert them to real variables.V. Real vs. Nominal Interest Ratesa. Nominal interest rate: the stated interest rate on a loanb. Real interest rate: equal to the nominal interest rate minus the inflation