economic performance: must- know concepts, definitions, and formulae

claimant count

• an administrative count of people receiving a benefit principally for being unemployed

labour force survey measure

• a survey estimating unemployment using the definition of out of work, searched for work in the last four weeks, and available to start within two weeks

economically active

• those in employment plus those unemployed (LFS defintion)

economically inactive

• of working age but neither in work nor seeking it

• students, carers, the long- term sick, and the discouraged

voluntary unemployment

• out of work and unwilling to accept a job at the going real wage rate

involuntary unemployment

• willing and able to work at the going real wage rate, but no job is available

frictional unemployment

• short-term unemployment that occurs when workers are between jobs, because it takes time to search for a new job and match it with their skills

structural unemployment

• a lasting mismatch between the skills or location of the unemployed and the vacancies that exist

cyclical unemployment

• unemployment caused by a deficiency of AD during a downturn or recession in the economic cycle

• demand- deficient unemployment

seasonal unemployment

• unemployment that appears and disappears with a predictable annual pattern

real wage unemployment

• unemployment caused by the real wage being held above the market- clearing level, so labour supplied exceeds labour demanded

• more people want to work that firms want to hire

natural rate of unemployment

• the rate that persists when there is full employment (no cyclical unemployment)

• consists of real wage, frictional, seasonal, and structural unemployment

demand- pull inflation

• a sustained rise in the general price level caused by aggregate demand growing faster than aggregate supply, usually when the economy is close to full capacity

• excess demand “pulls” prices up

cost- push inflation

• a rise in the general price level caused by a rise in firms’ costs of production, shifting SRAS leftwards

• resulting in higher prices and lower real GDP

short- run economic growth

• an increase in a country’s real GDP in the short term, caused by an increase in AD or the utilization of spare capacity

long- run economic growth

• an increase in a country's productive capacity over time, enabling a sustainable increase in real output

sustainable growth

• growth that can be maintained over the long run without depleting the natural or produced capital on which future output depends

trend rate of growth

• the average rate at which productive capacity expands over a period long enough for the cycle to average out

economic cycle

• the tendency of actual real output to move above and below the trend rate of growth, through the phases boom, downturn, recession and recovery

positive output gap

• real GDP above the productive potential of the economy

negative output gap

• real GDP below the productive potential of the economy

unemployment rate equation

how can the unemployment rate fall and the number of people working not rise?

• unemployed is defined as someone who is out of work, has been searching for work in the last four weeks, and available to start within two weeks

• therefore, a person can stop searching and no longer be counted as unemployed

fishers equation of exchange

• PQ is nominal national income

real interest rate

why could there be a negative real rate, and what are the effects?

• it is negative when the rate of inflation is higher than nominal interest rate

• saving becomes less attractive and borrowing becomes cheaper, so consumption and investment rise, which increases AD

• helpful in a recession, but it can add to inflation if the economy is near full capacity

• borrowers gain: they repay in money worth less than they borrowed, so the real value of their debt falls

• lenders and savers lose: they are repaid in money with less purchasing power, so the real value of savings falls

  • redistribution of wealth from lenders to borrowers

short-run phillips curve

• a downward- sloping relationship between the unemployment rate and the inflation rate

long- run phillips curve

• a vertical line at the natural rate of unemployment

• no trade-off between inflation and unemployment in the long run