PPT--Ch07-FA2018.ppt - Unemployment Inflation and Long-Run...

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CHAPTER OUTLINE PPT-Ch_07 Unemployment, Inflation, and Long-Run Growth The Consumer Price Index and Inflation The Consumer Price Index and Inflation Rate The Costs of Inflation Unemployment Measuring Unemployment and Other Labor Statistics Types of Unemployment Rate The Costs of Unemployment Looking Ahead
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Readings 1. PPT_Ch_07 2. DOC_Ch_07 3. Case, Fair, Oster – Chapter 7
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Recall: Keeping prices under control is a very important macroeconomic Objective. Inflation is an increase in the overall price level (P). It happens when most prices increase simultaneously. Deflation is a decrease in the overall price level (P). Inflation / Deflation is measured as %ΔP (Percentage change in Overall Price level) But, how to measure P=Overall Price Level ? See next
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Price Indexes (Averages of ALL Prices) Price indexes are used to measure overall price level and Inflation. Two types of Price Indexes : GDP Deflator : is the price index that measure the overall price of all goods and services produced in the economy (we studied GDP Deflator in the last chapter) Consumer Price Index (CPI ) is the price index that measure the overall price of a “market basket” purchased monthly by a typical consumer (It is computed each month by the Bureau of Labor Statistics= ( BLS)
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The CPI market basket shows how a typical consumer divides his or her money among various goods and services. Most of a consumer’s money goes toward housing, transportation, and food & beverages. The Market Basket for a Typical Consumer
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Calculate CPI and Inflation Rate -- FIVE Steps -- 1. Fix the “basket.” (Determine the Quantities in the basket) The Bureau of Labor Statistics ( BLS ) surveys consumers to determine what’s in the typical consumer’s “ Market Basket ”. 2. Find the Prices . BLS collects data on the prices of the goods in the basket. 3. Compute the basket’s cost. Use determined Quantities and prices to compute the Cost of The Basket.
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Calculate CPI and Inflation Rate -- FIVE Steps -- 4. Choose a Base Year and compute the CPI in any year: 5. Calculate the Inflation Rate = %ΔP in That Year in Year BASE Cost of Basket 100 Cost of Basket In a year In a year In a year CPI P CPI in That Year in Previous Year in Previous Year P - P Infl Rate 100 P In a year
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Calculate CPI and Inflation Rate -- FIVE Steps –
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EXAMPLE Market Basket: { 4 pizzas, 10 lattes } $12 x 4 + $3 x 10 = $78 $11 x 4 + $2.5 x 10 = $69 $10 x 4 + $2 x 10 = $60 Cost of Basket $3.00 $2.50 $2.00 price of latte $12 2005 $11 2004 $10 2003 price of pizza year Compute CPI in each year (BASE Year = 2003): 2003: 100 x ($60/$60) = 100 2004: 100 x ($69/$60) = 115 2005: 100 x ($78/$60) = 130 15% 13% Inflation rate:
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A C T I V E L E L E A R N I N G G 1 1 : Calculate the CPI Calculate the CPI 10 The basket contains: 20 movie tickets 10 textbooks. The table shows their Prices for 2004-2006. The Base Year is 2004 A.
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