ECON 2 Exam 1: Price Indexes and Unemployment

Nominal GDP

Affected by rising/falling prices

Real GDP

only Affected by quantity (not affected by prices)

Nominal GDP

Affected by rising/falling prices

Real GDP

only Affected by quantity (not affected by prices)

In Real GDP

PRICES are FIXED (BASE YEAR)

In Nominal GDP

multiply Price by Quantity

GDP Deflator is

Nominal GDP divided by Real GDP

Two applications of Real GDP

Business growth, Economic Growth

Steps for finding Real GDP

1. Set Base year

2. Fix prices from Base year

3. Multiply FIXED price by Quantity

Two price indexes in Macroeconomy

CPI and GDP Deflator

When computing CPI

FIX the quantity of goods (Base Year)

Technically, the CPI is…

…a violation of the law of demand

Steps to find CPI

1. Find Cost of Living

2. Find CPI

3. Find Inflation Rate

(Calculation) Cost of Living is

Price times Quantity

(Calculation) CPI is

Cost of living(Year n) divided by Cost of living (Base year)

CPI of year 1 is…

…Always 100

(Calculation) Inflation Rate is

CPI (year b) - CPI (year a) divided by CPI (year a)

Limitations of CPI

CPI is substitution based - it does not allow for substitution effects according to the law of demand

CPI does not allow for “new product introduction”

CPI does not reflect “quantity changes” of existing products

Application of CPI

finding equivalencies

3 Labor statistics

Unemployment Rate

Unemployment Rate

Labor Force Participation

3 Types of Unemployment

Frictional Unemployment

Structural Unemployment

Cyclical Unemployment

(Calculation) Unemployment Rate

# unemployed divided by # labor force x100

(Calculation) Employment rate

# Employed divided by # total population x100

(Calculation) Labor Force Participation Rate

# labor force divided by # total population x100

2 Components of Total Population (16 years+)

People in Labor Force and People NOT in labor force

Unemployed includes

people actively searching for a job in the past 30 days, new entrants, re-entrants, people who:

1. quit their job

2. lost their job

3. were laid off

As Real GDP increases

Unemployment decreases

As Real GDP decreases

Unemployment increases

People in the Labor force include

Employed and Unemployed

Employed includes

Full time employed

Part-time employed

Self-employed

People NOT in the Labor Force include

Armed forces

Retirees

Institutionalized workers

Disabled people

Stay at home parents

Full-time students

Discouraged workers

Frictional Unemployment

People VOLUNTARILY quit but HAVE THE SKILLS to find a new job that is a better fit

Structural Unemployment

People lose their job because their SKILLS are NOT RELEVANT in that field anymore

Structural employment examples

Government regulation, Tech advancement

Frictional and Structural Unemployment…

cannot be eliminated AND make up Natural Unemployment

Cyclical Unemployment

arises from recessions and leads to layoffs (CAN be eliminated)

Causes of Structural Unemployment

Minimum wage, unions and efficiency wages