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INFLATION
 Inflation is a sustained increase in the overall price
level of goods and services in the market.
 Hyperinflation is a period of a rapid and sustained
increases in the overall price level. Hyperinflations
Macroeconomic Concerns: are rare, but have been used to study the costs
and consequences of even moderate inflation.
 Deflation is a sustained decrease in the overall
Inflation and Unemployment price level. Prolonged periods of deflation can be
just as damaging for the economy as sustained
inflation.
 Stagflation is a period where prices are high yet
overall output or GDP is declining

ADRIANE JOHN P. LUNCIDO SOURCE: Case and Faire, 2015. Principles of Economics
Professor-in-Charge

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Source: Facebook website of National Economic Development Authority of the Philippines Source: Facebook website of National Economic Development Authority of the Philippines

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Source: Facebook website of National Economic Development Authority of the Philippines Source: Facebook website of National Economic Development Authority of the Philippines

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Step by step procedure

to compute CPI:
1. Find the past records of prices among
basic commodities purchased by most
Filipinos with corresponding quantities
of it and found in the common
“market basket”.
2. Obtain current prices of the same
basic commodities purchased by most
Filipinos with its corresponding
quantities. (Done through a survey)
3. Compute for the total cost of market
baskets

Source: Facebook website of National Economic Development Authority of the Philippines

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Hypothetical Example on How

Step by step procedure
Derive CPI
to compute CPI:
Base Year Current Quantity/
4. After obtaining the total cost of market Quantity/Unit
Price/Unit Price/ Unit Unit
basket then calculate CPI using this Commodities
in 2010
Purchased in
in 2014 in Year
formula: Year 2010
(in Peso) (in Peso) 2014

1. Egg 4 20 7 15
Current Cost of Market Basket
CPI = x100 2. Fish 90 15 140 13
Base Cost of Market Basket
3. Vegetables 20 13 50 10

4. Rice 35 20 45 15

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Hypothetical Example on How Hypothetical Example on How

Derive CPI Derive CPI and Inflation Rate
Base Year Current Quantity/ Cost of CPI = (Current Market
Cost of
Quantity/Unit Market Cost of Market Basket Basket / Base Market
Price/Unit Market Basket Price/ Unit Unit YEAR
Commodities Purchased in Basket in (in Peso) Basket) X 100
in 2010 in 2010 (Base in 2014 in Year
Year 2010 2014
(in Peso) Year) (in Peso) 2014
1. Egg 4 20 4x20= 80 7 15 7x15=105 2010 (Base) 2,390 (2,390/2,390) x 100 = 100
2. Fish 90 15 90x15=1,350 140 13 140x13=1,820 2014 3,100 (3,100/2,390) x 100 = 129.71
20x13=260 50x10=500 2015* 3,680 (3,680/2,390) x 100 = 153.97
3. Vegetables 20 13 50 10
2016* 4,230 (4,230/2,390) x 100 = 176.99
4. Rice 35 20 35x20=700 45 15 45x15=675
TOTAL: 2,390 TOTAL: 3,100 CPI 2 − CPI1
Inflation..Rate = x100
CPI1
129.712014 − 1002010
Inflation..Rate = x100 = 29.71%
1002010

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TYPICAL ISSUES OF CPI

1. Typical household does not
represent every household.
2. Product substitution
3. Consumption of new
product is unaccounted
4. Change in quality
5. Outlet substitution
UNEMPLOYMENT
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What is Unemployment?
In economics, unemployment refers
to the condition and extent of
joblessness within an economy
It is measured in terms of the
unemployment rate, which is the
number of unemployed workers
divided by the total civilian labor
force
Hence, unemployment is the
condition of not having a job, often
referred to as being "out of work", or
unemployed

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Why is there unemployment?

 lack of employment
opportunities
 lack of investors and businesses
 fast growth of population
 lack of education
 Job mismatch

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Types of Unemployment Types of Unemployment (cont…)

