ECON 101 Lecture Notes - Lecture 1: Gdp Deflator, Potential Output, Final Good
Economics 101
Lori Leachman
Part 1 ā¢ Lecture
ā¢ Production Possibilities Curve PPC: all possible combos of goods & services an economy can produce if
all resources are fully and efficiently employed - represents potential GDP
o Anywhere on curve is at full employment, potential GDP
o Anywhere inside PPC represents unemployed resources, inefficiency
o Anywhere on PPC closer (heavily loaded) towards consumer goods, signals inflation
o Anywhere on PPC closer (heavily loaded) towards capital goods, signal future growth (capital
accumulation)
o Anywhere outside PPC represents trading (consuming outside of PPC), only attainable
through growth, PPC shifts out... can also push full capital utilization (not good)
ā¢ Marginal Cost increases as economy specializes towards a product - no economy produces only one
product - no complete specialization
ā¢ Goal 1#: EMPLOYMENT
o Employment Types
āŖ Full Employment: unemployment rate less than or equal to rate of frictional
unemployment (~4%)
āŖ Frictional Unemployment: people out of work bc entering job force (college students)
or quit job and looking for new one (~4%)
āŖ Structural Unemployment: out of work bc they lack the necessary skills to take jobs
available
āŖ Cyclical Unemployment: out of work because of downturn in business cycle; in a
recession
āŖ Seasonal Unemployment: out of work due to the seasonal nature of work (farmers... etc)
o Discretionary Policy: only addresses cyclical unemployment (you do not want to reduce
frictional unemployment (keep competitive market) and need other policy for structural
unemployment)
o Unemployment Measures:
āŖ U3 rate = % of non-institutionalized labor force (not in jail...etc), 16-64 age range,
includes military
ā¢ Must be out of work and actively looking
ā¢ Part time counted as full time (even just one hour)
āŖ U5 rate includes discouraged workers (not included in labor force), around ~7.9%
āŖ U6 rate includes discouraged workers (U5) and part-timers who want to work full time
(better representation) - around 8.2%
āŖ Calculate the rate:
ā¢ U3 rate = average duration (average num of weeks unemployed) x % of
people out of work & actively looking (monthly survey sample)
ā¢ If change in U3 due to change in duration => structural employment
o Problem in market clearing & matching
ā¢ If change in U3 due to change in average number of workers => cyclical
unemployment
o Discretionary policy is useful here, unlike before
āŖ Unemployment rate does not consider demographic, region, gender information in these
rates
o Why unemployment matters
āŖ Mortality - higher unemployment leads to higher mortality
ā¢ High correlation - deaths of despair
āŖ Higher divorce rates, sexual/spouse abuse
āŖ Waste of human resources - lower GDP
āŖ Self perpetuating joblessness - younger people not gaining skills/confidence - atrophy...
taking menial jobs
āŖ Political costs - election turnover & government turnover (protests, rebellions...etc)
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