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Monitoring Cycles, Jobs, and The Price Level

This chapter discusses how business cycles, jobs, and price levels are monitored. It explains that recessions are defined by the National Bureau of Economic Research and looks at unemployment measures like rates, labor force participation, and employment populations. Inflation is also examined through the Consumer Price Index, which tracks price changes in consumer goods to measure inflation. The CPI can overstate inflation through biases, so adjustments are made to reduce errors.

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34 views42 pages

Monitoring Cycles, Jobs, and The Price Level

This chapter discusses how business cycles, jobs, and price levels are monitored. It explains that recessions are defined by the National Bureau of Economic Research and looks at unemployment measures like rates, labor force participation, and employment populations. Inflation is also examined through the Consumer Price Index, which tracks price changes in consumer goods to measure inflation. The CPI can overstate inflation through biases, so adjustments are made to reduce errors.

Uploaded by

ibarhim
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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5

MONITORING
CYCLES, JOBS, AND CHAPTER
THE PRICE LEVEL
b
Objectives

After studying this chapter, you will able to


 Explain how we date business cycles
 Define the unemployment rate, the labor force
participation rate, the employment-to-population ratio,
and aggregate hours
 Describe the sources of unemployment, its duration, the
groups most affected by it, and how it fluctuates over a
business cycle
 Explain how we measure the price level and the inflation
rate using the CPI
Vital Signs

A recession started in March 2001. What defines a


recession, who makes the decision that we are in one, and
how?
How do we measure unemployment and what other data
do we use to monitor the labor market?
Being employed alone does not determine standard of
living; the cost of living also matters, so we also need to
know what the Consumer Price Index is, and how that is
measured and used.
The Business Cycle
The Business Cycle

Business Cycle Dates


Figure shows the percentage change in real GDP over
each cycle between 1921 and 2000.
The Business Cycle

The 2001–2002 Recession


The 2001-2002 recession, as seen from mid-2002,
appears to have been the mildest recession on record.
Jobs and Wages

Population Survey
The U.S. Census Bureau conducts monthly surveys to
determine the status of the labor force in the United
States.
The population is divided into two groups:
 The working-age population—the number of people
aged 16 years and older who are not in jail, hospital, or
other institution.
 People too young to work (less than 16 years of age) or
in institutional care.
Jobs and Wages

The working-age population is divided into two groups:


 People in the labor force
 People not in the labor force
The labor force is the sum of employed and unemployed
workers.
Population

Working age population Nonworking age


>16 Not institutionalized population

Labor Force Out of Labor Force

People Employed +
People Unemployed

Unemployment = (# of People Unemployed / Labor Force)*100


Jobs and Wages

To be considered unemployed, a person must be:


 without work and have made specific efforts to find a job
within the past four weeks, or
 waiting to be called back to a job from which he or she
was laid off, or
 waiting to start a new job within 30 days.
Jobs and Wages
Unemployment and Full Employment

The Anatomy of Unemployment


People end a spell of unemployment for two reasons:
Hired or recalled workers gain jobs.
Discouraged unemployed workers withdraw from the labor
force.
Unemployment and Full Employment

Figure illustrates the labor


market flows between the
different states.
Inflation Rate
CONSUMER PRICE INDEX
What is Inflation

• Inflation is a sustained
increase in the general price
level of goods and services
in an economy over a
period of time.
The Consumer Price Index

The price level is the “average” level of prices and is


measured by using a price index.
The consumer price index, or CPI, measures the
average level of the prices of goods and services
consumed by an urban family.
The Consumer Price Index

Reading the CPI Numbers


The CPI is defined to equal 100 for the reference base
period.
The value of the CPI for any other period is calculated by
taking the ratio of the current cost of a market basket of
goods to the cost of the same market basket of goods in
the reference base period and multiplying by 100.
The Consumer Price Index

Constructing the CPI


Constructing the CPI involves three stages:
 Selecting the CPI basket
 Conducting a monthly price survey
 Using the prices and the basket to calculate the CPI
The Consumer Price Index

Figure 5.12 illustrates the


CPI basket.
Housing is the largest
component.
Transportation and food
and beverages are the
next largest components.
The remaining components
account for only 26 percent
of the basket.
Consumer Price Index - Egypt
The Consumer Price Index

The CPI basket is based on a Consumer Expenditure


Survey.
The current CPI is based on a 1993-95 survey, although
the reference base period is still 1982-84.
Every month, BLS employees check the prices of 80,000
goods and services in 30 metropolitan areas.
The CPI is calculated using the prices and the contents of
the basket.
The Consumer Price Index

For a simple economy that consumes only oranges


and haircuts, we can calculate the CPI.
The CPI basket is 10 oranges and 5 haircuts.

