other measures of total production and total income
DESCRIPTION
Other Measures of Total Production and Total Income. The Division of Income, 2010. 21%. FIGURE 7-5. The Division of Income. 55%. $7,981 748 350 2,455 2,993. 2%. 1,036 1,418. Measuring the Unemployment Rate and the Labor Force Participation Rate. The Household Survey. - PowerPoint PPT PresentationTRANSCRIPT
Other Measures of Total Production and Total Income
The Division of Income, 2010
FIGURE 7-5The Division of Income
21%
55%
2%$7,981 748 350 2,455
2,993
1,0361,418
Labor force The sum of employed and unemployed workers in the economy.
Employed can be in any job -- part-time, underemployed
Unemployment rate The percentage of the labor force that is unemployed: not working and looking.
Measuring the Unemployment Rate and the Labor Force Participation Rate
The Household Survey
Discouraged workers: Available for work but haven’t looked for a job (for the past four weeks) because they believe no jobs are available for them.
The Employment Status of the Civilian Working-Age Population, July 2009
Measuring the Unemployment Rate and the Labor Force Participation Rate
The Household Survey
In July 2009, the working-age population of the United States was 235.9 million. The working-age population is divided into those in the labor force (154.5 million) and those not in the labor force (81.4 million). The labor force is divided into the employed (140.0 million) and the unemployed (14.5 million). Those not in the labor force are divided into those not available for work (75.0 million) and those available for work but not currently working (6.4 million). Finally, those available for work but not in the labor force are divided into discouraged workers (0.8 million) and those not currently looking for work for other reasons (5.6 million).
The Employment Status of the Civilian Working-Age Population, April 2007
Sept 2011
240.1
154.0 86.1
140.0 14.0
79.9
6.2
1.0
5.2
100Number of unemployed Unemployment rateLabor force
• Unemployment rate: the percentage of the labor force that is unemployed … not working and looking.
• Labor force participation rate: the percentage of the working-age civilian population in the labor force.
100Labor force Labor force participation rateWorking-age population
Men
Women
Household and Establishment Survey Data for March and April 2007
HOUSEHOLD SURVEY ESTABLISHMENT SURVEY
MARCH APRIL CHANGE MARCH APRIL CHANGE
EMPLOYED 146,254,000 145,786,000 −468,000 137,596,000 137,684,000 +88,000
UNEMPLOYED 6,724,000 6,801,000 +77,000
LABOR FORCE 152,979,000 152,587,000 −392,000
UNEMPLOYMENT RATE 4.4% 4.5% +0.1%
The Establishment Survey: Another Measure of Employment
Frictional Unemployment and Job SearchFrictional unemployment Short-term unemployment that arises from the process of matching workers with jobs.
Types of Unemployment
Structural unemployment Unemployment because of persistent mismatch between worker skills and characteristics and job requirements.• Declining industries and regions / Expanding industries and regions
Cyclical unemployment Unemployment caused by a business cycle recession.
Cyclical Unemployment
Structural Unemployment
Full employment is not considered to be zero unemployment becausea) some cyclical unemployment always exists
b) some people do not want a job
c) there are not enough jobs for everyone who wants one
d) people do not find jobs right away
Unemployment Insurance and Other Payments to the Unemployed
Explaining Unemployment
Minimum Wage Laws
Labor Unions / Work Rules
Seniority / Probation Periods
Efficiency Wages: • higher-than-market wage that a firm pays to increase
worker productivity wait unemployment.• Reduce hiring costs, turnover, monitoring costs, shirking• Increase morale
Deficient Demand
Average Unemployment Rates in the United States, Canada, Japan, and Europe, 1997–2006
Government Policies and the Unemployment Rate
If the federal government implements programs so that the unemployed are more quickly matched with jobs, the natural rate of unemployment will decrease.
a) True b) False
Eliminating frictional employment would be good for the economy.
a) True b) False
Measuring Inflation
Price level (= P) A measure of the average prices of goods and services in the economy.
Inflation rate (= π) The percentage increase in the price level from one year to the next.
Π = 100 x (Pt - Pt-1 ) / Pt-1
Price Indices of Note• GDP Deflator• Consumer Price Index
• Core CPI: CPI excluding energy and food• Producer Price Index
Measuring InflationThe Consumer Price Index The CPI Market Basket,
December 2006
Consumer price index (CPI) An average of the prices of the goods and services purchased by the typical urban family of four.
The Consumer Price Index
BASE YEAR (1999) 2012 2013
PRODUCTQUANT-
ITY PRICEEXPEND-ITURES PRICE
EXPENDITURES
(ON BASE-YEAR
QUANTITIES) PRICE
EXPENDITURES (ON
BASE-YEAR QUANTITIES)
Eye exams 1 $50 $50 $100 $100 $85 $85
Pizzas 20 10 200 15 300 14 280
Books 20 25 500.00 25 500 27.50 550
Total $750 $900 $915
The Consumer Price Index
APPLIED TO 2012 APPLIED TO 2013
120100750$900$
122100
750$915$
CPI = 100year base in the esExpenditur
yearcurrent in the esExpenditur
122 120 100 1.7%120
2008 - 2009 Inflation Rate = Π = 100 x (P2009 - P2008 ) / P2008
Π =
Is the CPI Accurate?
• Substitution bias.
• Increase in quality bias.
• Outlet bias.
• New product bias.
CPI inflation overstates the increase in the “Cost of Living”
The GDP deflator is the best measure of the prices of goods and services purchased by American households.
a) True b) False
Because of substitution bias, businesses over-compensate employees when giving cost-of-living increases based on the CPI
a) True b) False
Calculating Real Average Hourly Earnings
YEARNOMINAL AVERAGE HOURLY EARNINGS
CPI(1982-1984 = 100)
2006 $16.76 201.6
2007 17.43 207.3
2008 18.08 215.3
YEARNOMINAL AVERAGE HOURLY EARNINGS
CPI(1982-1984 = 100)
REAL AVERAGEHOURLY EARNINGS
(1982-1984 DOLLARS)
2006 $16.76 201.6 $8.31
2007 17.43 207.3 8.41
2008 18.08 215.3 8.40
Real versus Nominal Interest Rates
Nominal interest rate: The stated interest rate on a loan.
Real interest rate: The nominal interest rate minus the inflation rate.
Real interest rate = Nominal interest rate − Inflation rate
Deflation A decline in the price level.
Real versus Nominal Interest Rates
The real interest rate is equal to the nominal interest rate minus the inflation rate. The real interest rate provides a better measure of the true cost of borrowing and the true return on lending than does the nominal interest rate. The nominal interest rate in the figure is the interest rate on three-month U.S. Treasury bills. The inflation rate is measured by the percentage change in the CPI from the same quarter during the previous year.
Does Inflation Impose Costs on the Economy?
Inflation Affects the Distribution of Income– Arbitrary redistribution
• Debtors gain / Creditors lose disincentive to save• Pensioners lose
The Problem with Anticipated Inflation
Menu costs The costs to firms of changing prices.
The Problem with Unanticipated Inflation
Price Uncertainty fear Stagnation
Deflation: Debtors Lose ... Creditors Lose ... Vicious Downward Spiral
Consumer price index (CPI)Cyclical unemploymentDeflationDiscouraged workersEfficiency wageFrictional unemployment Inflation rateLabor forceLabor force participation rateMenu costs
Natural rate of unemploymentNominal interest ratePrice levelProducer price index (PPI)Real interest rateStructural unemploymentUnemployment rate
K e y T e r m s