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Consumer Price Index (CPI)
- Reports inflation each month and year
- Reports the price of a basket of 300 consumer goods a typical urban consumer would buy
- Includes foreign goods (difference between CPI and PI)
- Base year = 1982-1984
- Better reflection of what people actually buy than PI
- CPI = (price of most recent market basket in the particular year)/(price of the same market basket in 1982-1984) x 100
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GDP per Capita
Divide the GDP by the size of the population
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Economic Growth
An increase in real GDP over some time period or an increase in real GDP per capita over some time period
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Main Sources of Growth
- Increasing inputs of resources
- Increasing the productivity (real output per unit of input) of the resources used
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Rule of 70
- To approximate number of years required to double GDP
- 70/annual percentage rate of growth
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Recession/Contraction
- 6 months or more of decline in total output, income, and increase in unemployment
- Period of time during which aggregate economic activity is falling
- If recession is particularly bad = depression
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During a recession �
- Many sectors of the economy experience declining sales and production
- Workers are laid off or forced to work only part-time
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Peak
The point in which output starts to decline
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Upturn
- After reaching the low point of the contraction (trough), aggregate economic activity begins to increase
- Expansion/boom � period of time during which aggregate economic activity grows
- Peak � high point of expansion
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Demand-Pull Inflation
- When resources are fully employed and the business sector can�t respond to excess demand by increasing output
- Excess demand causes an increase in cost
- Demand shifts right, price goes up
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Cost-Push Inflation
- Rising per-unit costs of production lower profits and force the prices up
- Costs more to make goods
- Supply shifts left, price goes up
- Usually due to natural disasters or civil war
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Supply Shock
Abrupt increases in the cost of raw materials
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Per Unit Cost
Total input cost / number of units of output
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Hyperinflation
- An extremely high and fast inflation rate
- Ex: Germany after WWI (wheelbarrows of money to buy bread)
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COLA
- Cost Of Living Adjustment
- An increase in benefits as inflation occurs
- Pay more next month so you have the same purchasing power
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Who is Hurt by Inflation?
- Fixed income receivers � same amount of money doesn�t go as far
- Savers � purchasing power of saved money goes down, not as valuable as when you put it away
- Creditors � paid back money that has less purchasing power, money they get back is less valuable than the money they loaned
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Who is Not Hurt by Inflation?
- Flexible income receivers � adjusted for inflation, have the same purchasing power
- Debtors � pay back money that�s less valuable than what they got
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Labor Force
- Consists of people who are willing and able to work
- Those employed and unemployed but seeking work count
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Unemployment Rate
- Random monthly telephone survey of 60,000 people conducted by the Bureau of Labor Statistics (BLS)
- Use results to make conclusions for the nation
- About 9.1% right now
- Unemployed = percentage of the labor force unemployed
- Unemployment rate = unemployed / labor force x 100
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BLS splits the population into 3 groups:
- People under 16 and people who are institutionalized (prison, asylums, etc) � not counted in labor force
- Adults who don�t have a job and aren�t seeking work � not in labor force
- Everyone else � counted in labor force
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Flaws with Unemployment
- Discouraged workers aren�t included (people who gave up looking but would still like to work) unemployment rate underestimated because of it
- Underemployed people are included as employed even though they�re working below their skill level
- Part-time works are included even if they are also looking for a full-time job
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Frictional unemployment � occurs from people moving between jobs, careers, or locations
- Job to job, just out of college, just moved
- Not necessarily bad, normal
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Structural unemployment � mismatch of workers and job openings
- Unemployed people lack skills, education, or geographical location
- Ex: marine biologist living in Alaska
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Cyclical unemployment � occurs from changes in the business cycle (recession/depression)
Lay-offs due to decrease in demand for goods/services
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Seasonal unemployment � change in hiring patterns due to the time of year
Ex: ski instructors, lifeguards, landscapers
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Full Employment/Natural Rate of Unemployment
- Exists when there�s structural, friction, and seasonal unemployment
- Can�t be any cyclical unemployment
- Economy is producing at its potential output
- Number of job seekers matches the number of jobs available
- About 4-5%
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Nominal income
- Number of dollars received as wages, rent, interest or profits
- Not adjusted for inflation
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Real income
- A measure of the amount of goods and services nominal income can buy
- Purchasing power of nominal income
- Income adjusted for inflation
- Real income = (nominal income) / (price index/100)
- % change in real income = % change in nominal income - % change in price level
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