Inflation, Unemployment, and Employment
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Transcript of Inflation, Unemployment, and Employment
The GDP deflator
• Definition:– GDP deflator = nominal GDP/real GDP
• A by-product of measuring real GDP
• Provides a measure of “average” prices in the economy
• Sometimes called implicit price deflator
Example:Calculating the GDP Deflator
2nd Qtr 1998 3rd Qtr 1998
Nominal GDP 8,440.6 8,526.5
(2) Real GDP 7,498.6 7,559.5
GDP Deflator(1)/(2)
1.126 1.128
A measure of the inflation rate
• Inflation rate: the percent change in the deflator from one period to the next
• (Pt - Pt-1)/Pt-1 stated in percent
• (1.128 - 1.126)/1.126 = .002 or .2 percent
• At an annual rate this is .8 percent as stated in the WSJ news story
Recap of our discussion of GDP
• Enough now to read and do “critical thinking” about the typical news story
• But remember that GDP is not perfect• misses things: Home Work (two words),
underground economy
• not the only measure of well-being
• For international comparisons, we must take account of exchange rates and “purchasing power” differences in different countries
Consumer price index (CPI)
• based on a fixed market basket of goods and services that a “typical” person purchases
• How much more does that market basket cost this year than last year?– Answer (in percentage terms) is the inflation rate using the
CPI
– Example 50 cartons of milk, 300 cookies
– 1998: 2.00x50 + 1x300 = 400
– 1997: 1.50x50 + .5x300 = 225
– 400/225 = 1.78: inflation rate would be 78%
CPI Inflation Bias
• Many complain that the CPI gives an upward biased measure of inflation – misses quality improvements– market basket changes
• indexing social security makes this an important public policy issue– commission chaired by Michael Boskin of Stanford
found the bias was about 1 percent (maybe larger)
How do inflation rates based on the CPI and GDP deflator compare?
20_07
INFLATION RATE
(PERCENT PER YEAR)
1960 1970 1980 1990 20001965 1975 1985 1995
12.5
10.0
7.5
5.0
2.5
15.0
CPI
GDPdeflator
Unemployment Rate
• A major economy-wide labor market indicator
• cyclical
• frictional and structural
• concept of natural unemployment rate– natural does not mean “good”
As stated in this WSJ article, the October unemployment rate is to
be released tomorrow
Other Economy-Wide Labor Market Indicators
• Employment (total number of jobs)
• Labor Force Participation Rate
• Employment-To-Population Ratio
21_2
Employed (126.7)
Labor force (133.9)
Working age population (200.5)
Total population (265.5)
Three Labor Market Indicators
UnemployedUnemployment rate =
Labor force
Employed
Labor force
(7.2)7.2
(7.2) + (126.7)133.9
(7.2) + (126.7)FPO
Unemployed(7.2)
Working age but notin labor force (66.6)(in school, retired, or
performing unpaid workat home)
Too young to workor institutionalized
(65.0)
= 5.4 percent
Labor force participation rate = 133.9
(7.2) + (126.7) +200.5
(66.6)
= 67 percent
(126.7)
Employment-to-population ratio = 126.7
(7.2) + (126.7) +200.5
(66.6)
= 63 percent
Working age population
Working age population
= =
= =
= =
Unemployment data are collected by the U.S. Department of Labor
• Let’s take a look at the DOL web page to see what’s happening
• You can enter through Econ1 web page
Employment to Population Ratios21_3
PERCENT
90
80
70
60
50
40
301950 1975 19901970 198519651960 1980 19951955
Men
Total
Women
unemployment 21_4
1987 Normal
Job losers Job leavers Entrants
1992 Cyclical
high
1989 Cyclical
low
7
6
5
4
3
2
1
0
PERCENT OF LABOR FORCE
Three types of unemployment
Duration of Unemployment21_5
1987 Normal
More than 26 weeks
5 to 26 weeks
Less than 5 weeks
1992 Cyclical high
1989 Cyclical low
7
6
5
4
3
2
1
0
PERCENT OF LABOR FORCE
International Comparisons of Unemployment Rates (1996)
21A
U.S. France U.K.Germany Italy CanadaJapan
12
10
8
6
4
2
0
PERCENT
Preview of Coming Attractions
• Next Four Lectures: Long Run Fundamentals and Economic Growth– Labor (Ch 21) partly covered already– Capital (Ch 22) try to read for next lecture– Technology (Ch 23)– Money (Ch 24)
• Then Economic Fluctuations• Then Economic Policy
End of Lecture