Understanding Unemployment and Economic Indicators

Employed

Individuals who are working for pay or profit, including part-time and temporary workers.

Unemployed

Individuals who are not working but are actively looking for work.

Not in the labor force

Individuals who are neither working nor looking for work, such as retirees, students, or homemakers.

Household Survey

A survey of households to determine the employment status of individuals in the labor force.

Employment Survey

A survey of businesses to collect data about employment levels and wages.

Unemployment Rate

Unemployment Rate = (Unemployed / Labor Force) × 100

Labor Force Participation Rate

Labor Force Participation Rate = (Labor Force / Working-Age Population) × 100

Employment-Population Ratio

Employment-Population Ratio = (Employed / Working-Age Population) × 100

Discouraged Workers

Workers who are willing and able to work but have stopped looking for work due to a lack of job opportunities.

Frictional Unemployment

Temporary unemployment due to individuals moving between jobs or entering the labor force.

Structural Unemployment

Long-term unemployment due to changes in the economy that make certain jobs obsolete.

Cyclical Unemployment

Unemployment caused by economic downturns (e.g., recessions).

Seasonal Unemployment

Unemployment that occurs at certain times of the year, such as in agriculture or tourism.

Full Employment

When the economy is operating at its maximum sustainable output, and only frictional and structural unemployment exist.

Natural Rate of Unemployment (NRU)

The rate of unemployment that occurs even in a healthy economy due to frictional and structural factors.

Consumer Price Index (CPI)

CPI = (Cost of Basket in Current Year / Cost of Basket in Base Year) × 100; measures the average change over time in the prices paid by urban consumers for a basket of goods and services.

Inflation Rate

Inflation Rate = ((CPI in Current Year - CPI in Previous Year) / CPI in Previous Year) × 100

Inflation

The rate at which the general level of prices for goods and services rises, and subsequently, purchasing power falls.

Indexation

The process of adjusting income, wages, or taxes to account for inflation, so that real value remains constant.

Substitution Bias

The CPI doesn't account for changes in consumer behavior when prices rise (e.g., switching to cheaper alternatives).

New Product Bias

The CPI doesn't immediately incorporate new goods or services.

Quality Bias

The CPI does not fully adjust for improvements in product quality over time.

Nominal Interest Rate

The interest rate stated without adjusting for inflation.

Real Interest Rate

The interest rate adjusted for inflation.

Real Interest Rate

Nominal Interest Rate − Inflation Rate

Long-Run Economic Growth

The sustained increase in the economy's productive capacity due to increases in capital, labor, and technological advancements.

Growth Rate

GDP in Current Year − GDP in Previous Year / GDP in Previous Year × 100

Constant Growth Rule

GDP in future = GDP in current × (1 + Growth Rate) ^ t

Rule of 70

Doubling Time = 70 / Growth Rate

Average Growth Rates

The average annual percentage change in a variable over time.

Actual GDP

The real output of the economy.

Potential GDP

The maximum output the economy can produce at full employment, without inflation.

Financial Markets

Platforms where borrowers can obtain funds from lenders (e.g., stock markets).

Financial Intermediaries

Institutions like banks that connect savers and borrowers.

Direct Finance

Borrowers obtain funds directly from lenders in financial markets (e.g., issuing bonds).

Indirect Finance

Financial intermediaries (like banks) facilitate the flow of funds between savers and borrowers.

Savings and Investment Identity

S = I

Loanable Funds Market

The market where savings are available for investment.

Crowding Out

When government borrowing increases interest rates, reducing private investment.

Consumption (C)

Household spending on goods and services.

Investment (I)

Business spending on capital goods.

Government Spending (G)

Government expenditures on goods and services.

Net Exports (NX)

Exports minus imports.

Planned Investment

The investment businesses plan to make based on expected future sales.

Actual Investment

The amount businesses actually invest in capital goods.

Consumption Function

C = C0 + C1(Y)

MPC (Marginal Propensity to Consume)

The change in consumption from an additional dollar of income. MPC = ΔC / ΔY

MPS (Marginal Propensity to Save)

The change in savings from an additional dollar of income. MPS = 1 − MPC

Autonomous Expenditures

The portion of consumption and investment that is independent of income levels.

Macroeconomic Equilibrium

Occurs when total spending equals total output. AE = Y

Multiplier Effect

Multiplier = 1 / (1 − MPC)