Ch 8: Economics and Macroeconomics: Unemployment and Inflation Notes

Flashcards covering key definitions, formulas, and case studies from Chapter 8(23) on Unemployment and Inflation, based on the Krugman and Wells textbook.

Employment

The number of people currently employed in the economy, either full time or part time.

Unemployment

The number of people who are actively looking for work but aren’t currently employed.

Labor Force

The sum of the number of people employed and the number of people unemployed.

Labor Force Participation Rate

The percentage of the population aged $16$ or older that is in the labor force.

Unemployment Rate

The percentage of the total number of people in the labor force who are unemployed.

Discouraged Workers

Nonworking people who are capable of working but have given up looking for a job because of the state of the job market.

Marginally Attached Workers

People who would like to be employed and have looked for a job in the recent past but are not currently looking for work.

Underemployment

The number of people who work part time because they cannot find full-time jobs.

Minimum Wage

A government-mandated floor on the price of labor; in the United States, it was $\$8.25$ an hour in $2010$.

Efficiency Wages

Wages that employers set above the equilibrium wage rate as an incentive for better performance.

Natural Rate Formula

$$\text{Natural unemployment} = \text{Frictional unemployment} + \text{Structural unemployment}$$

Actual Unemployment Formula

$$\text{Actual unemployment} = \text{Natural unemployment} + \text{Cyclical unemployment}$$

Real Wage

The wage rate divided by the price level: $\frac{\text{wage rate}}{\text{price level}}$.

Real Income

Income divided by the price level: $\frac{\text{income}}{\text{price level}}$.

Menu Cost

The real cost of changing a listed price.

Full Employment Output

AKA full employment real output. The amount of output that is produced in an economy when that economy is using all of its resources efficiently; the full employment output would be a combination of output that is on that country’s PPC.

Natural Rate of Unemployment

The natural rate of unemployment is the normal unemployment that exists even when the economy is healthy because of frictional and structural unemployment.

The unemployment rate that exists when an economy is producing the full employment output.

Frictional Unemployment

The component of the natural rate of unemployment that occurs because the job search process is not instantaneous.

For example, after Rosita graduated from dental school, it took her a few weeks to find a job as a dentist. During this period she will be frictionally unemployed.

Structural Unemployment

Unemployment that occurs as a result of a structural change in the economy, such as the development of a new technology or industry. This is a part of the natural rate of unemployment.

For example, Negan finds a cure for all dental diseases, and as a result, Rosita loses her job as a dentist and is now structurally unemployed.

Cyclical Unemployment

Unemployment associated with the recessions and expansions; this can have a positive or negative value. The current unemployment rate will depend on both the natural rate of unemployment and the amount of cyclical unemployment at the time.

Unit-of-Account Costs

Costs that arise from the way inflation makes money a less reliable unit of measurement.

Shoe-leather Costs

Increased costs of transactions caused by inflation, such as the time spent moving money in and out of bank accounts.

Inflation

General increase of Goods and Services (price inflation)

Disinflation

The process of bringing the inflation rate down.

Nominal Interest Rate

The interest rate expressed in dollar terms.

Real Interest Rate

The interest rate calculated as: $\text{nominal interest rate} - \text{rate of inflation}$.

Aggregate Price Level

A single number that summarizes all prices in an economy, reflecting the overall level of prices for goods and services.

Price Index

A measure that calculates the changing cost of purchasing a particular (and unchanging combination of goods (called a “market basket”) each year.

Consumer Price Index (CPI or CPI-Urban)

An index that calculates the cost of a market basket of goods purchased by a typical family that lives in an urban area; the purpose of the CPI is to track changes in the cost of living over time.

Market Basket

The combination of goods that are used to calculate a price index; the goods stay the same from year to year.

Base Year

A reference year to which variables are compared

Purchasing Power

what can actually be bought with money.

Real Variable

Nominal variables deflated by the price level.