Answers to Unemployment Quiz

1. a
2. d
3. e
4. b
5.  c
6. d
7. a
8. d
9. b
10. d
11. b
12. d
13. c
14. d
15. c
16. e
17. a
18. c
19. d
20. e

Consumer Price Index Notes

CPI

Assume that in the “base year” (2006) the total expenditures were

  $48,398 for a family of four.

48,398

48,398  = 1 (rate of change).  1 x 100 = CPI of 100

Then, the 2007 total expenditures for the family were $48,898

48,898

48,398 = 1.01 (rate of change).  CPI = 101

Therefore:  Inflation would be =

101 – 100            1           

     100       =    100    =  .01 (x 100) = 1% inflation for the year

Example:

College Tuition for me versus you:

Mine  =  approx  $  1,200 a year

Yours =  approx $ 12,000 a year

12,000 – 1,200          10,800

        1,200          =      1,200      = 9 (rate of change) x 100 = 900%

                                                                                              Inflation

Tuition for your children

x – 12,000

   12,000     = 9 (rate), = x-12000 = 108,000, x = $120,000 a year

Consumer Price Indexing

Changes in Values over Time:  Data comes from the Bureau of Labor Statistics

• Assume that most of your parents were in high school in 1982.  This was 29 years ago. 
• Assume that inflation rates from the past will be the same the equivalent time period into the future.
• Assume your children will graduate from high school in 2040.  This assumes that you marry in the next decade or so and start a family, the same as your parents did in the past.  This is 29 years into the future. 
• Assume that you were born in 1993 or 1994.  If you were born in another year, use the data from 1993.
• Calculate the problems below to 2 decimal points.

Year	CPI for that year (Index year was 1983)
1982	99
1993	144
1994	148
2011	225
2040	???

1. What has been the rate of change since your parents graduated HS?
2. What has been the inflation % since your parents graduated HS?
3. What will your kids earn in minimum wage during their senior year in HS?  Use the current wage as $7.25.
4. What will your kids pay at a gas station for a gallon of gas during their Senior year?  Assume the current price is $3.40.
5. What will your child earn as a first year teacher after graduating college?  Assume the current Texas teacher starting salary is $42,000.
6. What will a house cost your newly graduated (from college) child.  Assume the current average house cost is $200,000.
7. What will a car cost your newly graduated child.  Assume a $25,000 car.
8. What will you be expected to help pay for your high school graduates first year of college when they enter college in the fall of 2040.  Assume the total current costs of college are about $15,000 a year. 
9. What will the CPI be in 2040?
10. (This is a typical AP question, answer without a calculator):  If a selected year’s CPI is 300, what is the inflation % change from the Index Year?

Inflation Notes

Inflation and Changes over Time

Terms and Concepts to Cover:

  Inflation Rate

  Inflation Percentage

  Calculating Inflation (Year Later minus Year Earlier)

                                            Year Earlier                          = Rate x 100)

  Index Year = 100

  CPI

  CPI Changes (Index Year 2 minus Index Year 1)

                                 Index Year 1                                 = Rate  x 100)

  GDP Deflator

  Nominal Interest

  Real Interest (Nominal Interest Rate minus Inflation = Real Interest)

  Stagflation

  Rule of 70

  Anticipated Inflation

  Demand Pull Inflation

  Cost Push Inflation

  Deflation

  Disinflation

  Economic “Norms”

 

Inflation

Demand Pull Inflation

Too many consumers chasing too few goods (can be normal)

Excessive spending out of fear of future inflation

Too few unemployed and wage inflation due to competition

Cost Push Inflation

Natural disasters cut supply

Political actions like boycotts cut the supply (OPEC 1973, 1979)

Natural reduction of resources with no new discoveries

Political Inflation

Governments printing too much currency to cover debts…

Examples:

Continental Dollars of the 1770’s and 1780’s

Germany of the early 1920’s

Zimbabwe Civil War 2008 to 2011

Inflation “Helps”:

Those who pay back loans at a fixed interest rate

Inflation “Hurts”:

Those who lend money at a fixed interest rate

Those saving money at fixed rate interest rate returns

Those on any long term fixed level of income

Those trying to hire workers and keep costs under control

Those trying to plan future business projects and project costs

Economic Norms:

Unemployment =	4 to 5 % (post 1980 in the USA)
Inflation =	2 to 3 % per year (“Anticipated Inflation”)

Misery Index = Unemployment and Inflation Rates Together:

Acceptable Misery	6 to 8
Excessive Misery	Any double digit number

Why is Unemployment Bad?

