Unemployment Rate,And Onto Starting A Macro Model

Lecture 10Dr. Jennifer P. Wissink

©2015 Jennifer P. Wissink, all rights reserved.

September 24, 2015

Announcements (MACRO) Fall 2015 If you have a conflict with Prelim 1, make sure you...

– Read the syllabus concerning your options

– And then use the link you can find on our BlackBoard site (see left hand menu choices) and register for Option 1 or Option 2.

» Note: You WILL NOT get any reply from us – all you need to do is sign up. If you want “proof” you signed up, print the screen you see once you submit the form.

FINAL EXAM INFO: We have been assigned Saturday December 12 at 2:00pm. Everyone is expected to take the exam at that time UNLESS you have an official Cornell reason for a makeup.– See: https://registrar.cornell.edu/Sched/rules.html

– For those eligible for the makeup, the date and time of the makeup is being determined. It will almost surely be either Wednesday or Thursday the NEXT week. No finals will be scheduled PRIOR to Saturday December 12 at 2pm. Please book travel plans/internships/jobs/whatever with that in mind.

i>clicker questions

If the US has been experiencing inflation, real GDP in 2014 will be smaller than nominal GDP in 2014.A. TrueB. False

When calculating real GDP for 2014 you use quantities from the base year and prices from 2014.A. TrueB. False

The value of real GDP and current GDP will be the same in the base year.A. TrueB. False

Assume the base year does not equal 2014.

The Process of Deflating & The Implicit GDP Deflator Index Deflating: changing a measure from a current or

nominal value to a real value by use of a deflator.– implies you have a deflator!

To deflate (if you have a deflator):

Conveniently: the government reports the following– $nominal GDP– $real GDP– So subbing-in and cross-multiplying we get...

And...to make it an index just multiply it by 100!

Nominal GDP, Real GDP & The IGDPDI

GDP in billions

of current dollars

GDP in billions

of chained

2005 dollars

2000 9,951.5 11,216.42001 10,286.2 11,337.52002 10,642.3 11,543.12003 11,142.2 11,836.42004 11,853.3 12,246.92005 12,623.0 12,623.02006 13,377.2 12,958.52007 14,028.7 13,206.42008 14,291.5 13,161.92009 13,939.0 12,703.12010 14,526.5 13,088.02011 15,087.7 13,313.4

In 1975/76 Cornell tuition + fees + room & board cost approximately $5,000 per YEAR!

So, based solely on the implicit GDP deflator index, what should Cornell have cost in 2011/12?

Using An Index Like The Implicit GDP Deflator Index

ANOTHER Measure of Inflation: The Consumer Price Index

The consumer price index (CPI) is a price index computed each month by The Bureau of Labor Statistics using a bundle that is meant to represent the “market basket” purchased monthly by the typical urban consumer.

It’s the most popular fixed-weight price index.

The CPI market basket shows how a typical consumer divides his or her money among various goods and services.

FIGURE 7.1 The CPI Market Basket

Note: 1982-1984=100

TABLE 7.5 The CPI, 1950–2012

PercentageChange

in CPI CPI

PercentageChangein CPI CPI

PercentageChangein CPI CPI

1950 1.3 24.1 1971 4.4 40.5 1992 3.0 140.3

1951 7.9 26.0 1972 3.2 41.8 1993 3.0 144.5

1952 1.9 26.5 1973 6.2 44.4 1994 2.6 148.2

1953 0.8 26.7 1974 11.0 49.3 1995 2.8 152.4

1954 0.7 26.9 1975 9.1 53.8 1996 3.0 156.9

1955 0.4 26.8 1976 5.8 56.9 1997 2.3 160.5

1956 1.5 27.2 1977 6.5 60.6 1998 1.6 163.0

1957 3.3 28.1 1978 7.6 72.6 1999 2.2 166.6

1958 2.8 28.9 1979 11.3 65.2 2000 3.4 172.2

1959 0.7 29.1 1980 13.5 82.4 2001 2.8 177.1

1960 1.7 29.6 1981 10.3 90.9 2002 1.6 179.9

1961 1.0 29.9 1982 6.2 96.5 2003 2.3 184.0

1962 1.0 30.2 1983 3.2 99.6 2004 2.7 188.9

1963 1.3 30.6 1984 4.3 103.9 2005 3.4 195.3

1964 1.3 31.0 1985 3.6 107.6 2006 3.2 201.6

1965 1.6 31.5 1986 1.9 109.6 2007 2.8 207.3

1966 2.9 32.4 1987 3.6 113.6 2008 3.9 215.3

1967 3.1 33.4 1988 4.1 118.3 2009 -0.4 214.5

1968 4.2 34.8 1989 4.8 124.0 2010 1.7 218.1

1969 5.5 36.7 1990 5.4 130.7 2011 3.1 224.9

1970 5.7 38.8 1991 4.2 136.2 2012 2.1 229.6

Calculating the Consumer Price Index

The Implicit GDP Deflator Index vs The CPI

Cool Tool: The BLS “Inflation Calculator” About the CPI inflation calculator: http://www.bls.gov/

The CPI inflation calculator uses the average Consumer Price Index for a given calendar year. This data represents changes in prices of all goods and services purchased for consumption by urban households. This index value has been calculated every year since 1913. For the current year, the latest monthly index value is used.

Why Do We Care So Much About Inflation? Its potential to change the distribution of income. Its special effects on debtors & creditors. The costs of “keeping up” might be self-fulfilling. Resources (time and money) are used up in the mere act

of posting and keeping up with price changes and searching for low prices.

Increased likelihood that people don’t know (or can’t keep up with) changing relative prices, so they don’t allocate efficiently.

Increased uncertainty, pessimism and risk, perhaps making people tentative and investment riskier depresses expenditure on consumption and investment.

Real Culprit: asymmetric and unanticipated inflation What about DEFLATION? It’s got its problems, too – more

on that later.

Unemployment

Defining & Measuring Unemployment Who does it in the U.S.?

– United States Department of Labor, Bureau of Labor Statistics– …is the principal Federal agency responsible for measuring

labor market activity, working conditions, and price changes in the economy. Its mission is to collect, analyze, and disseminate essential economic information to support public and private decision-making. As an independent statistical agency, BLS serves its diverse user communities by providing products and services that are objective, timely, accurate, and relevant.

An employed person is any person 16 years old or older who:

1. works for pay, either for someone else or in his or her own business for 1 or more hours per week,

2. works without pay for 15 or more hours per week in a family enterprise, or

3. has a job but has been temporarily absent, with or without pay.

An unemployed person is a person 16 years old or older who:

1. is not working, 2. is available for work, and3. has made specific efforts to find work during the previous

4 weeks.

NOTE: Persons who were waiting to be recalled to a job from which they had been laid off need not have been looking for work to be classified as unemployed.

A person who is not looking for work, either because he or she does not want a job or has given up looking, is not in the labor force.

Defining & Measuring Unemployment

u n em p lo y m en t ra te = u n em p lo y ed

em p lo y ed + u n em p lo y ed

lab o r fo rce = em p lo y ed + u n em p lo y e d

p o p u la tio n = lab o r fo rce + n o t in lab o r fo rce *

lab o r fo rc e p artic ip a tio n ra te = lab o r fo rc e

p o p u la tio n

Defining & Measuring Unemployment

*Included are persons 16 years of age and older residing in the 50 States and the District of Columbia who are not inmates of institutions (for example, penal and mental facilities, homes for the aged), and who are not on active duty in the Armed Forces.