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Inflation, Unemployment, and Employment

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.

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Inflation, Unemployment, and Employment

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  1. Inflation, Unemployment, and Employment

  2. 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

  3. Example:Calculating the GDP Deflator

  4. 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

  5. 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

  6. 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%

  7. 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)

  8. How do inflation rates based on the CPI and GDP deflator compare?

  9. Unemployment Rate • A major economy-wide labor market indicator • cyclical • frictional and structural • concept of natural unemployment rate • natural does not mean “good”

  10. As stated in this WSJ article, the October unemployment rate is to be released tomorrow

  11. Other Economy-Wide Labor Market Indicators • Employment (total number of jobs) • Labor Force Participation Rate • Employment-To-Population Ratio

  12. 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

  13. Employment to Population Ratios

  14. Three types of unemployment unemployment

  15. Duration of Unemployment

  16. International Comparisons of Unemployment Rates (1996)

  17. 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

  18. End of Lecture

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