Unemployment and Inflation Flashcards

Labour Market Indicators

• Working-age population: Total number of civilians aged 15 years and over.

• Not in the labor force: Includes those in school full-time, retired, and discouraged job seekers.

Unemployment Rate

• Definition: The percentage of people in the labor force who are unemployed.

• Labor Force: The number of people employed plus the number unemployed.

• Labor Force Participation Rate: The percentage of the working-age population who are members of the labor force.

• Unemployment Rate Formula: \frac{\text{Number of people unemployed}}{\text{Labor force}} \times 100

Labour Force Survey Criteria

• Employed: Persons who, during the reference week:

  • Worked at least 1 hour as a paid employee or in a family business or farm.

  • Were not working but had jobs from which they were temporarily absent.

• Unemployed: Persons who, during the reference week:

  • Had no employment and were available for work.

  • Had actively looked for a job in the past four weeks, or were waiting to start a new job within four weeks.

Other Definitions of Unemployment

• Marginally Attached Workers: Available for work but stopped looking due to repeated failure (discouraged workers).

• Part-time Workers Wanting Full-time Jobs: Underemployed individuals who want full-time work but cannot find it due to unfavorable business conditions.

Types of Unemployment

• Frictional Unemployment

• Structural Unemployment

• Cyclical Unemployment: Fluctuating unemployment over the business cycle, increasing during recessions and decreasing during expansions.

Full Employment (Natural Unemployment Rate)

• Occurs when the unemployment rate equals the natural unemployment rate.

• Natural Unemployment Rate: Comprises frictional and structural unemployment (cyclical unemployment is zero).

• Major Influences:

  • Age distribution of the population (affects frictional unemployment).

  • Scale of structural change.

  • Real wage rate (i.e., minimum wage rate).

  • Unemployment benefits.

Unemployment and Real GDP

• Potential GDP: The value of real GDP when the economy is at full employment (natural unemployment rate).

• Output Gap: Real GDP minus potential GDP, expressed as a percentage of potential GDP.

  • If the gap is negative, the unemployment rate is greater than the natural unemployment rate.

The Consumer Price Index (CPI)

• Definition: A measure of the average prices paid by urban consumers for a fixed market basket of consumer goods and services.

• Frequency: Calculated quarterly by the Australian Bureau of Statistics (ABS).

• Purpose: Used to derive the inflation rate.

Constructing the CPI

• Three Stages:

  1. Selecting the CPI basket.

  2. Conducting the quarterly price survey.

  3. Calculating the CPI.

CPI Formula

• CPI = \frac{\text{Cost of CPI basket at current period prices}}{\text{Cost of CPI basket at base period prices}} \times 100

Measuring Inflation and Deflation

• Inflation Rate: The percentage change in the price level from one year to the next.

• Inflation Rate Formula: \frac{\text{CPI in current year} - \text{CPI in previous year}}{\text{CPI in previous year}} \times 100
  Example: Suppose CPI for 2019 was 120 and CPI for 2020 was 140. \frac{140 - 120}{120} \times 100 = 16.7 \text{ per cent}

• Deflation: A situation in which the inflation rate is negative.

The CPI Bias

• Limitations in using the CPI as a measure of the cost of living:

  • Quality change bias.

  • Commodity substitution bias.

  • Outlet substitution bias.

  • New goods bias.

Nominal and Real Values

• To compare dollar amounts at different dates, we need to know the CPI for those dates.
  Example: To convert the price of a 4¢ stamp in 1966 into 2018 prices.

• Nominal Value Adjustment Formula: \text{Price in 2018 dollars} = \text{Price of stamp in 1966 dollars} \times \frac{\text{CPI in 2018}}{\text{CPI in 1966}}
  Example: Suppose CPI2018 = 113 and CPI1966 = 8.6. \text{Price of stamp in 2018 dollars}= 4¢ \times \frac{113.0}{8.6} = 52.55¢

Example: Alternatively, we could convert a 52.55¢ stamp in 2018 into 1966 prices. Suppose CPI2018 = 113 and CPI1966 = 8.6. \text{Price of stamp in 1966 price} = \text{Price of stamp in 2018} \times \frac{\text{CPI in 1966}}{\text{CPI in 2018}} = 52.55¢ \times \frac{8.6}{113} = 3.999¢

Nominal Wages and Real Wages

• Nominal Wages: The wage measured in current dollars.

• Real Wage: The wage measured in the dollars of a given reference base year.

• Using changes in inflation and nominal wages to measure the change in real wages.

Calculating Percentage Change in Real Wages

• Percentage change in nominal wage = \frac{(\text{Nominal wages}{2020} – \text{Nominal wages}{1997})}{\text{Nominal wages}_{1997}} \times 100

• Inflation rate = \frac{(\text{CPI}{2020} – \text{CPI}{1997})}{\text{CPI}_{1997}} \times 100

• % change in real wage = % change in nominal wage – Inflation rate

Nominal Interest Rate and Real Interest Rate

• Nominal Interest Rate: The dollar amount of interest expressed as a percentage of the amount loaned.

• Real Interest Rate: The nominal interest rate adjusted to remove the effects of inflation.

• Real Interest Rate Formula: \text{Real interest rate} = \text{Nominal interest rate} – \text{Inflation rate}