Macroeconomics

Chapter 8 & 9: 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 GDP
Lagging indicators
 Tend to change after real GDP
Unemployment
 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 unemployment)
 Social and psychological costs
Unemployment statistics
 Unemployment rate is usually higher for
women
 Teenagers have the highest
unemployment rates
 Nonwhites have higher unemployment
rates
Inflation
 Sustained increase in the average level
of prices
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
debtors
Types of inflation
 Demand-pull inflation
 Cost-push inflation
 Structural inflation (wage-price spiral)
Hyperinflation
 Extremely high rate of inflation