arnold 8e ch 05 traditional final

8/12/2019 Arnold 8e Ch 05 Traditional Final

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Paul Schneiderman, Ph.D., Professor of Finance & Economics, SouthernNew Hampshire University2008 South-Western


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Measuring Prices

Unemployment andEmployment

In This Lecture..


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THE STUDY OF

MACROECONOMICS


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MACROECONOMIC PROBLEMS

High inflation rate

High unemployment rate

High interest rates

Low economic growth or stagnation


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MACROECONOMIC THEORIES

Explain:

Changes in output of all goods and services

Changes in total of all incomes earnedChanges in price levelsChanges in in unemploymentChanges in interest rates


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MACROECONOMIC POLICIES

Fiscal Policy deals with changesin government expendituresand/or taxes. to achieve particularmacroeconomic goals.

Monetary Policy deals with.changes in the money supply, orthe rate of growth of the moneysupply, to achieve particularmacroeconomic goals.


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DIFFERENT VIEWS OF HOW

THE ECONOMY WORKSThe economy is inherentlystable and self-regulating.

The economy is inherentlyunstable and requiresintervention to correct problems.


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THREE MACROECONOMIC

ORGANIZATIONAL CATEGORIESP-Q categorySelf-Regulating Economic Instability category

Effective-Ineffective category


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THE P-Q CATEGORYMacroeconomics deals with many variables, but two major variablesare the Price level and Real GDP .Price level (P) is the weighted average of the prices of all goods andservices.

Real GDP (Q) is the value of the entire output produced annuallywithin a countrys borders, adjusted for price changes.


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P AND Q IN MACROECONOMICS

Gross Domestic Product (GDP). P times Q.Unemployment. Changes in unemployment

are related to changes in Q.Inflation. A rising P.Deflation. A falling P.

Economic growth . Related to increasing Q.Stagflation. A rising P combined with risingunemployment.


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P AND Q IN

MACROECONOMICSBusiness cycle. Recurrent swings up anddown in Q.Inflationary gap. The condition of the

economy when Q is above its natural level.Recessionary gap. The condition of theeconomy when Q is below its natural level.Fiscal policy. Concerned with stabilizing Pand increasing Q.Monetary policy . Concerned with stabilizingP and increasing Q.


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THE SELF-REGULATING ECONOMIC

INSTABILITY CATEGORY

Axel Leijonhufvud notes:

The central issue in macroeconomic theory is once again

the extent to which the economy, or at least its market sectors,may properly be regarded as a self-regulating system. . . . Howwell or badly, do its automatic mechanisms perform?


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THE EFFECTIVE-INEFFECTIVE

CATEGORY How effective are: Fiscal Policy?

Changes in government expenditures and/or changes in taxes toachieve particular macroeconomic goals.

Monetary Policy? Changes in the money supply, or the rate of growth of the money

supply, to achieve particular macroeconomic goals.


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THE SELF-REGULATING ECONOMIC

INSTABILITY CATEGORY

Real GDP

The value of the entireoutput produced annuallywithin a countrys borders,adjusted for price changes.


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MACROECONOMIC MEASURES -PRICES

Price Level - A weighted average of theprices of all good and services.

Price Index - A measure of the price level.

Consumer Price Index (CPI) - A widely citedindex number for the price level; the weightedaverage of prices of a specific set of goodsand services purchased by a typicalhousehold.


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MACROECONOMIC

MEASURES - PRICESBase Year - The year chosen as a point of reference or basis ofcomparison for prices in other years; a benchmark year.


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COMPUTING THE

CONSUMER PRICE INDEX


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1983-2006


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1983-2006Year Annual 1983 99.6 1984 103.9 1985 107.6 1986 109.6 1987 113.6 1988 118.3

1989 124.0 1990 130.7 1991 136.2 1992 140.3 1993 144.5 1994 148.2

Year Annual 1995 152.4 1996 156.9 1997 160.5 1998 163.0 1999 166.6 2000 172.2

2001 177.1 2002 179.9 2003 184.0 2004 188.9 2005 195.3 2006 201.6


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CHANGES IN PRICES

In 2005 the CPI was 195.3; in 2006 the index was201.6. What was the percentage change in pricesfrom 2005-2006?

3.23 %


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MACROECONOMICMEASURES - INCOME

Nominal Income - The current- dollar amount of a persons income.

Inflation - An increase in the price level.

Real Income - Nominal income adjusted for price changes.


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GDP IMPLICIT PRICEDEFLATOR VS. CONSUMER

PRICE INDEXGDP Implicit Price Deflator is based uponall goods and services produced in aneconomy.

CPI is based upon a representative group

of goods and services purchased by atypical household


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SELF-TEST

Explain how the CPI is calculated.

What is a base year?

In year 1, your annual income is $45,000 and the CPI is 143.6; inyear 2, your annual income is $51,232 and the CPI is 150.7. Hasyour real income risen, fallen, or remained constant? Explain youranswer.


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WHO ARE THE UNEMPLOYED?


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LABOR FORCE PARTICIPATION

RATELabor force participation rate - Thepercentage of the civilian noninstitutional

population that is in the civilian labor force:Civilian labor force

LFPR = --------------------------------------------- x 100

Civilian noninstitutional population


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UNEMPLOYMENT

Unemployment Rate- The percentage of the civilian force that isunemployed:

Number of unemployed personsU = -------------------------------------------- X 100

Civilian labor force


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UNEMPLOYMENT Employment Rate - The percentage of the civilian noninstitutional

population that is employed:

Number of employed persons (E) = ----------------------------------------------- X 100

Civilian noninstitutional population


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WHO ARE THE UNEMPLOYMENT

Job loser. This is a person who was employed in thecivilian labor force and was either fired or laid off.

Job leaver. This is a person employed in the civilian laborforce who quits his or her job.

Reentrant. This is a person who was previously employed,hasnt worked for some time, and is currently reentering thelabor force.

New entrant. This is a person who has never held a full-time job for two weeks or longer and is now in the civilianlabor force looking for a job.


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FRICTIONAL

UNEMPLOYMENT Unemployment due tothe natural frictions ofthe economy, which iscaused by changingmarket conditions and isrepresented by qualified

individuals withtransferable skills whochange jobs.


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STRUCTURAL

UNEMPLOYMENT Unemployment due tostructural changes in theeconomy that eliminate some

jobs and create other jobs forwhich the unemployed areunqualified.


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NATURAL UNEMPLOYMENT Unemployment caused by frictional and structural factors in the

economy.

Natural unemployment rate = Frictional unemployment rate +Structural unemployment rate.


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FULL EMPLOYMENT

The condition that exists whenthe unemployment rate is equalto the natural unemployment

rate.


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CYCLICAL UNEMPLOYMENT

RATE The difference between the unemployment rate and the naturalunemployment rate.


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SELF-TEST QUESTIONS

What is the major difference between a person who is frictionallyunemployed and one who is structurally unemployed?

If the cyclical unemployment rate is positive, what does thisimply?


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