is the ratio of the current cost of that market basket to the cost in a base year, multiplied by 100 o o The inflation rate is the yearly percentage change in a price index, typically based on the Consumer Price Index , or CPI, the most common measure of the aggregate price level The CPI measures the cost of the market basket of a typical urban American family o 8
o Chained dollars is the method of calculating changes in the CPI using the average between the growth rate calculated using an early base year and the growth rate calculated using a late base year Other Price Measures A similar index to CPI for goods purchased by firms is the producer price index Economists also use the GDP deflator , measures the price level by calculating the ratio of nominal GDP to real GDP The GDP deflator for a given year is 100x the ratio of nominal GDP to real GDP in that year CH. 9 UNEMPLOYMENT AND INFLATION Unemployment Rate Employment : number of people currently employed in the economy, full time or part time Unemployment : number of people who are actively looking for work but aren’t currently employed Labor force : Employment + Unemployment Labor Force Participation Rate : the percentage of the population aged 16 or older that’s in the labor force o Unemployment Rate : the percentage of the total number of people in the labor force who are unemployed o Discouraged workers : nonworking people who are capable of working but have given up looking for a job b/c of the state of the job market Marginally attached workers : would like to be employed and have looked for a job in the recent past but are not currently looking for work Underemployment : number of people who work part time because they cannot find full-time jobs The Nature of Unemployment Workers who spend time looking for employment are engaged in job search Frictional Unemployment is unemployment due to the time workers spend in job search The rates of job creation and destruction will determine this o Lots of people being fired – more searchers at any one time o Lots of firms hiring Structural unemployment : is unemployment that results when there are more people seeking jobs in a labor market than there are jobs available at the current wage o Can be due to skill-mismatch o New vs. Old industries o Institutions of the Labor market Like worker protections Unemployment insurance Minimum wage Whatever is left over is Cyclical Unemployment o That’s unemployment that is due to recession/boom 9
o Not necessarily a healthy thing for an economy: this is what we’d like to get rid of Minimum wage : a government-mandated floor on the price of labor Unions : by bargaining all a firm’s workers collectively, unions can often win higher wages from employers than the market would have otherwise provided when workers bargained individually Efficiency wages : wages that employers set above the equilibrium wage rate as an incentive for better performance Side effects of government policies
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