Economics Unit 3 (Chapter 7)

3 Major Goals of Macroeconomics

Price stability, full employment (established by Employment Act of 1946), and economic growth

Unemployment

Resources available for production are not being used

Frictional Unemployment

Occurs when people are voluntarily out of work for a short period of time while searching for a job

Cyclical Unemployment

Involuntary unemployment that results from a downswing in a business cycle, or a recession

Structural Unemployment

Involuntary unemployment that results when a worker's job is no longer part (needed) of the production structure of the economy

Labor Force

People 16+ working or actively seeking work

Participation Rate

The percentage of some specified group that is in the labor force

Unemployment Rate

Percentage of labor force without work but seeking employment

Full Employment

When only voluntarily unemployed are without work

Natural Rate of Unemployment

Economy has only frictional and structural unemployment

Inflation

Increase in general price level

Consequences:

• Reduces money’s purchasing power

• Harms fixed-income earners

• Reduces real income

• Affects interest rates

Money Income

Income measured in terms of current dollars

Real Income

Income measured in terms of the goods/services that can be purchased with a particular amount of money income (purchasing power)

Cost-of-Living Adjustment (COLA)

An arrangement whereby an individual's wages automatically increase with inflation

Demand-Pull (Inflation)

Excess demand (from buyers' side of the market)

Cost-Push (Inflation)

Increasing production costs (from sellers' side of the market)

Price Indices

Compares prices to base year (set at 100)

Consumer Price Index (CPI) (Major Indices)

Measures how the overall cost of everyday living changes over time

Producer Price Index (PPI) (Major Indices)

Measures how much businesses receive for the goods and services they sell

GDP Price Index (Major Indices)

Measures inflation across the entire economy

Deflation

A sustained (continuous) price decrease

Disinflation

A slowing inflation rate

Production

The creation of goods and services

Full Production

Economy operating at maximum capacity

Economic Growth

Increase in productivity capacity over time; shown by production possibilities curve shifting right

Key growth factors:

• Technology

• Human capital investment

• Resource efficiency

GDP

Market value of all final goods and services produced in a year

Money GDP

Measured in current prices

Real GDP

Adjusted to eliminate inflation

Calculation: Money GDP / GDP Price Index

Productivity

Output per worker; key to improved living standards

Underground Economy

Economic activity not captured in GDP (unreported income)

*Unemployment vs. Inflation (Tradeoff)

Pursuing full employment may lead to demand-pull inflation

*Growth vs. Environment (Tradeoff)

Economic expansion may have environmental consequences

?What do many macroeconomic measures exclude?

Important elements like household production