Real v Nominal GDP

The choice of what base year to use is arbitrary. In the example above
changing the base year would change the GDP growth rate by .4%. In the
United States we used Chain GDP taking the average GDP growth rate
between two different years.

GDP per Capita is GDP/population. It is a better measure of how wealthy a

countries people are. China may have an higher GDP than ours (depending
on how you calculate it) but is still poorer.

GDP dose not perfectly measure quality of life. It excludes house work,
leisure time (though not money spent on leisure), and includes expenditures
that might make people unhappy (i.e. some countries have large amount of
economic activity based on private security)
Employed people are currently holding a job in the economy, either full time or
part time.
Unemployed people are actively looking for work but arent currently employed.
The labor force is equal to the sum of the employed and the unemployed.
The labor force participation rate is the percentage of the population aged 16 or
older that is in the labor force.
The unemployment rate is the percentage of the total number of people in the
labor force who are unemployed.
Like GDP unemployment figures miss details.
Unemployment can be over stated. Even in a hot job market people change jobs
and there is a time between those jobs where people are technically unemployed.
This is called frictional unemployment.

Unemployment can be understated as well.

Discouraged workers are nonworking people who are capable of working but have
given up looking for a job due to the state of the job market.
Marginally attached workers would like to be employed and have looked for a job in
the recent past but are not currently looking for work.
The underemployed are people who work part time because they cannot find full-
time jobs.
Seasonal Adjustment

U-1 Persons unemployed 15 weeks or longer, as a percent of the civilian labor force

U-2 Job losers and persons who completed temporary jobs, as a percent of the civilian labor
force

U-3 Total unemployed, as a percent of the civilian labor force (official unemployment rate)

U-5 Total unemployed, plus discouraged workers, plus all other persons marginally attached to
the labor force, as a percent of the civilian labor force plus all persons marginally attached to the
labor force

U-6 Total unemployed, plus all persons marginally attached to the labor force, plus total
employed part time for economic reasons, as a percent of the civilian labor force plus all persons
marginally attached to the labor force
Suppose that employment websites enable job- seekers to
find suitable jobs more quickly. What effect will this have on
the unemployment rate over time? Also suppose that these
websites encourage job- seekers who had given up their
searches to begin looking again. What effect will this have on
the unemployment rate
Use the data provided below to calculate each of the following. Show
how you calculate each.
a. the size of the labor force
b. the labor force participation rate
c. the unemployment rate
Population age 16 and older =12 million
Employment =5 million
Unemployment =1 million
What is the labor market classification of each of the following individuals?
Be as specific as possible, and explain your answer.
a.Julie has a graduate degree in mechanical engineering. She works full-time
mowing lawns.
b. Jeff was laid off from his previous job. He would very much like to work at
any job, but, after looking for work for a year, has stopped looking for work.
c. Ian is working 25 hours per week at a bookstore, and has no desire to work
full time.
d. Raj has decided to take a year off from work to stay home with his
daughter.
Natural Unemployment= Frictional Unemployment+ Structural Unemployment
Causes of Structural Unemployment
Too High Minimal Wage
Unions
Efficacy Wages: are wages that employers set above the equilibrium wage rate as
an incentive for better employee performance
Side effect of Government policy
Over generous unemployment
Over Regulation
Government Policy can decrease Structural Unemployment
Job training programs
Job placement programs
Wage Subsidies
Shifts in the rate of natural rate of unemployment
Demographics
Technological changes

Actual unemployment = Natural unemployment + Cyclical unemployment

Cyclical unemployment: Unemployment from the macro economic
performance (such as a recession)
In each of the following situations, what type of unemployment is Melanie
facing? Explain.

a. After completing a complex programming project, Melanie is laid off. Her

prospects for a new job requiring similar skills are good, and she has signed
up with a programmer placement service. She has passed up offers for low-
paying jobs.

b. When Melanie and her co-workers refused to accept pay cuts, her
employer outsourced their programming tasks to workers in another
country. This phenomenon is occurring throughout the programming
industry.

c. Due to the current slump in investment spending, Melanie has been laid
off from her programming job. Her employer promises to rehire her when
business picks up.
The price level doesnt matter, changes in the price level dose
Real v nominal
Wages
Income
Interest rates
Inflation rate= Price Level year 2- Price Level Year 1
_______________________________
Price Level Year 1
Costs of high inflation rate
Shoe Leather Cost: costs of extra transactions
Menu Costs: costs of changing prices
Unit of Account Costs: the costs arising from the way inflation makes money a less
reliable unit of measurement
Disinflation: The process of getting inflation under control usually requiring a period of
high unemployment
Winners and losers
In the following examples, is inflation creating winners and losers at no net cost
to the economy or is it imposing a net cost on the economy? Explain. If inflation
is imposing a net cost on the economy, which type of cost is involved?
a. When inflation is expected to be high, workers get paid more frequently and
make more trips to the bank.
b. Lanwei is reimbursed by her company for her work- related travel expenses.
Sometimes, however, the company takes a long time to reimburse her. So when
inflation is high, she is less willing to travel for her job.
c. Hector Homeowner has a mortgage loan that he took out five years ago with a
fixed 6% nominal interest rate. Over the years, the inflation rate has crept up
unexpectedly to its present level of 7%.
d. In response to unexpectedly high inflation, the manager of Cozy Cottages of
Cape Cod must reprint and resend expensive color brochures correcting the price
of rentals this season.
You borrow $1,000 for one year at 5% interest to buy a couch. Although you
did not anticipate any inflation, there is unexpected inflation of 5% over the
life of your loan.
What was the real interest rate on your loan?
b. Explain how you gained from the inflation.
c. Who lost as a result of the situation described? Explain.
The aggregate price level is a measure of the overall level of prices in the economy.
A market basket is a hypothetical set of consumer purchases of goods and
services.
A price index measures the cost of purchasing a given market basket in a given
year. The index value is normalized so that it is equal to 100 in the selected base
year.
The consumer price index, or CPI, measures the cost of the market basket of a
typical urban American family.
The producer price index, or PPI, measures changes in the prices of
goods and services purchased by producers. (early warning)

The GDP deflator for a given year is 100 times the ratio of nominal GDP
to real GDP in that year.
Suppose the year 2000 is the base year for a price index. Between 2000
and 2020 prices double and at the same time your nominal income
increases from $40,000 to $80,000.
a.What is the value of the price index in 2000?
b. What is the value of the price index in 2020?
c. What is the percentage increase in your nominal income between
2000 and 2020?
d. What has happened to your real income between 2000 and 2020?
Explain