Note for ECON 104 with Professor Staihr at KU
Note for ECON 104 with Professor Staihr at KU
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ECON 104 EXAM 2 STUDY GUIDE CHAPTERS 1314 CHAPTER 13 UNEMPLOYMENT AND INFLATION Unemployment current rate aka U3 79 calculated monthly by the Bureau of Labor Statistics BLS they calculate it through surveys ofAmerican workers What 79 Represents the percentage of the labor force that is employed NOT the percentage ofthe population that is unemployed According to the BLS you are 1 Employed 2 Have looked for work in the past 4 weeks OR 3 Not in the labor force Labor Force employed people AND people who have sought employment within the past 4 weeks NOT in the labor force retired people housewives anyone under 16 doing odd jobs for money those who are not actively seeking employment fulltime students that don39t work current amount 89 million people 4 TYPES OF UNEMPLOYMENT 1Seasonal certain jobs39 demand for labor is seasonal lifeguarding teaching etc so it39s natural to see unemployment at times from these industries 2Frictional at any point in time some people are looking for jobs and some firms are looking for employees in a uid labor market matching workers with jobs takes time 3Structural most controversial a mismatch between workers and the skills and or requirements ofthe job as the economy changes we produce different goods and services people who were employed in a now outdated industry lose jobs 4Cyclical ofthe four this is the only that IS a problem unemployment caused by a recession simply a case oftoo few jobs around insufficient demand for goods and services creates this insufficient demand for labor NOTE structural frictional and seasonal make up 56 ofthe natural rate of unemployment Full employment also known as the right amountquot of unemployment 0 unemployment would actually cause problems full employment is the targeted rate of unemployment or the natural ratequot of unemployment it is about 56 Statistics Employed 1433 million people Looked in the past 4 weeks 123 million people NOT in the labor force 89 million people the quotrightquot amount of unemployment is about 56 Formula for Unemployment Rate U3 Unemployed divided by labor force then multiplied by 100 Example unemployed 123 million employed 1433 million and looked in the past 4 weeks123 million unemployed and actively looking are the same thing in the labor force SO 123 divided by 1433 123 0079 take 0079 and multiply by 100 to get the current unemployment rate answer is 79 Education Unemployment Rates overall79 high school 81 some college 70 college degree 37 0THER MEASUREMENTS marginally attached 24 million people have looked for work within the past year discouraged workers 804000 people included in marginally attached people who39ve given up looking because they believe there aren39t any jobs available parttime workers for economic reasons 8 million people these are included amongst employed people U3 vs U6 U3 79 is the standard measure reported by BLS U6 144 is a broader measure that some feel gives a more accurate picture of unemployment it includes marginal and part time U6 Formula unemployedmarginallyattachedparttime for econ reasons divided by labor forcemarginally attached then multiply the result by 100 those who cannot be in labor force under 16 in prison or hospital military NOTE everyone else could be included ifthey wanted ofthe 2447 million who qualify only 1556 million are in the labor force Labor Force Participation Rate Formula labor force divided by who could be in the labor force then multiply the result by 100 current rate is 636 this is decreasing because of changes in the work place USA has never had rate higher than 70 participation peaked in 2000 social factors can in uence participation Why unemployment exists there39s a supply and demand curve for employment WAGES ABOVE MARKET AVERAGE ef ciency wages wages that exceed market wage to keep workers happy productive and efficient union wages membership has decreased a lot over past 50 years today only 113 oflabor force is part ofa union minimum wage ifbelow market wage it39s NOT causing unemployment it39s a government tool to ensure economic wellbeing to citizens with few skills having a higher minimum wage does not equal higher unemployment Why we have unemployment we39re paying people not to work we pay people unemployment insurance to keep money owing in the economy each person who39s unemployed has nothing to contribute so the unemployment insurance allows people to be able to keep their money owing through the system SOME longterm unemployment is caused by government intervention NEXT TOPIC INFLATION in ation continual rise in the overall price level de ation is the opposite we generally see in ation not de ation it can be measured with the GDP