PaulSchneiderman,Ph.D.

,ProfessorofFinance&Economics,Southern
NewHampshireUniversity
2008SouthWestern

InThisLecture..
MeasuringPrices
UnemploymentandEmployment

TheStudyofMacroeconomics

MacroeconomicProblems
Highinflationrate
Highunemploymentrate
Highinterestrates
Loweconomicgrowthorstagnation

MacroeconomicTheories
Explain:
Changesinoutputofallgoodsand
services
Changesintotalofallincomesearned
Changesinpricelevels
Changesininunemployment
Changesininterestrates

MacroeconomicPolicies
FiscalPolicydealswithchangesin
governmentexpendituresand/ortaxes.to
achieveparticularmacroeconomicgoals.
MonetaryPolicydealswith.changesin
themoneysupply,ortherateofgrowthof
themoneysupply,toachieveparticular
macroeconomicgoals.

DifferentViewsofHowthe
EconomyWorks
Theeconomyisinherentlystableandself
regulating.
Theeconomyisinherentlyunstableand
requiresinterventiontocorrectproblems.

THEEFFECTIVEINEFFECTIVE
CATEGORY
Howeffectiveare:
FiscalPolicy?
Changesingovernmentexpenditures
and/orchangesintaxestoachieve
particularmacroeconomicgoals.
MonetaryPolicy?
Changesinthemoneysupply,ortherate
ofgrowthofthemoneysupply,toachieve
particularmacroeconomicgoals.

MacroeconomicMeasures Prices
PriceLevel Aweightedaverageofthe
pricesofallgoodandservices.
PriceIndex Ameasureofthepricelevel.
ConsumerPriceIndex(CPI) Awidelycited
indexnumberforthepricelevel;the
weightedaverageofpricesofaspecificsetof
goodsandservicespurchasedbyatypical
household.

MacroeconomicMeasures Prices
BaseYear Theyearchosenasapointof
referenceorbasisofcomparisonforprices
inotheryears;abenchmarkyear.

ComputingtheConsumerPrice
Index

ChangesinPrices

In2005theCPIwas195.3;in2006theindexwas
201.6.Whatwasthepercentagechangeinprices
from20052006?

3.23%

MacroeconomicMeasures
Income
NominalIncome Thecurrentdollar
amountofapersonsincome.
Inflation Anincreaseinthepricelevel.
RealIncome Nominalincomeadjusted
forpricechanges.

GDPImplicitPriceDeflatorvs.
ConsumerPriceIndex
GDPImplicitPriceDeflatorisbaseduponall
goodsandservicesproducedinaneconomy.
CPIisbaseduponarepresentativegroup of
goodsandservicespurchasedbyatypical
household

SelfTest
ExplainhowtheCPIiscalculated.
Whatisabaseyear?
Inyear1,yourannualincomeis$45,000
andtheCPIis143.6;inyear2,yourannual
incomeis$51,232andtheCPIis150.7.Has
yourrealincomerisen,fallen,orremained
constant?Explainyouranswer.

WhoAretheUnemployed?

LaborForceParticipationRate
Laborforceparticipationrate - The
percentageoftheciviliannoninstitutional
populationthatisinthecivilianlaborforce:
Civilian labor force
LFPR = --------------------------------------------- x 100
Civilian noninstitutional population

Unemployment
UnemploymentRateThepercentageof
thecivilianforcethatisunemployed:
Number of unemployed persons
U = -------------------------------------------- X 100
Civilian labor force

Unemployment
EmploymentRateThepercentageofthe
civiliannoninstitutionalpopulationthatis
employed:
Number of employed persons
(E) = ----------------------------------------------- X 100
Civilian noninstitutional population

WhoaretheUnemployment
Jobloser.Thisisapersonwhowasemployedinthe
civilianlaborforceandwaseitherfiredorlaidoff.
Jobleaver.Thisisapersonemployedinthecivilian
laborforcewhoquitshisorherjob.
Reentrant.Thisisapersonwhowaspreviously
employed,hasntworkedforsometime,andis
currentlyreenteringthelaborforce.
Newentrant.Thisisapersonwhohasneverhelda
fulltimejobfortwoweeksorlongerandisnowinthe
civilianlaborforcelookingforajob.

FrictionalUnemployment
Unemploymentdueto
thenaturalfrictions
oftheeconomy,which
iscausedbychanging
marketconditionsand
isrepresentedby
qualifiedindividuals
withtransferableskills
whochangejobs.

StructuralUnemployment
Unemployment
duetostructural
changesinthe
economythat
eliminatesomejobs
andcreateother
jobsforwhichthe
unemployedare
unqualified.

NaturalUnemployment
Unemploymentcausedbyfrictionaland
structuralfactorsintheeconomy.
Naturalunemploymentrate=Frictional
unemploymentrate+Structural
unemploymentrate.

FullEmployment
Theconditionthatexistswhenthe
unemploymentrateisequaltothenatural
unemploymentrate.

CyclicalUnemployment
Rate
Thedifferencebetweentheunemployment
rateandthenaturalunemploymentrate.

SelftestQuestions
Whatisthemajordifferencebetweena
personwhoisfrictionallyunemployed
andonewhoisstructurallyunemployed?
Ifthecyclicalunemploymentrateis
positive,whatdoesthisimply?