Price indexes: average price of a good and service relative to price of the same good and service in base

year Consumer Price Index (CPI): cost of a good and service relative to the cost of the same good and service in a fixed year called base year. GDP deflator: goods and services fall, inflation negative Inflation and the CPI or GDP deflator Indexing: increase nominal quantity each year by a percentage equal to the rate of inflation, to have a constant level of purchasing power Nominal value: quantity measured in current dollar value Real value: quantity measured in physical terms of goods and services Problems with the CPI: sometimes the CPI (1996) over estimates inflation and indexing gets messed up Why does inflation matter? Inflation and real wage need to be equal Who benefits and who loses with inflation: higher income/CPI benefit Living standards and worker productivity: rise living standards and average labor productivity will increase Compound interest: payment of interest on all previous accumulated interest Growth rates: Real GDP per person indicates living standards, growth reflects power of compound interest Factors that affect productivity: Human capital: skills, talent, education, training . Gov't promotes saving and investment Physical capital: available land and natural resources factories, machines, equipment, and buildings. Infrastructure: good growth when gov't helps private-sectors Technology: help productivity Entrepreneurship: people who create new enterprises Growth rate differences: different growth rate produce different living standards Political and legal environment/Institutions: encourage people to work hard, invest, acquire information and skills, and provide goods and services that public demands. Government policies and economic growth: policy changes promote growth Problems with growth: cost for creating new capital, cost of research and development to improve technology, cost of training (human capital) Employment: person employed part or full time in past week or is on vacation or sick Unemployment: not working but made an effort to find a job in the past 4 weeks Labor market Demand for labor: labor demand curve down. Shifts in labor demand: lower the real wage, the more workers the firm will find it profitable to employ Worker productivity: increase in worker productivity, increase the demand for labor. Marginal product of labor: extra production gained by adding one more worker Supply of labor: supply is offered if the real wage is greater than the opportunity cost; up curve. Shifts in labor supply: increase when slot are available. Increase labor supply when working age is up and people seeking employment. Effects of technology in the labor market: favor more skilled people. Technology progress increase long term productivity Effects of globalization in the labor market: globalization raises wages of workers in exporting industries by raising demand for workers while reducing wages of workers in importing industries

Frictional unemployment: short-term unemployment, gov't matching people for jobs (beneficial) Structural unemployment: long-term unemployment when economy is normal. Heavy economic costs on workers and society as well as psychological costs on workers and their family. Cyclical unemployment: extra unemployment during recessions Effects of minimum wage laws, unions: cause structural unemployment. Strike to raise prices. Unemployment benefits: allows unemployment workers to search longer

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