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Principles of Macroeconomics

Unemployment and Inflation

Business cycle

• Pattern of rising and falling real GDP

Business cycle
Leading indicators

• Change before real GDP changes

• Often provide false indicators of the start
of a recession
Coincident indicators

• Tend to change at the same time as real

Lagging indicators

• Tend to change after real GDP

• Unemployment =
• # unemployed / labor force
• Labor force = noninstitutionalized residents 16+
years of age who are:
– Working, or
– Actively seeking work
• Labor force (and unemployment statistic) does
not include those who are discouraged and have
stopped looking for work
Unemployment rate

• may understate the cost of unemployment

to society due to:
– underemployment, and
– discouraged workers.
• May overstate the cost of unemployment
due to:
– the underground economy
Types of unemployment
• Seasonal – recurring seasonal pattern of
unemployment (voluntary unemployment)
• Frictional – short-term movement between jobs
and during first job search (search
unemployment) (voluntary unemployment)
• Structural – due to technological change and/or
changing patterns of labor demand (involuntary)
• Cyclical – due to business cycle (involuntary)
Costs of unemployment

• GDP gap = potential real GDP – actual

real GDP
– Potential real GDP = GDP that occurs if
unemployment rate = natural rate (no cyclical
• Social and psychological costs
Unemployment statistics

• Unemployment rate is usually higher for

• Teenagers have the highest
unemployment rates
• Nonwhites have higher unemployment

• Sustained increase in the average level of

Costs of inflation

• Arbitrary redistribution of income and wealth

• Higher transaction costs
• Creditors and debtors are affected by
unexpected changes in the inflation rate
– Real interest rate = nominal interest rate minus
inflation rate
– Unexpected inflation harms creditors and benefits
Types of inflation

• Demand-pull inflation
• Cost-push inflation
• Structural inflation (wage-price spiral)

• Extremely high rate of inflation