Paul Schneiderman, Ph.D.

, Professor of Finance & Economics, Southern New Hampshire University 2008 South-Western

Macroeconomic Problems
High inflation rate High unemployment rate High interest rates Low economic growth or stagnation

Macroeconomic Policies
Fiscal Policy deals with changes in government expenditures and/or taxes. to achieve particular macroeconomic goals. Monetary Policy deals with. changes in the money supply, or the rate of growth of the money supply, to achieve particular macroeconomic goals.

Different Views of How the Economy Works

The economy is inherently stable and self-regulating. The economy is inherently unstable and requires intervention to correct problems.

THE P-Q CATEGORY

Macroeconomics deals with many variables, but two major variables are the Price level and Real GDP. Price level (P) is the weighted average of the prices of all goods and services. Real GDP (Q) is the value of the entire output produced annually within a countrys borders, adjusted for price changes.

Macroeconomic Measures - Prices

Price Level - A weighted average of the prices of all good and services. Price Index - A measure of the price level. Consumer Price Index (CPI) - A widely cited index number for the price level; the weighted average of prices of a specific set of goods and services purchased by a typical household.

Macroeconomic Measures - Prices

Base Year - The year chosen as a point of reference or basis of comparison for prices in other years; a benchmark year.

Computing the Consumer Price Index

Consumer Price Index 1983-2006

Consumer Price Index 1983-2006

Year Annual Year Annual

1983
1984 1985 1986

99.6
103.9 107.6 109.6

1995
1996 1997 1998

152.4
156.9 160.5 163.0

1987
1988 1989 1990

113.6
118.3 124.0 130.7

1999
2000 2001 2002

166.6
172.2 177.1 179.9

1991
1992 1993 1994

136.2
140.3 144.5 148.2

2003
2004 2005 2006

184.0
188.9 195.3 201.6

Changes in Prices

In 2005 the CPI was 195.3; in 2006 the index was 201.6. What was the percentage change in prices from 2005-2006? Click below for answer.

3.23 %

Macroeconomic Measures - Prices

Gasoline cost $1.15 per gallon in 1980. At todays prices are we better off? Click below to check.

Macroeconomic Measures Income

Nominal Income - The current-dollar amount of a persons income. Inflation - An increase in the price level. Real Income - Nominal income adjusted for price changes.

GDP Implicit Price Deflator vs. Consumer Price Index

GDP Implicit Price Deflator is based upon all goods and services produced in an economy. CPI is based upon a representative group of goods and services purchased by a typical household

Self-Test
Explain how the CPI is calculated. What is a base year? In year 1, your annual income is $45,000 and the CPI is 143.6; in year 2, your annual income is $51,232 and the CPI is 150.7. Has your real income risen, fallen, or remained constant? Explain your answer.

Who Are the Unemployed?

Labor Force Participation Rate

Labor force participation rate - The percentage of the civilian noninstitutional population that is in the civilian labor force:
Civilian labor force LFPR = --------------------------------------------- x 100 Civilian noninstitutional population

Unemployment
Unemployment Rate-The percentage of the civilian force that is unemployed:
Number of unemployed persons U = -------------------------------------------- X 100 Civilian labor force

Unemployment
Employment Rate -The percentage of the civilian noninstitutional population that is employed:
Number of employed persons (E) = ----------------------------------------------- X 100 Civilian noninstitutional population

Who are the Unemployment

Job loser. This is a person who was employed in the civilian labor force and was either fired or laid off. Job leaver. This is a person employed in the civilian labor force who quits his or her job. Reentrant. This is a person who was previously employed, hasnt worked for some time, and is currently reentering the labor force. New entrant. This is a person who has never held a full-time job for two weeks or longer and is now in the civilian labor force looking for a job.

Frictional Unemployment
Unemployment due to the natural frictions of the economy, which is caused by changing market conditions and is represented by qualified individuals with transferable skills who change jobs.

Structural Unemployment
Unemployment due to structural changes in the economy that eliminate some jobs and create other jobs for which the unemployed are unqualified.

Natural Unemployment
Unemployment caused by frictional and structural factors in the economy. Natural unemployment rate = Frictional unemployment rate + Structural unemployment rate.

Full Employment
The condition that exists when the unemployment rate is equal to the natural unemployment rate.

Cyclical Unemployment Rate

The difference between the unemployment rate and the natural unemployment rate.

Self-test Questions
What is the major difference between a person who is frictionally unemployed and one who is structurally unemployed? If the cyclical unemployment rate is positive, what does this imply?