3.) Classical Unemployment
1.) Frictional Unemployment
- Classical Unemployment occurs when real
- when a person loses his current job and is wages for a job rises above the market-clearing
out looking for a new one level
- the time period from shifting from one job to - Because of this, many more people apply to that
another is known as frictional unemployment. job but only few vacant slots are available.
4.) Cyclical Unemployment
2.) Structural Unemployment
- happens when there is an economic recession,
- happens because of structural changes in wherein there is less demand for goods and
the economy services
- In this type of unemployment, workers do - During this time more unskilled workers are
unemployed due to the fact that demand for
not match with their jobs or they do not have labour decreases.
the skill that is required in doing the work.

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Types of Unemployment (cont…) Why study UNEMPLOYMENT?

5.) Seasonal Unemployment
You might be part of it
- happens because there are
The unemployment (rate) is a key
some jobs that concentrate only indicator of the economy’s health.
at a certain time of the year -
The existence of unemployment
Industries that are seasonal may be
seems to imply that the aggregate
fruit picking, tourism, hotels and
labor market is not in equilibrium.
caterings.
SOURCE: Case and Faire, 2015. Principles of Economics

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Unemployment vs. Facts and Figures: Philippine

Underemployment Unemployment

Unemployment Underemployment

 condition of not having a  “underemployed people” is

job, often referred to as
being "out of work", or
unemployed
 described as person who is
not working or one who
does not get paid, but seeks
employment
defined as those holding jobs but
who want to work longer hours in
their present job, those wanting
an extra job, or those who want a
new job with longer working hours
 described as a person who is
working part-time but would like
to work full time
 also means that the workers skill is
greater than that of what he is
required to do

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Facts and Figures: Philippines Facts and Figures: Poverty Incidence

Population, and Labor Force and Unemployment Rates

Source: Philippine Statistical Authority Source: taken from the article of Paqueo and Orbeta (2016). Beware of the “End of
Contractualization! Battle Cry”

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Facts and Figures: Average Daily

Earnings and Distribution of Employment

Source: taken from the article of Paqueo and Orbeta (2016). Beware of the “End of
Contractualization! Battle Cry”

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Natural Rate of Unemployment

 Natural rate of unemployment:
the average rate of unemployment around
which the economy fluctuates.
 In a recession, the actual unemployment
rate rises above the natural rate.
 In a boom, the actual unemployment rate
falls below the natural rate.

Source: taken from the article of Paqueo and Orbeta (2016). Beware of the “End of Contractualization! Battle Cry”

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A first model of the natural rate Assumptions:

1. L is exogenously fixed.
Notation: 2. During any given month,
L = # of workers in labor force s = fraction of employed workers
that become separated from their jobs,
E = # of employed workers
f = fraction of unemployed workers
U = # of unemployed that find jobs.

U/L = unemployment rate s = rate of job separations

f = rate of job finding
(both exogenous)

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The transitions between employment The steady state condition

and unemployment
Definition: the labor market is in
s E steady state, or long-run equilibrium,
if the unemployment rate is constant.
The steady-state condition is:

Employed
s E = f U
Unemployed
# of employed
people who lose or # of unemployed
leave their jobs people who find jobs

f U

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Example:
Solving for the “equilibrium” U rate
fU = sE Each month, 1% of employed workers
lose their jobs (s = 0.01)
= s  (L – U)
Each month, 19% of unemployed
=sL – sU workers find jobs (f = 0.19)
Solve for U / L: Find the natural rate of unemployment:
(f + s)  U = s  L
U s 0.01
so, = = = 0.05, or 5%
U s L s +f 0.01 + 0.19
=
L s +f

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Policy Implication… Why is there unemployment?

