Economic Problems: Unemployment/Employment and Inflation/Deflation

Employed

Individuals who are employed full time or part time.

Unemployment rate

number of unemployed*100/labor force

Labor force

Number of employed + number of unemployed

Labor force participation rate

labor force*100/adult population

Discouraged workers

workers who give up trying to find work

underemployment

workers who are…

1. skilled but can only find low-wage unskilled jobs

2. part-time workers who want full-time work but can not find it

unemployed

People who are not employed but have tried to find work within the past 4 weeks

Three types of unemployment:

Cyclical, structural, frictional

Cyclical unemployment

Workers lose their job due to a downturn in the economy

Structural unemployment

unemployment caused by mismatch between workers’ skills and available jobs

ex: workers lose jobs to automation

Frictional unemployment

unemployment due to temporary transitions in work or school

ex: a worker quits a job to find a new one, a college graduate now looking for a job

The Natural Rate of Unemployment

Because of frictional and structural unemployment, there will always be some unemployment in the economy.

Therefore, the unemployment rate with never be 0%

The unemployment rate that will always exist is called the ___________________

Natural Rate of Unemployment

Inflation

Increase in the price of goods and services (decrease in purchasing power of currency)

Deflation

Decrease in the price of goods and services (increase in purchasing power of currency)

Inflation rate

The percent change in prices over a period of time

Uses year 2 and year 1

Market Basket

It is a dollar amount

a hypothetical set of consumer purchases of goods and services.

Market basket is used to determine the price index (consumer price index)

(Most popular price index is consumer price index which we will be focusing on finding in class)

Consumer price index

A raw number (no units)

Combination of many consumer goods consumed by a typical family of four

Uses given year and base year

given year

more recent year

base year

what your comparing given year to

year 2

most recent year

year 1

what your comparing year 2 to

Nominal income

Amount a person is paid

Real income

amount a person is paid adjusted for inflation

how to find real income

real income=nominal income -(nominal income*inflation rate)

nominal interest rate

actual interest rate on a loan

real interest rate

the interest rate adjusted for inflation

how to find real interest rate

real interest rate=nominal interest rate - inflation rate

If the _______ ______ is ______ than the ______ _____ _____, lenders are paid back ______ ______ ______ than they lent out

inflation rate, higher, nominal interest rate, less purchasing power

banks always want to loan at an interest rate ____ than the inflation rate

higher

Philips Curve

Graphical relationship between unemployment and inflation

Unemployment and inflation have an _____ relationship (often but not always)

Inverse

when unemployment is high, it can ____ inflation

reduce

Why? High unemployment means less people are earning income, so there is decreased demand for goods and services, so prices of goods and services decrease (deflation)

when unemployment is low, it can ____ inflation

increase

Why? Low unemployment means more people are earning income, so there is increased demand for goods and services, so prices of goods and services increase (inflation)

Explain why the Philips Curve is not always accurate

The Phillips Curve is linked to supply and demand. Shows an inverse relationship between unemployment and inflation, assuming all other things are equal. Doesn’t account for economic downturn.

The curve assumes all other things in the economy stay equal, but supply shocks could happen, such as the oil price shocks of 1970s —> severe oil shortages leading to major increase in oil prices (inflation) and industries faced higher production costs leading to layoffs (unemployment). So there was high inflation and high unemployment.