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Chapter 7 and 8 Notes Econ

1. Unemployment can be structural, frictional, cyclical, seasonal, or natural. Structural unemployment results from technological changes that eliminate certain jobs. Frictional unemployment is short-term between jobs transitions. Cyclical unemployment increases during economic downturns. Seasonal unemployment affects industries with seasonal workloads. The natural rate is around 3-4% even during full employment. 2. Inflation is measured using indices like the CPI and PPI. The CPI tracks prices of typical consumer goods while the PPI tracks production costs. Moderate inflation is under 9% while hyperinflation exceeds 100%. Problems from inflation include shoe-leather costs, menu costs, and wealth redistribution

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27 views

Chapter 7 and 8 Notes Econ

1. Unemployment can be structural, frictional, cyclical, seasonal, or natural. Structural unemployment results from technological changes that eliminate certain jobs. Frictional unemployment is short-term between jobs transitions. Cyclical unemployment increases during economic downturns. Seasonal unemployment affects industries with seasonal workloads. The natural rate is around 3-4% even during full employment. 2. Inflation is measured using indices like the CPI and PPI. The CPI tracks prices of typical consumer goods while the PPI tracks production costs. Moderate inflation is under 9% while hyperinflation exceeds 100%. Problems from inflation include shoe-leather costs, menu costs, and wealth redistribution

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Dima Nazar
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© © All Rights Reserved
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Chapter 7 Notes

1. What are the reasons for Unemployment?


A. Structural Unemployment
a. Defined as change in the structure of the economy and one of those ways is
creative destruction; often a sign of a healthy growing economy
i. Creative Destruction: intro of new products and technology which leads
to the end of other industries and jobs”
ii. Creation of CDs so no use for vinyl records (a new product eliminates old
jobs)
b. Evolving Economy
i. When we switch products, we usually eliminate jobs
B. Frictional Unemployment
a. Defined as short term unemployment (usually 90 days or less); usually people
between jobs; sign of growing evolving economy; leaving one trade for another
i. EX: Mary accepted a layoff in the spring knowing she would start a new
school job at kindergarten school
C. Cyclical Unemployment
a. Defined as unemployment caused by economic downturns, during a recession or
trough; not considered a natural type of unemployment;
b. Jobs are not available for many people who want to work (laid off)
D. Seasonal Unemployment
a. Defined as refers to those people who work in the industries that don’t use the
same number of employees all year long
i. EX: in Michigan, during winter, construction workers don’t work outside
in the cold
ii. K-12 teachers are not seasonal unemployed
E. Natural Rate of Unemployment
a. Amount of unemployment we have when we are at “full employment”
(everyone who’s willing to work at the going rate in their trade has a job)
b. Around 3-4%
2. What can be learned from unemployment data?
A. The unemployment Rate
a. Calculated using CLF (civilian labor force) = those who are working and those
unemployed with union benefits (U)
b. Unemployment rate = U/CLF
c. U= number unemployed/ labor force
B. Who is IN and who is OUT
a. IN: those who are working and those unemployed with union benefits
b. OUT: discouraged workers (a person who is out of work and ran out of
unemployment checks); the military
C. The way U is calculated
D. Other Labor Market Indicators
a. LF Participation Rate
i. Percentage of the people who are working out of the people who are
actually working
ii. How we used to define unemployment back in the 1960s
iii. Defined as percentage of population that is in the labor force
iv. LFPR = (LF/population) x 100
b. Race and Gender Statistics
i. NO ?s asked

Chapter 8 Notes

1. How Is Inflation Measured


A. CPI (Consumer Price Index)
a. Inflation is the general increase in the cost of living and is measured by consumer
price index
b. Based on prices from typical basket of all consumer goods (100 goods)
c. Measure of the price level based on the consumption patterns of a typical
consumer
B. Computing CPI
a. Housing 41%
b. Transportation 17%
c. Food and Beverages 15%
d. Recreation 6%
e. Communication 4%
f. Apparel 4%
g. Education 3% and Other 10%
C. PPI (producer price index)
a. Measures the cost of bringing goods & services to market and then selling them
b. Based on the cost of 50 typical inputs of goods and services (i.e minimum wage)
c. If the cost of bringing bread to market goes up 2%, then the next quarter prices
will go up by 2%
D. Measuring Inflation Rates
a. Moderate: 0-9% inflation
b. Galloping: 10-99% inflation (double digits) (spending habits change, saving
ceases and there is no saving)
c. Hyper: 100% or more inflation – 3 digits or more in a single year (or a 50% price
increase in a single month)
E. Using CPI to equate dollar values
F. Accuracy of CPI

2
a. A rapid fall in inflation signals a recession and is an indicator of national
economic conditions; but it is not very accurate bc its based on 100 goods and
we have 100 million goods that can go into that basket
b. Substitution
i. Sub white loaf bread to rye bread
ii. When the price of a good rises, consumers look for a substitute that cost
less
iii. i.e. Gas station prices
c. Changes in quality
i. Quality of goods generally increases (more competition, better quality)
d. New products and locations
i. Every 5-10 years, they redo market basket to make it representative of
current consumer
2. Problems from Inflation
A. Shoe-leather costs (the resources that are wasted by people’s attempts to avoid holding
money)
a. Time and resources are spent to guard against the effects of inflation
B. Money Illusion: when nominal changes are perceived as REAL; income increase from
$30,000
a. Consumers misinterpret nominal changes as real changes
C. Menu costs: the costs of changing prices
a. Firms must incur extra costs to change their output prices
D. uncertainty about future prices: side effect of inflation, creates an amount of
uncertainty
a. one of the side effects of inflation is that we know it will increase but we don’t
know how much or how much will affect those goods important to us
E. Wealth redistribution: inflation redistributes wealth
a. People who borrow money to buy a home, at 15 years, the value of the
mortgage check would be lesser value due to inflation
b. People who save, their wealth is redistributed away from them
c. Surprise inflation redistributes wealth between borrowers and lenders
F. Price confusion: the false signal of increased demand, to firms
a. Inflation makes it difficult to read price signals, and this confusion can lead to a
misallocation of resources
G. Tax Distortions: tax laws do not account for inflation in wages or in pricing like capital
gain taxes
a. Inflation makes capital gains appear larger and thus increases tax burdens
3. Causes of Inflation
A. Inflation is always a monetary issue
B. Governments inflate money supply because of their mounting debts

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