Arnold Chapter 5

8/3/2019 Arnold Chapter 5

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


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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 Policies

Fiscal Policy deals withchanges in governmentexpenditures and/or taxes. toachieve particular

macroeconomic goals.Monetary Policy deals with.

changes in the money supply,

or the rate of growth of themoney supply, to achieveparticular macroeconomicgoals.


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Different Views of How theEconomy Works

The economy isinherently stableand self-regulating.

The economy isinherently unstableand requires

intervention tocorrect problems.


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THE P-Q CATEGORY

Macroeconomics deals with manyvariables, but two major variables are thePrice level and Real GDP.

Price level (P) is the weighted average ofthe prices of all goods and services.

Real GDP (Q) is the value of the entire

output produced annually within acountrys borders, adjusted for pricechanges.


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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; theweighted average of prices of a specific set ofgoods and services purchased by a typical

household.


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Base Year - The year chosen as a point ofreference or basis of comparison for pricesin other years; a benchmark year.


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Computing the Consumer PriceIndex


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Consumer Price Index 1983-2006


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Consumer Price Index 1983-2006

Year 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?

Click below for answer.

3.23 %


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Gasoline cost $1.15 per gallon in 1980. Attodays prices are we better off?

Click below to check.
http://data.bls.gov/cgi-bin/cpicalc.pl


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Macroeconomic Measures -Income

Nominal Income - The current-dollaramount of a persons income.

Inflation - An increase in the price level.

Real Income - Nominal income adjustedfor price changes.


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GDP Implicit Price Deflator vs.Consumer Price Index

GDP Implicit Price Deflator is based upon allgoods and services produced in an economy.

CPI is based upon a representative group of

goods and services purchased by a typicalhousehold


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Self-Test

Explain how the CPI is calculated.

What is a base year?

In year 1, your annual income is $45,000and the CPI is 143.6; in year 2, your annualincome is $51,232 and the CPI is 150.7. Has

your real income risen, fallen, or remainedconstant? Explain your answer.


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Who Are the Unemployed?


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Labor Force Participation Rate

Labor 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 ofthe civilian force that is unemployed:

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

Civilian labor force


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Unemployment

Employment Rate -The percentage of thecivilian noninstitutional population that isemployed:

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 civilianlabor force who quits his or her job.

Reentrant. This is a person who was previouslyemployed, hasnt worked for some time, and iscurrently reentering the labor force.

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


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Frictional Unemployment

Unemployment due tothe natural frictionsof the economy, whichis caused by changingmarket conditions andis represented by

qualified individualswith transferable skillswho change jobs.


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Structural Unemployment

Unemploymentdue to structuralchanges in the

economy thateliminate some jobsand create other

jobs for which theunemployed areunqualified.


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Natural Unemployment

Unemployment caused by frictional andstructural factors in the economy.

Natural unemployment rate = Frictionalunemployment rate + Structuralunemployment rate.


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Full Employment

The condition thatexists when the

unemployment rateis equal to thenatural

unemploymentrate.


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Cyclical UnemploymentRate

The difference between the unemploymentrate and the natural unemployment rate.


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Self-test Questions

What is the major difference between aperson who is frictionally unemployedand one who is structurally unemployed?

If the cyclical unemployment rate ispositive, what does this imply?

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Arnold Chapter 5