De ator OR Consumer Price Index Consumer Price Index CPI calculated by BLS part of the Department of Labor measures how prices change over time implements costofliving adjustments for paychecks social security etc CPI in the base year is always 100 current base year is 1983 CPI for December is 230 CPI has increased by 17 in the last year Market basket what CPI measures the price of things that average Americans buy Top 3 1 Housing42 2 Transportation 17 3 Foodbeverages 15 the market basket is weighed to re ect the portion ofpeople39s income spent on each type of thing Calculating CPI add prices of current year add prices ofbase year divide added prices of CURRENT year by added prices of BASE YEAR then multiply the result by 100 Billion Prices Project tracks five million online prices daily online sales are not accounted for in CPI which understates the measurement BPP found de ation 56 days before CPI did in the year 2000 3 Flaws of CPI 1Quali ty Bias sometimes misses the changes in the quality ofa product this can cause CPI to over or understate the impact ofa price change on consumers 2 Substitution Bias a fixed market basket ofgoods doesn39t include all products meaning ifthe price of Diet Coke goes up and people buy more pepsi CPI says people are spending more BUT in reality they aren39t this can cause the CPI to OVERSTATE the impact of price changes on consumers this bias only works in ONE direction 3New Product Bias fixed market basket doesn39t include NEW products often new products start out highpriced and then decline this means that the price decreases may not be captured in CPI can cause the CPI to OVERSTATE the impact on consumers this bias only works in ONE direction Interest Rates some you pay car or house loan some you receive interest from your savings account Nominal interest rate the stated rate ofinterest on a loan or financial asset current nominal interest rate is 57 nominal wages are what you get paid Real interest rate takes in ation into account and is therefore adjusted real interest ratenominal interest rate minus in ation rate current INFLATION rate is 17 SO let39s calculate the REAL interest rate we know from above that the nominal rate 57 and the in ation17 plug the numbers into the formula so REAL INTEREST RATE5717 thus the current real interest rate is about 4 NEXT TOPIC ECONOMIC GROWTH WE WANT GDP TO GROW Longrun economic growth the process by which rising productivity increase the standard ofliving What makes GDP grow 1 Natural Resources access to oil gold etc 2 Labor supply the more workers you have the more you can produce 3 MOST IMPORTANTLY labor productivity the quantity of goods and services that can be produced by one worker or by one unit one hour ofwork Production depends on your 39tools39 CAPITAL capital is tools equipment etc capital makes labor MORE productive and increased labor production means GDP GROWTH SO access to CAPITAL is the KEY to GDP growth NEXT TOPIC THE BUSINESS CYCLE Business Cycle definition alternating periods of economic expansion and recession The Business Cycle of Real GDP 1expansion phase production employment and income are increasing 2 expansion phase ends at the business cycle peak GDP stops growing 3recession phase following the peak production employment and income decrease 4 recession phase ends at the business cycle troughGDP stops declining 5 then another expansion phase begins and the cycle repeats over and over National Bureau of Economic Research NBER decides business cycles definesrecession as a significant decline in activity spread across the economy lasting more than a few months visible in industrial production employment real income and wholesaleretail trade THE LENGTH OF A RECESSIONTHE NUMBER OF MONTHS FROM THE PEAK TO THE TROUGH What causes Business Cycles in 1800s economist William Stanly evons theorized that sunspots caused business cycles Three SHOCKS that caused business cycles 1 in 1973 OPEC countries raised the price of oil quickly 2 Information technology revolution 3 Housing bubble followed by financial markets Three facts during the business cycle 1unemployment will go UP during a recession and continue to INCREASE during the expansion 2 DURABLE goods are affected much more than nondurable goods 3 In ation rate DECLINES during the RECESSION period BUT that is NOT THE SAME THING as price declining Market for Loanable Funds definition interaction ofborrowers and lenders that determines the market interest rate and the quantity ofloanable funds exchanged Demand is determined by the Willingness offirms to borrow money to engage in new investment projects Supply is determined by the Willingness of households to save AND by the extent ofgovernment saving or dissaving aka budget deficit udgetdefecit when the government spends more than it collects on taxes