ECON: Test 3 - Chapter 11, 12, 17

working-age population

those 16 and older who are not in the military or institutionalized

employed

simply people in the working age population who are working, at least one hour during the week for pay

unemployed

people in the working age population without jobs who are trying/actively searching to get jobs

labor force 

part of the working age population that is employed or unemployed, the people who are available to produce goods and services 

not in the labor force

working-age people who are neither employed nor unemployed 

labor force participation rate 

the percentage of the working-age population that is either employed or unemployed

unemployment rate

percentage of the labor force that’s unemployed

equilibrium unemployment rate

long-run unemployment rate to which economy tends to return, occurs when the economy is operating at potential, averages around 5%

long-term unemployed

anyone who spends more than six consecutive months unemployed

marginally attached

someone who wants a job, and has looked for a job within the past year, but who isn’t counted as unemployed because they aren’t currently searching for work

discouraged workers 

a quarter of marginally attached people who don’t believe there are jobs available for them

underemployed

someone who has some work but wants more hours, or whose job isn’t adequately using their skills

involuntarily part time

someone who wants full-time work and is working part time because they haven’t found a full time job, apart of underemployed

three categories of reasons why people experience unemployment

frictional unemployment, structural unemployment, cyclical unemployment

frictional unemployment

unemployment due to the time it takes for employers to search for workers and for workers to search for jobs

structural unemployment

unemployment that occurs because wages don’t fall to bring labor demand and supply into equilibrium

cyclical unemployment

unemployment due to a temporary downturn in the economy

three major factors determine how much time it takes for workers and employers to find each other 

the efficiency of the resources employers and workers use to find each other, the alignment of the skills workers have and the skills employers desire, unemployment insurance and income support during unemployment

skills mismatch

skills workers have are not skills employers want

unemployment insurance

program through which the government provides financial assistance to workers who’ve lost their job through no fault of their own

efficiency wages

a higher wage paid to encourage greater worker productivity above the prevailing market wage, involves structural unemployment

three institutional factors tend to be primary causes of structural unemployment 

unions can keep wages high for some workers, job protections make it harder to fire workers, the minimum wage keeps wages from falling below the set minimum wage 

the economic costs of unemployment

the unemployed often end up with lower wages and worse career opportunities, permanent unemployment can arise from periods of high unemployment, lower tax revenue and higher government spending

hysteresis

when a period of high unemployment leads to a higher equilibrium unemployment rate

social costs of unemployment

unemployment can be very isolating and painful, long-term unemployment is associated with worse outcomes in earnings losses and health issues, children whose parents experience unemployment suffer 

protecting yourself from the harmful effects of unemployment 

do more job searching that you really want to do, build up a nest egg, build new skills, keep an eye out for better opportunities when you’re employed, build a strong professional network and tap into it if you become unemployed, avoid long term unemployment 

inflation 

a generalized rise in the overall level of prices, a rise in the cost of living, a decline in the purchasing power of money

consumer price index (CPI) 

an index that tracks the average price consumers pay over time for a representative “basket” of goods and services 

inflation rate

the annual percentage increase in the average price level calculated as the percentage change in the price of this basket of goods and services

constructing the consumer price index and measuring inflation 

find out what people typically buy, collect prices from the stores where people do their shopping, tally up the price of the basket of goods and services, calculate the inflation rate (percentage change in the price of that fixed basket of goods over a year) 

deflation 

a generalized decrease in the overall price level

three things that make CPI overstate inflation

quality improvements can hide price decreases, new products can make you better off thereby reducing your cost of living, substitutions 

substitution bias

the overestimate of the cost of living that occurs because people substitute towards goods whose prices rise by less 

chained CPI 

alternative inflation measure that is designed to update the basket of goods each month to correct for substitution bias 

indexation

automatically adjusting wages, benefits, tax brackets, and the like to compensate for inflation 

