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Week 4 Lecture Notes

by: Kayla Notetaker

Week 4 Lecture Notes Econ 253-101

Marketplace > Marshall University > Economcs > Econ 253-101 > Week 4 Lecture Notes
Kayla Notetaker
GPA 4.0
Principles of Macroeconomics
Dr. Yuanyuan (Catherine) Chen

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About this Document

The continuation of Chapter 9 notes from Dr. Chen's lectures. Discusses wage laws and how they affect the unemployment rate. These notes also provides sample calculations for CPI and Inflation ra...
Principles of Macroeconomics
Dr. Yuanyuan (Catherine) Chen
Class Notes
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This 3 page Class Notes was uploaded by Kayla Notetaker on Wednesday September 16, 2015. The Class Notes belongs to Econ 253-101 at Marshall University taught by Dr. Yuanyuan (Catherine) Chen in Fall 2015. Since its upload, it has received 65 views. For similar materials see Principles of Macroeconomics in Economcs at Marshall University.


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Date Created: 09/16/15
Macroeconomics 253 1 Chapter 9 Continued Explaining Unemployment 0 Individuals who are unemployed are eligible for unemployment insurance aid received while they search for a new job 0 This aid is usually equal to about half 12 of their previous wage and lasts for six months 0 This payment helps the unemployed maintain income and spending habits as well as reduces the harshness of recession 0 Also elevates the unemployment rate Minimum Wage Laws 0 Government enacted a Minimum Wage law in 1938 o 1938025 an hour 0 2013725 an hour 0 If minimum wage is set above the market wage wage determined by supply and demand of labor the quantity of labor supplied will be greater than the quantity of labor demanded This means there will be more people searching for fewer jobs 0 A study shows that teen employment drops as minimum wage increases employers hire less workers to compensate for the higher wages 200 mil Unemployed SL Workers Gov Minimum Wage 30hr quotquotquot 39 I I Market wage 20hr I l I I I I I I DL Jobs I I I I 400 mil 500 mil 600 mil 0 Labor Unions 0 Organizations of workers who bargain with their employers for better wages and better working conditions 0 Because their wage is usually above market wage there are fewer people hired 0 Most industries are not unionized so the effects on employment are minimal 0 Efficiency Wages 0 Above the market wage used to motivate employees hoping that motivated workers means higher productivity 0 Again is an above the market wage so it also has a hand in unemployment Measuring In ation o The continuous rise of the cost of living Price Level measure of the average prices of goods and services in the economy In ation Rate the percentage increase in the price level from one year to the next De ation Rate the percentage decrease in price level from one year to the next Consumer Price Index CPI Macroeconomics 253 2 0 The average prices of goods and services bought measured in terms of goods and services consumed by a typical urban HH of four 0 Calculating CPI 0 First calculate individual eXpenditures Base Year of 1995 2013 2014 Product Q P E P X Q P E P2013 X Q1995 P E P2014 X Q1995 Baseball Tickets 1 55 55 60 60 85 85 Hamburgers 25 3 75 5 125 450 11250 Notebooks 15 5 75 650 9750 6 90 TOTAL 205 28250 28750 V J Measured in Base Year Quantities 0 Second find the CPI Current Year CPI Formula CPI of the Current Year ECY divided by EBY X 100 So if we wanted to find the CPI for 2013 the formula would be 28250 X 100 205 Similarly if we wanted the CPI for 2014 28750 x 100 140 205 138 In ation Rate H 0 To Calculate in ation rate you use the CPIs you calculated above CPITz CPIT1 x 100 CPIT1 0 So to find the in ation rate from 2014 to 2015 140 138 1 3 8 Is CPI Accurate There are four biases that eXist and make the CPI overstate the in ation rate x 145 increase in the cost of living Macroeconomics 253 3 Substitution bias the BLS assumes that consumers purchase the same products and same amounts monthly but consumers actually buy fewer of the products as they increase the most in price and more of a product that increases the least in price Increase in Quality bias happens overtime as current products improve in quality Products may rise in price as a result of their raised quality BLS attempts to make adjustments so only the pure in ation part of the raised prices is included in the CPI It is hard to know exactly the price of true in ation so this usually gets overstated New Product bias BLS updates the market basket of good every ten years new products introduced between those years do not get included For instance technology comes out and its prices decline rapidly after their release These decreases in prices usually are not included in the CPI because they happen before the next update Outlet bias the BLS collects price statistics from fullpriced retail stores and does not take into account discount stores and online shopping These biases can lead the in ation rate astray from 05 to 1 Steps have been taken to reduce the size of the bias For example the BLS has started updating the market basket every two years rather than ten reducing the New Product Bias Producer Price Index PPI 0 Tracks the prices received by firms as they sell goods and services 0 This includes the prices of raw material and intermediate goods 0 PPI also can show any signs of potential changes in the CPI Using Price Indexes to Adjust for In ation 0 Sometimes we are interested in tracking changes in economic variables overtime rather than in dollar amounts 0 To correct for the effects of in ation we can divide nominal variable by price index and multiply by 100 to obtain the real variable Example Value in 2009 Value in 1985 x CPI 2009CPI 1985 Year Price Value CPI 1985 V2 50 2009 V1 30 100 So if VT2 VT1x CPI 2009CPI 1985 then P1985 30 x 501985 1002009 Interest Rate P1985 V2 15 0 The cost of borrowing moneyfunds expressed as a percentage of the amount that was borrowed O 0 Nominal Interest Rate stated rate on a loan Bank loan etc Real Interest Rate Nominal interest rate minus In ation rate I This is an approximation for real interest rate provides a better measure of cost of borrowing In ation De ation Real Nominal Interest Rate gt 0 Real Nominal Interest Rate lt 0 Real lt Nominal Real gt Nominal


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