ECON 1012 Lecture 4: Econ Lecture 4

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8 Feb 2017
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Principles of Economics II, Lecture 4 1/26/17
Unemployment and Full Employment
Full Employment
Defined as the situation in which the unemployment rate equals the natural
unemployment rate
No cyclical unemployment just frictional and structural
Natural unemployment rate changes over time and is influenced by many factors
The age distribution of the population
The scale of structural change
The real wage rate
Unemployment benefits
Real GD and Unemployment Over the Cycle
POTENTIAL GDP- is the quantity of real GDP produced at full employment
o Corresponds to the capacity of the economy to produce output on a sustained
basis
Real GDP minus Potential GDP = OUTPUT GAP
o Fluctuates and the unemployment rate fluctuates around natural unemployment
rate
Price Level, Inflation and Deflation
PRICE LEVEL- the average level of prices and value of money
Persistently rising price level is inflation, falling- deflation
We can use price level to measure inflation rate or deflation rate
Distinguish between money values and real values of economic variables
Why Inflation and Deflation are problems
o Low, steady and anticipated inflation or deflation is not a problem
o Unpredictable is a problem
Redistributes income and wealth
Lowers real GDP and employment
Diverts resources from production
o High inflation rate is a problem because it diverts resources from productive
activities to inflation forecasting
o HYPERINFLATION- an inflation rate that is so rapid that workers are paid twice a
day because money loses its value so quickly
CONSUMER PRICE INDEX, CPI- measures average of the prices paid by urban
consumers for a fixed basket of consumer goods and services
o Defined to = 100 for the reference base period
o Constructing CPI
Select the CPI baskets
Conduct monthly rice survey
Calculating the CPI
o Calculating CPI
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