GDPUNEMPLOYMEN TINFLATION INFLATION Inflation is a general increase

GDP/UNEMPLOYMEN T/INFLATION

INFLATION Inflation is a general increase in price levels that reduces purchasing power–it means a dollar buys fewer things Today gas is $3. 23 a gallon. In 1955 gas was 29 cents a gallon. In 1955 $1 bought 3. 45 gallons of gas. Today $1 buys only. 31 gallons of gas.

HOW IS INFLATION MEASURED? ONE WAY IS THE CONSUMER PRICE INDEX (CPI) CPI is a measure of the average change over time in the prices paid by consumers for a market basket of consumer goods and services

WHAT ITEMS MAKE UP THE CPI BASKET OF GOODS? FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks) HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture) APPAREL (men's shirts and sweaters, women's dresses, jewelry) TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance) MEDICAL CARE (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services) RECREATION (televisions, toys, pets and pet products, sports equipment, admissions); EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories); OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses).

HOW ARE THE PRICE CHANGES DETERMINED? Each month data collectors visit or call thousands of retail stores, doctor’s offices, service establishments, to obtain the price of about 80, 000 items Consumer Good Quantity in market Unit price 2013 Unit price 2014 Swiss Cheese 20 lbs $5. 00 $6. 00 Inline Skates 1 pair $30. 00 $35. 00 Aspirin 10 bottles $4. 00 $5. 50 Cost of basket in 2013 Cost of basket in 2014 $_______ $_____

THREE CAUSES OF INFLATION 1. Quantity theory: Too much money in the economy chasing too few goods 2. Demand Pull (Demand side): Demand for goods and services exceeds supply Growing economy: people spending more money Expectation of Inflation: Buy now before inflation hits Discretionary spending: Government military spending raises prices for military equipment Strong brand: Good Marketing Technological Innovations: I-Phone, Credit Default Swaps

3. Cost Push (Supply-side): Producers raise prices to meet increased costs for labor/raw materials. Happens with inelastic products. Monopoly/Oligopoly: OPEC and Oil/Gasoline Wage Inflation: An increase in wage demand forces firms to raise prices to cover cost of production. Natural Disasters/ Lack of Resources: Driven by Scarcity. Ex: Japanese earthquake/auto parts, Hurricane Katrina/Gas prices Government Regulation and Taxation: Government regulations can reduce the supply of certain products. Ex: Sin Taxes, Subsidies

AFFECTS OF INFLATION Reduces purchasing power People on fixed incomes, such as social security, unemployment, and investment proceeds (CD’s, preferred stock dividends, Treasury bonds) are negatively effected. The greater the inflation rate, interest earned on savings loses value – can buy less with the money you have If you have a long-term contract - eats up profits over time.

HYPERINFLATION Inflation that exceeds 50% per month The value of money decreases quickly CAUSES: Government needs to pay for government services but does not want to raise taxes, so they print more money People immediately convert money to goods and services because they are worth more

EXAMPLES OF HYPERINFLATION U. S. (1918): 20. 4% - booming economy after WWI Germany (1921 -23): 29, 500% monthly inflation. 4. 2 trillion Marks = 1 USD. Economic crisis helped rise Hitler to power Greece (1941 -44): 13, 800% peak in 1944, with daily inflation at 20. 9% Hungary (1945 -46): 207% daily inflation. 100 Quintillion denominations were used Yugoslavia (1989 -94): 313, 000% monthly and 64. 6% daily inflation. Zimbabwe (2000 – 09): 516 quintillion % inflation per month.

WHY IS 2% INFLATION Course Economics—Inflation (8 min) CONSIDERED Crash OKAY? • It guards against deflation

DEFLATION SOUNDS GREAT! RIGHT? Deflation is a decrease in the price level, or average level of prices Unfortunately not all prices fall at the same time Deflations leads to firms going out of business and people getting laid off One minute video on deflation

REAL GROSS DOMESTIC PRODUCT (GDP) Doesn’t inflation skew GDP?

NOMINAL GDP VS REAL GDP

WHICH IS A BETTER MEASURE OF ECONOMIC WELL-BEING—REAL GDP OR NOMINAL GDP? WHY? Real GDP is the production of goods and services valued at constant prices Nominal GDP is the production of goods and services valued at that year’s prices Real GDP is a better measure of economic well-being because changes in real GDP reflect changes in the amount of output being produced Thus, a rise in real GDP means people have produced more goods and services, but a rise in nominal GDP could occur either because of increased production or because of higher prices.