PCE deflator

alternative measure of inflation based on a slightly different basket of goods and services that also includes items you consume but don’t pay for directly like medical care for you paid by employer 

core inflation

alternative measure of inflation that excludes food and energy 

producer price index (PPI)

a price index that tracks the prices of inputs into the production process

GDP deflator

a price index that tracks the prices of inputs of all goods and services produced domestically

nominal variable

a variable measured in dollars (whose value may fluctuate over time)

real variable 

a variable that has been adjusted to account for inflation 

nominal interest rate

the stated interest rate without a correction for the effects of inflation

real interest rate

the interest rate in terms of changes in your purchasing power

money illusion

the mistaken tendency to focus on nominal dollar amounts instead of inflation-adjusted amounts

nominal wage rigidity

reluctance to cut nominal wages

three functions of money

medium of exchange, unit of account, store of value

medium of exchange

you’re using money as a medium of exchange whenever you hand it over to buy stuff or when you accept it from employer in exchange for your hard work

unit of account

common unit that people use to measure the economic value

store of value

when you save money for a rainy day, you’re using money as a store of value, storing your purchasing power for another day

hyperinflation

extremely high rates of inflation

the costs of expect inflation

inflation creates menu costs for sellers, inflation creates shoe-leather costs for buyers 

menu cost

the marginal cost of adjusting prices

shoe-leather costs

the costs incurred trying to avoid holding cash

the costs of unexpected inflation

inflation confuses the signals that prices send, inflation redistributes

inflation fallacy

the mistaken belief that inflation destroys purchasing power

strategies for dealing with inflation

don’t be fooled by money illusion take opportunities to index for inflation, when inflation is high spend more time looking for cheaper alternatives, when inflation is high avoid holding cash, hedge against inflation risk

business cycle

short term fluctations in economic activity

potential output

the level of output that occurs when all resources are fully employed

output gap

the difference between actual and potential output, measured as a percentage of potential output

boom

when the economy is operating above its sustainable potential and corresponds with a positive output gap

bust

when the economy is operating below its sustainable potential and corresponds with a negative output gap

peak

a high point in economic activity

trough

a low point in economic activity

recession

a period of falling economic activity, between the peak and the trough, also called contractions

expansion

a period of rising economic activity, runs from the trough to the subsequent peak

persistence

economic conditions today are closely related to those in the near future

comovement

the tendency for economic variables to rise and fall together

leading indicators

variables that tend to predict the future path of the economy, business confidence, consumer confidence, and the stock market

lagging indicators

variables that follow the business cycles with a delay, unemployment

Okun’s Rule of Thumb

for every percentage point that the output gap rises, the unemployment rate tends to fall by half a percentage point (just multiply by 1/2)

seasonally adjusted

data stripped of predictable seasonal patterns

annualized rate 

data converted to the rate that would occur if the current rate had continued throughout the year

revisions

updates to earlier estimates

top ten economic indicators

Real GDP is the broadest measure of economic activity, Real GDI provides a useful cross-check on GDP, Nonfarm payrolls tell you if the labor market is improving, the unemployment rate is an indicator of excess capacity, initial unemployment claims provide a timely indicator, business confidence tells you what managers are planning, consumer confidence tells you what consumers are thinking, the rate of inflation tells you what’s happening with prices, the employment cost index tells you what’s happening with wages, the stock market tells you about the future expected profits of businesses

five tips for tracking the economy

track many indicators, look at broader indicators, seek just-in-time data and leading indicators, find the signal in the noise, change your outlook when data differs from expectations

labor force participation rate = 

((employed + unemployed aka labor force)/working age population) x 100

unemployment rate =

(unemployed/labor force) x 100

inflation rate =

((price level this year - price level last year)/price level last year) x 100

GDP deflator =

(nominal GDP/real GDP) x 100

CPI =

cost of (total) basket in current year/cost of basket in base year

today’s dollars =

another times dollars x price level today/price level another time (whatever you’re comparing to/past year)

real value in base year dollars =

nominal value in t dollars x price level in base year/price level in year t

percent change in real value =

percent change in normal value - percent change in prices

real interest rate

nominal interest rate - inflation rate 

output gap = 

((actual output - potential output)/potential output) x 100

percent change with real income =

(((new year income - original year income)/original year income) x 100) - percent change inflation rate (subtract the total basket values to find inflation rate)

finding basket of goods or involves a quantity consumed

(quantity of good x price of good) + (quantity of another good x price of another good) + … 

all GDPs are calculated the same way =

(quantity of good x price of good) +…

for nominal GDP calculations

use the same year for quantities and prices

for real GDP calculations

use the year you want to find for quantities and the base year for prices