Not enough Consumption (GDP)

Too much poverty...

Too much government assistance needed.

Why is Unemployment Good?

More workers available for future expansions.

Less pressure to raise wages.

Why is Inflation Bad?

Loss of real wages

Loss of real wealth

Loss of the value of savings

Loss of the value of fixed income

Panic buying

Loss of the value of currencies

Loss of the incentive to take financial risks

Loss of the incentive to hire

Why is Inflation Good?

If you owe money, you pay back cheaper money

BECAUSE Unemployment hurts the unemployed, but Inflation hurts

everyone, always assume that government policies should focus on controlling inflation FIRST. 

Economic Norms

GDP growth (real):

          2 to 3% per year is considered manageable growth.

          Negative GDP change is officially a “recession”.

          1 to 2% growth is considered weak.

          Over 4% probably puts too much inflation pressure on

                   the economy.

Unemployment %:

          4 to 5% per year seems to be attainable (at least since

                   the 1990’s).

          Over 5% unemployment seems linked to recessions.

          Under 4% appears to cause worker shortages and

                   leads to wage inflation.

Inflation Rate (usually measured with the CPI):

          2 to 3% seems attainable and “normal” for steady

                   growth.

         

1 to 2% inflation seems to indicate too little growth.

4 to higher %’s indicate an overheated economy:

          1) inflation due to too much demand –or-

          2) inflation due to too little sup

Study Guide for Exam on Thursday February 26

1.  Circular flow model
             - parts and functions
             - what happens between phases?
2.  Business Cycle
             - describe the phases
             - expansion, contraction, peak, trough,
3.  Labor force participation
             - who is counted?
             - who is excluded?
4.  Inflation
             - what is inflation?
             - causes of inflation
5.  GDP - what is it the formula?
             - what is included, what is not included?
             - real GDP vs. nominal GDP
             - what is GDP per capita?
             - what is the base year?
6. Unemployment
             - define unemployment
             - determine % of unemployment
             - 4 types of unemployment
             - what is NRU?
7. Consumer Price Index
             - what is CPI?
             - nominal wage vs. real wage
             - what is the base year?
             - calculate inflation
             - calculate CPI changes
             - calculate GDP changes
           
Use your 5 Steps to a 5 Ap Guide for review for the following topics above.
             -

Unemployment Notes

Employment and Unemployment

Start with the total population of the US:

          Subtract those under 16

          Subtract those in the Armed Forces and "institutionalized"

This leaves you with the "Non-Institutional Adult Civilians":

          Subtract those already retired and the “homemakers”

          Subtract full time students over the age of 16

          Subtract the "discouraged" (those not looking)

This leave you with the "Civilian Labor Force": This includes:

                   Employed Full Time or Part Time, counted

                        during the week of the 12th of the month.

                   Employed unpaid workers in family businesses,

                        if working over 15 hours in that business.

                   Those on sick leave, on strike, or on vacation

                        during the week of the 12th of the month.

                   Unemployed because they are actively looking for work but can't find work, or are waiting for better careers, or seasonal changes.

Four Kinds of Unemployment

"Good" or "OK" Unemployment:

1.  Frictional:  We are between jobs because we choose new opportunities, choices, lifestyles, education levels, etc.

2.  Seasonal:  We are waiting for the correct season to conduct our trade and know the interruption in work is temporary and natural.  We plan wages and hours accordingly.

                        "Bad" Unemployment (Looking but can't find):

3.  Cyclical:  The business cycle has turned against us and business is bad for a while. We wait or seek government help.

4.  Structural:  Technology and times have changed, therefore what we do no longer fits the market.  Now what?

Official Employment Statistics

Start with the total population of the US.

Subtract

Subtract

Subtract

This leaves the “Non Institutional Adult” population.

