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ECN 211 Notes Week 5

by: Jonathan Gonzales

ECN 211 Notes Week 5 Ecn 211

Marketplace > Arizona State University > Economcs > Ecn 211 > ECN 211 Notes Week 5
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Week 5 of Macroeconomic Principles notes.
Stefan Ruediger
Class Notes
Economics, ECN, 211, Macroeconomics, economic, Macroeconomic, Principles, Stefan, Reedier, week, 5, five
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This 4 page Class Notes was uploaded by Jonathan Gonzales on Monday February 22, 2016. The Class Notes belongs to Ecn 211 at Arizona State University taught by Stefan Ruediger in Spring 2016. Since its upload, it has received 17 views. For similar materials see Macroeconomics in Economcs at Arizona State University.


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Date Created: 02/22/16
Economics Notes Day 9 • Review: GDP • No used or intermediate goods • Nominal GDP: Not adjusted for inflation • Real GDP: Adjusted for inflation • Patents: Were once considered an intermediate good, but as of 2013 it is now considered  an investment • To fit in with international standards • Fixed asset, lasts a very long time, can be sold, and held in ownership • Foreign companies operating in the United States contribute to American GDP (Mercedes  in Alabama, for example) • To calculate real GDP, use prices of base year with quantity of current year • GDP deflator is nominal GDP divided by real GDP times 100 • Inflation rate is [(GDP deflator in given year)­(GDP deflator in the previous year)]/(GDP  deflator in the previous year) • Problems with GDP • Doesn’t include… • Quality changes • Underground economy • “bads”, such as environmental damage • Leisure time • Happiness • Health • Many of these things are calculated in GDP in the long run, for example poor health will  result in lower productivity • On the other hand… • International happiness numbers are positively correlated with GDP • Life expectancy also roughly positively correlated with GDP • Water quality is more nebulous, but there is some slight positive correlation with GDP • Using GDP Properly • Short­term changes in real GDP • Many policy reactions to the Great Depression were misguided because GDP data did  not exist back then • Measuring a Nation’s Unemployment • “We don’t have many challenges here” • Unemployment has fluctuated wildly over the past few decades, with ten recessions since  World War II • Lots of unemployment data is available on Fred for free • Labour Force Statistics • Labour Force: Everyone who has a job and everyone who is looking for a job • Produced by Bureau of Labor Statistics (BLS) in the U.S. Department of Labor • Based on regular survey of 60,000 households • Based on “adult population” (16 years or older) • Population divided into three groups: • Employed: Paid employees, self­employed, and unpaid workers in a family business • Maybe interns? This is ambiguous • Unemployed: People who do not have work but have been searching for it for four or  more weeks • Not in the labour force: Everyone else • Unemployment Rate (u­rate): Percentage of the labour force that is unemployed, or  100x(number of unemployed)/(labour force) • Labour Force Participation Rate: Percentage of the adult population that is in the labour  force • Has been in the news quite a lot, as it has been falling since 2000­ish • Women entering the workforce drastically increased the labour force participation rate, whereas retiring Baby Boomers is currently reducing the labour force participation rate • Let’s look at United States unemployment! • Seasonally adjusted vs. non­seasonally adjusted • Employment is usually higher in the fourth quarter due to Thanksgiving and  Christmas shopping • Unemployment rates tend to go up and down at the same time of the year no  matter what (Holiday shopping good, summer bad, etc.) • Seasonal adjustment smooths these fluctuations out • Categories of Unemployment • Frictional: Caused by people transitioning between jobs • Seasonal: Relating to the time of year, explained in more detail above • Structural: Resulting a surplus in workers • Cyclical: Relating to the business cycle, which naturally has periods of boom and  bust • Cyclical unemployment vs. Natural rate of unemployment • Natural Rate of Unemployment: The normal rate of unemployment around which  the actual unemployment rate fluctuates • Cyclical Unemployment: Fluctuation of unemployment from its natural rate • Frictional Unemployment + Structural Unemployment = Natural Rate of  Unemployment • Frictional Unemployment: Occurs when workers spend time searching for the jobs  that best suit their skills and tastes • This is generally short term • This is difficult to eliminate, and I doubt there’s much point to trying • Structural Unemployment: When there are fewer jobs that workers • This is generally long term and difficult to eliminate • Often caused by advancing technology/obsolescence Economics Notes Day 10 • Some review! • Unemployment Rate (“u­rate”): Percent of labour force that is unemployed, 100 x (#  unemployed)/(labour force) • Labour Force Participation Rate: Percent of adult population that is in the labour force, 100  x (labour force)/(adult population) • Employment and Unemployment • Categories: Frictional, seasonal, structural, cyclical • Natural Rate of Unemployment only includes frictional and structural unemployment • Causes for Unemployment • Unemployment Insurance (UI): A government program that partially protects workers’  incomes when they become unemployed • Not entirely simple, as it allows people to focus on searching for a job • May lead to people not working as hard to find a new job, thus increasing frictional  unemployment • Benefits of UI • Reduces uncertainty of incomes, thus allowing employees to find a better job match  and have higher lifetime earnings and higher productivity • Employees oft have families as well, so this may be necessary to preserve them • Structural unemployment • Structural unemployment occurs when not enough jobs go around • Occurs when wages are kept above equilibrium • Reasons for wages above equilibrium • Minimum wage laws, but this does not significantly impact unemployment • Unions, which have both benefits and costs with regard to unemployment • Efficient Wage Theory: If the wage is higher than equilibrium, the space between  supply and demand curves for labour will represent unemployment • This situation benefits employers because… • Larger pool of workers to choose from • Incentive for workers to work harder, as their high wages make job loss more  painful • The above principles have been proven to hold true in many situations • Wisconsin dairy firms are paying very high wages in part because training new  workers is very expensive • Paying highly and treating employees well leads to more consistent, higher quality  due to worker motivation (coffee plantation) • Employment and Unemployment • Full Employment: zero cyclical unemployment • Overall unemployment will be greater than zero however, as a result of other forms  of unemployment • Potential Output (estimate): Level of output the economy could produce if operating at full employment • Represented by the very edge of the production possibilities frontier • Data comparing potential and actual output can be found online • Costs of Unemployment • Opportunity cost of lost output, and similarly less output as a result of output being  lower than the potential (see above) • Loss of human capital, lost skills • Some groups within society consume less output • Problems in Measuring Unemployment • Discouraged Workers: Unemployment goes down as workers give up on finding a job • There have been situations in which both employment and unemployment rose, as  workers ceased to be discouraged • On the other hand, both have dropped at the same time as workers became more  discouraged • Defined as: • Not working • Was searching for work within the past 12 months • Wants work, but does not search due to a belief that a job cannot be found • Part time work counts as employed even though it is suboptimal employment • Attached to labour force, some misrepresent themselves • Unemployment rate is imperfect, but still a “very useful barometer” of how the economy  and labour market is doing • Alternate Measure of Employment Conditions • The Establishment Survey • BLS surveys business establishments to measure added or lost jobs


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