Item Quantity Price Cost of CPI


basket
Oranges 10 $1.00 $10

Haircuts 5 $8.00 $40

Cost of CPI basket at base period prices $50


The Consumer Price Index

This table shows the prices in the base period.


The cost of the CPI basket in the base period was $50
2018/2019.

Item Quantity Price Cost of CPI


basket
Oranges 10 $1.00 $10

Haircuts 5 $8.00 $40

Cost of CPI basket at base period prices $50


The Consumer Price Index

This table shows the prices in the current period.


The cost of the CPI basket in the current period is $70.

Item Quantity Price Cost of CPI


basket
Oranges 10 $2.00 $20

Haircuts 5 $10.00 $50

Cost of CPI basket at base period prices $70


The Consumer Price Index

The CPI is calculated using the formula:


CPI = (Cost of basket in current period2019/Cost of basket
in base period2010) X 100.
Using the numbers for the simple example, the CPI is
CPI = ($70/$50) X 100 = 140.
The CPI is 40 percent higher in the current period than in
the base period.
The Consumer Price Index

Measuring Inflation
The main purpose of the CPI is to measure inflation.
The inflation rate is the percentage change in the price
level from one year to the next.
The inflation formula is:
Inflation rate = [(CPI this period – CPI last period)/CPI last
period]  100.
Inflation Rate in Egypt
Forecasted Sales = Last Yeas Sales X (1+Expected Economic Growth)X
(1+Infaltion Rate)
The Consumer Price Index

The Biased CPI


The CPI may overstate the true inflation for four reasons:
 New goods bias
 Quality change bias
 Commodity substitution bias
2000 2010
Base
Year

1000

$10
$10

overestimate the inflation and $100


underestimate the production
Nominal GDP = 1000 X
100 = $100,000
Real DGP = 1000X10 =
$10,000
The Consumer Price Index

New goods bias New goods that were not available in the
base year appear and, if they are more expensive than the
goods they replace, the price level may be biased higher.
Similarly, if they are cheaper than the goods they replace,
but not yet in the CPI basket, they bias the CPI upward.
Quality change bias Quality improvements generally are
neglected, so quality improvements that lead to price hikes
are considered purely inflationary.
The Consumer Price Index

Commodity substitution bias The market basket of


goods used in calculating the CPI is fixed and does not
take into account consumers’ substitutions away from
goods whose relative prices increase.
The Consumer Price Index

A Congressional Advisory Commission estimated that the


CPI overstates inflation by 1.1 percentage points a year.
The bias in the CPI distorts private contracts, increases
government outlays (close to a third of government outlays
are linked to the CPI), and biases estimates of real
earnings.
To reduce the bias in the CPI, the BLS will undertake
consumer expenditure surveys more frequently and revise
the CPI basket every two years.
WHAT IS THE HEALTHY LEVEL
OF INFLATION
Hyperinflation
Hyperinflation

Venezuela

•  Official estimations that


the inflation rate
increased to
53,798,500% between
2016 and 2019
• April 2019 Tomato Kg is
for 2.5 Million bolivars
Decrease in Prices is Disastrous
Deflation is bad to the
Bank Interest Inflation Real Return
Rate
20% 30% -10%
11% 5.5% 5.5%
Inflation
What in it for me?
Inflation Rate

• The minimum
return on your
savings

• High inflation
rates! you have to
move out of cash

• In case for high


inflation go for a
loan
5
MONITORING
CYCLES, JOBS, AND CHAPTER
THE PRICE LEVEL

THE END

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