Subtract

Subtract

Subtract

Subtract

This leaves the “Civilian Labor Force”

Count

Count

Count

Count

Subtract

This becomes the “Unemployment Rate” in %

0 to 3%	Overextended economy, war economy
4 to 5%	“Full Employment” Unemployment Rate (Efficient)
6 +    %	“Weak” Economy or “Recession” Economy
25%	Highest official unemployment rate in 1933

Frictional Unemployment:

(Seasonal Unemployment):

Cyclical Unemployment:

Structural Unemployment:

GDP Notes

Gross Domestic Product (GDP) Basics

The measures were created in the 1930’s.

Until the 1990’s, Gross National Product was the federal measure of the economy.

Key terms to know:

      “Gross” = Totals before adjustments (inflation’s effect)

      “National Product” = Production owned by US companies

      “Domestic Product” = Production in the US, even if foreign owned

GDP is officially measured in “quarters” of years:

      Quarter 1 = Jan/Feb/Mar

      Quarter 2 = Apr/May/June

      Quarter 3 = July/Aug/Sep

      Quarter 4 = Oct/Nov/Dec

The main form used is the “Expenditures” Approach:  C + Ig + G + Xn

C = Personal Consumption in the economy:  (67% of the Economy !!!)

      The purchases of finished goods and services (but not houses)

Ig = Gross Private Business Investment monies:

      Factory equipment maintenance,

      New factory equipment,

      Construction of housing,

      Unsold inventory of products built in a year, but not sold that year

G = Government Spending:

      Government purchases of products and services

Xn = Net Foreign Factor of Trade:  Exports minus Imports

      Exports = Dollars in, Imports = Dollars out

      (Post WWII, Xn has usually been a negative number: Trade Deficit)

Items that DO NOT Count in GDP:

      Used goods/Second-Hand goods

      Gifts or “Transfers” (Private or Public) (note COLAs)

      Stock/Equity/Securities purchases (places like the NYSE, NASDAQ)

      Unreported business activities conducted in “cash” (unreported tips...)

      Illegal activities (underground markets)

      Financial transactions between banks and businesses

      “Intermediate goods” (no double counting)

      “Non market” activities like volunteer and family work

Figure 17.2 to go with Business Cycles Handout

Business Cycle Notes

Business Cycles Notes

GDP Quarterly Reports	3 months of real GDP data + or – Q I = Jan – Mar,  QII = Apr – June, QIII = July – Sep, Q IV = Oct -- Dec
Expansions	2 consecutive quarters, or longer,  of growth in real GDP
Peaks	The quarter when GDP stops growing.  This can only be recognized after the recession has begun
Recessions/Contractions	2 consecutive quarters, or longer, of decline in real GDP (NBER uses newer, job related measures)
Troughs	The quarter when GDP stops declining.  This can only be recognized after the expansion has begun
Depressions	Traditionally measured as a recession that loses at least 10%, or more, of the value of real GDP
Stagflation	A time of increasing inflation (associated with expansions) and increasing unemployment (associated with recessions)
A Full Cycle	The time of one trough to the next trough
Historic Cycles	Since the founding of the US, cycles have averaged approximately 6 years from trough to trough
Historic Recessions	Since the early 1900’s, US recessions have averaged 14 months in length.
NBER	The National Bureau of Economic Research.  This agency is now often used as the official arbitrator of the cycles
Long Run Growth Assumptions	This is known as the Secular Trend.  Market Systems have shown long run growth in real GDP/Standard of Living as the PPF moves outward over time
Misery Index	The number created when the Inflation Rate is added to the Unemployment Rate

Business Cycles Notes

Secular Trend	The Private Assumption of Long Term Growth
Expansion	Growth for at least 6 months of real GDP (Inflation?)
Peak	The time Expansions end
Contraction Recession	Decline for at least 6 months of real GDP (Unemployment?)
Trough	The time Contractions end
Six Months	The minimum time GDP data is relevant to cycles
Trough to Trough	The “length” of a cycle
Six Years	The average length of a cycle in the US history 1776-2011
Fourteen Months	The average length of a recession in the US 1900-2011
Stagflation	Both Expansion and Recession at the same time
Misery Index	The Unemployment Rate and the Inflation Rate together