Module 9 Economics

Price

A single price, such as the price of apples, cars, shoes etc.

Price Level

A weighted average of the prices of all goods and services in the economy.

Price Index

A measure of the price level. The most commonly used is called the CPI.

Consumer Price Index (CPI)

The weighted average of prices of a specifice set of goods and services purchased by a typical household; a widely cited index number for the price level. Will be seen reported monthly on the business channels etc. Its an indication of whats happening to the overall price level.

Base Year

The year chosen as a point of reference or basis of comparison for prices in other years; a benchmark year

Market Basket

The CPI is based on a representative group of goods and services called the Market Basket., purchased by a typical household; it includes 8 major categories : food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, other goods and services.

Computing (calculating) CPI

CPI=(total dollar expenditure on market basket in current year/ total dollar expenditure on market basket in base year) x 100

-multiply column 1 (market basket) by column 2 (current year prices per item) you will get column 3 (current year expenditures)

- Add up the total of column 3 to get the total dollar expenditure on market basket in current year

-do the same thing for columns 1A and 2A to get column 3A, then add up to get total dollar expenditure on market basket in base year

The calculation of the CPI is going to be used as an indication of inflation or what happened to the overall price level

Inflation

An increase in the price level. Talked about on a yearly basis. When inflation rate is positive that tends to mean you pay more for things. You can find out if your income is keeping up with inflation by if your income is going up by the same percentage as prices. Youre not keeping up with inflation if your income is rising by a smaller percentage than prices.Youre more than keeping up with inflation if your income is rising at a rate that is faster than the overall price level.

Inflation and the CPI calculation

%△in prices= [(CPI later year- CPI earlier year) / CPI earlier year] x 100

Example: compare the CPI from 1989 to 1990

CPI 1989-124.0

CPI 1990-130.7

[(130.7-124.0)/124.0] x 100= 5.40

We do this becauses prices go up and down and it gives us an indication of whether or not peoples income is keeping up or not keeping up with whats happening to the overall price level.

Nominal Income

The current dollar amount of a persons income. "Im earning 85,000 dollars a year in the current year" thats your nominal income

Real income

Nominal income adjusted for price changes. The actual dollar amount divided by the consumer price index

Real income= (nominal income/CPI) x 100.

Case 1:Keeping up with inflation

-Real income stays constant

Case 2: Not keeping up with inflation

-Real income falls

Case 3: More than keeping up with inflation

-Real income rises

More people are happier in case 3 compared to case 2.

Converting dollars from one year to another

Salary in todays (current dollars) = Salary earlier year x (CPI later year/ CPI earlier year)

Example: First minimum m=wage qas $0.25 in 1938 when the CPI was 14.1. What would this minimum wage be today?

0.25x (CPI today/ 14.1)

Unemployment Rate

Percentage of the civilian labor force that is unemployed

-unemployment rate= number of unemployed/ civilian labor force

Employment Rate

Percentage of the civilian noninstitunional population that is employed

-Employment rate= number of employed persons/civilian noninstitutional population

Labor Force Participation Rate (LFPR)

Percentage of the civilian population that is in the civilian labor force. Have to be looking for a job to be considered unemployed.

-LFPR= civilian labor force/civilian nonistitutional population

Reasons for unemployment

Unemployed person falls into one of four categories: Job loser, Job leaver, Reentrant, New entrant

Job loser

The person was employed and was fired or laid off

Job leaver

The person was employed and quit

Reentrant

This person was previously employed, hasn't worked for some time, and is currently reentering the labor force. ex: retired for a couple of years and came back.

New entrant

This person has never held a full-time job for two weeks or longer and is now in the civilian labor force looking for a job

Discouraged workers

Persons who did not find a job, got discouraged, and stopped looking; they are not counted as unemployed because they are not considered apart of the labor force. If youre not looking, youre not considered apart of the labor force. Have not worked in the last 12 months, but they are currently not looking for a job because they think there in nothing available for them.

Frictional Unemployment

Unemployment that is due to the national so-called frictions in the economy and that is caused by changing market conditions and represented by qualified individuals with transferable skills who change jobs.

Structural unemployment

Unemployment due to structural changes in the economy that eliminate some jobs and create others for which the unemployed are unqualified. example: AI eliminates alot of jobs

Natural unemployment

unemployment caused by frictional and structural factors in the economy

-natural unemployment rate= frictional unemployment rate + structural unemployment rate.

Combination of both frictional and structural unemployement.

Full Employment

The condition that exists when the unemployment rate is equal to the natural unemployment rate

Cyclical unemployment rate

The difference between the unemployment rate and the natural unemployment rate

Actual Unemployment rate (U)

U=Number of unemployed persons/ civilian labor foce

Friction Unemployment rate (Uf)

Uf= Number of frictionally unemployed persons/ civilain labor force

Structural Unemployment Rate (Us)

Us= number of structurally unemployed persons/ civilian labor force

Natural Unemployment Rate (Un)

Un=UF + Us

Cyclical Unemployment Rate (Uc)

Uc=U-Un

In economics, if you are out of work it doesn't necessarily mean you are unemployed.

Start with total population in the US, then going to disqualify people from being in the civilian population if they are under 16, if they are in the armed forces, of if they are in institutionalized (mental health institution, prison or jail). If we take the total population and subtract these people, this is called the Civilian noninstutitional population. From there, you are either in the labor force, or youre not in the labor force. If youre not in the labor force, that means youre not looking for a job, youre not participating, then thats off the table. Now we are down to a relatively smaller group that defines the Civilian Labor Force. From here, we talk about and develop the unemployment rate. People who are not in the labor force would include people who are retired, stay at home moms/dads who work in their own homes, and those who choose not to work or would rather sit on the couch.