If job finding were instantaneous (f = 1),

A policy that will reduce the then all spells of unemployment would
be brief, and the natural rate would be
natural rate of unemployment
near zero.
only if it lowers s or increases f.
There are two reasons why f < 1:
1. job search
2. wage rigidity

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Job Search & Frictional Unemployment

Sectoral shifts
 frictional unemployment: caused by the
time it takes workers to search for a job
 occurs even when wages are flexible and
there are enough jobs to go around
 occurs because
▪ workers have different abilities, preferences
▪ jobs have different skill requirements
▪ geographic mobility of workers not instantaneous
▪ flow of information about vacancies and job candidates is
imperfect
 def: changes in the composition of demand
among industries or regions
 example: Technological change
increases demand for computer repair persons,
decreases demand for typewriter repair persons
 example: A new international trade agreement
causes greater demand for workers in the export
sectors and less demand for workers in import-
competing sectors.
 It takes time for workers to change sectors,
so sectoral shifts cause frictional unemployment.

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Unemployment insurance (UI)

Why is there unemployment?
 UI pays part of a worker’s former wages for a
limited time after losing his/her job.
If job finding were instantaneous (f = 1),
 UI increases search unemployment, because then all spells of unemployment would
it:
reduces the opportunity cost of be brief, and the natural rate would be
being unemployed near zero.
reduces the urgency of finding work
There are two reasons why f < 1:
hence, reduces f
1. job search (DONE ALREADY)
 Studies: The longer a worker is eligible for UI,
the longer the duration of the average spell of 2. wage rigidity
unemployment.

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Unemployment from real wage rigidity Unemployment from real wage rigidity
Real Supply
If the real wage If the real
wage is Unemployment wage is
stuck above stuck above Then, firms must ration the
the eq’m the eq’m scarce jobs among workers.
Rigid
level, then real level, then
there aren’t wage there aren’t
enough jobs enough jobs
to go Demand to go Structural unemployment:
around. around. the unemployment resulting
Labor from real wage rigidity and
Amount of job rationing.
Amount of labor
labor hired
willing to work

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Reasons for wage rigidity 1. The minimum wage

 The minimum wage is well below
the eq’m wage for most workers, so
1. Minimum wage laws it cannot explain the majority of
natural rate unemployment.
2. Labor unions  However, the minimum wage may
exceed the eq’m wage of unskilled
workers, especially teenagers.
3. Efficiency wages
 If so, then we would expect that
increases in the minimum wage
would increase unemployment
among these groups.

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2. Labor unions 3. Efficiency Wage Theory

 Unions exercise monopoly power to
 Theories in which high wages increase
secure higher wages for their members. worker productivity:
 When the union wage exceeds the attract higher quality job applicants
eq’m wage, unemployment results.
increase worker effort and reduce
 Employed union workers are insiders “shirking”
whose interest is to keep wages high. reduce turnover, which is costly
 Unemployed non-union workers are improve health of workers
outsiders and would prefer wages to (in developing countries)
be lower (so that labor demand would
 The increased productivity justifies the
be high enough for them to get jobs).
cost of paying above-equilibrium wages.
 The result: unemployment

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Hypothetical example of labor

supply and labor demand
Assume that labor demand and labor supply:
LS = 1/4w
LD = 400 – 3/4w - END -
where: LS = labor supply (in thousands)
LD = labor demand (in thousands)
w = nominal wage (in pesos)
a) Find the equilibrium wage and equilibrium level of employment
b) Due to government policy of stopping endo, labor market is
THANK YOU FOR
disturbed. The new LD is expressed as: LD = 150 – 0.05 w and new
LS is expressed as LS = 20 + 0.25 w LISTENING!!!
b.1.) IS there a new equilibrium wage? If yes, how much?
b.2.) Does Philippine economy gain benefits from stopping/
illegalizing endo? To answer this, compute the number of
unemployed citizens?

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QOUTES FOR THE DAY

“There will be challenges and

there will be difficulties. Do not
pray that God removes your trials
and adversities, ask God that He
would provide you with the
courage and wisdom equal to the
task. For when He equips us and
we go through it, we emerge
stronger and wiser.”
~ F. Kong ~

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