NOMINAL GDP VS. REAL GDP Year Price of ice Quantity of Nominal cream ice cream GDP produced Real GDP 2010 $5. 00 15, 000 75, 000 30, 000 2011 $7. 00 12, 000 84, 000 24, 000 Assume you live in an economy that only produces ice cream. Fill in the missing numbers on the table. In 2006, the base year, the price of ice cream was $2. 00 In what year was nominal GDP highest? In what year was real GDP highest? What would real GDP be in 2011 if 2010 was the base year? 60, 000

GDP Growth is not a Straight Line

WHAT ARE THE LITTLE UPS AND DOWNS ALONG THE GDP GRAPH? BUSINESS CYCLES Business cycles– a model representing the nation’s economic activity and strength It shows the ups and downs in real GDP

TYPES OF UNEMPLOYMENT

UNEMPLOYMENT Unemployment is a major indicator of the health of our economy GDP = C + I + G + Nx Which is the biggest piece of GDP? Consumption--We need people working/producing and spending!

HOW IS THE UNEMPLOYMENT RATE CALCULATED? The Bureau of Labor Statistics surveys 60, 000 households every month and asks a series of questions: How many people are over the age of 16? How many people have worked in the past week? Of those who haven’t worked, how many have actively looked for a job in the past 4 weeks?

Problems With The Official Unemployment Numbers TO BE “UNEMPLOYED” YOU MUST Have been actively looking for work during the past 4 weeks Not be working at any job—even part-time To be in the labor force, you must be either: • Employed Or • Unemployed

FULL EMPLOYMENT Even in an economy that is working properly, economists expect some unemployment. An unemployment rate of 4% or lower is considered full employment. However, some people with jobs could be underemployed (they work part-time but want full) Idaho unemployment rate: July 2008: 4. 1% March 2015: 3. 9% U. S. unemployment rate: July 2008: 5. 7% March 2015: 5. 5% August 2019 2. 9%

KEY TERMS OF EMPLOYMENT AND UNEMPLOYMENT • The labor force participation rate is the percentage of the population that is either employed or unemployed • People who have jobs are employed • People who are jobless, looking for a job, and available to work are unemployed • The labor force is made up of the employed and unemployed looking for work • People who are not employed or unemployed not looking for work are not in the labor force

RE-CAP

READY FOR YOUR BUSINESS CYCLE QUIZ? The economy is functioning at its maximum in which phase of the business cycle? a) Recovery b) Peak c) Recession d) Trough

READY FOR YOUR BUSINESS CYCLE QUIZ? What is the term to describe fluctuations that occur in economies? a) Aggregate demand b) Aggregate supply c) Business cycles d) Government regulations

READY FOR YOUR BUSINESS CYCLE QUIZ? In which phase of the business cycle are output and employment at their lowest levels? a) Recovery b) Peak c) Recession d) Trough

READY FOR YOUR BUSINESS CYCLE QUIZ? What is the phase of the business cycle where output and employment levels begin to rise a) Recovery b) Peak c) Recession d) Trough

READY FOR YOUR BUSINESS CYCLE QUIZ? Why have business cycles not been as severe since the Great Depression? a) Businesses have invested more b) Government safeguards and balances have been implemented c) Consumer confidence has been greater d) Government spending has increased

Game Show: Are You Unemployed?

Employed, unemployed, or not in the labor force? 1. Steve worked 40 hours last week in a music supply store.

Employed, unemployed, or not in the labor force? 2. Last week, Elizabeth worked 10 hours as a computer programmer for the National Video Company and attended night classes at the local college. She would prefer a full-time job.

Employed, unemployed, or not in the labor force? 3. Two weeks ago, Roger was fired from his job at Kentucky Fried Chicken. Since then he has been trying to find a job at local factories.

Employed, unemployed, or not in the labor force? 4. Linda is a homemaker. Last week she was occupied with her normal household chores.

Employed, unemployed, or not in the labor force? 4. Shelly has a degree in Chemical Engineering, but works at Starbucks while she searches for a better job.

Employed, unemployed, or not in the labor force? 5. Linda’s father developed dementia and is unable to work.

TYPES OF UNEMPLOYMENT

FRICTIONAL UNEMPLOYMENT People take time to find a job Get laid off, take time to find right job Graduate from high school or college Looking for a new job Left job to take care of a parent, coming back

SEASONAL UNEMPLOYMENT Unemployment that occurs as a result of harvest schedules or vacations Industries slow down or shut down due to cold weather Summer Job – Water Park Winter Jobs - Bogus

STRUCTURAL UNEMPLOYMENT Worker’s skills do not match the jobs that are available Need skills to success Move from farming to manufacturing Manufacturing to service Takes time to retrain

CYCLICAL UNEMPLOYMENT In economic downturns people are laid off because there is a surplus of inventories and no demand