Macroeconomic Measures - Prices
Price Level - A weighted average of the
prices of all good and services.
Price Index - A measure of the price level.
Consumer Price Index (CPI) - A widely cited
index number for the price level; the
weighted average of prices of a specific set of
goods and services purchased by a typical
household.
Macroeconomic Measures - Prices
Base Year - The year chosen as a point of
reference or basis of comparison for prices
in other years; a benchmark year.
Computing the Consumer Price
Index
Consumer Price Index 1983-2006
Year Annual Year Annual
1983 99.6 1995 152.4
1984 103.9 1996 156.9
1985 107.6 1997 160.5
1986 109.6 1998 163.0
1987 113.6 1999 166.6
1988 118.3 2000 172.2
1989 124.0 2001 177.1
1990 130.7 2002 179.9
1991 136.2 2003 184.0
1992 140.3 2004 188.9
1993 144.5 2005 195.3
1994 148.2 2006 201.6
Changes in Prices
In 2005 the CPI was 195.3; in 2006 the index was
201.6. What was the percentage change in prices
from 2005-2006?
3.23 %
Macroeconomic Measures -
Income
Nominal Income - The current-dollar
amount of a person’s income.
Inflation - An increase in the price level.
Real Income - Nominal income adjusted
for price changes.
Three Cases of Real Income
1.Keeping Up with Inflation - Real Income
stays same.
2. Not Keeping Up with Inflation - Real
Income Falls.
3. More than Keeping up with Inflation –
Real Income Goes up.
Flaw of CPI
• It does not take into account the fact that
consumers are rational and substitute the
expensive items with cheaper ones. Rather
it is based on a fixed basket of goods.
• This phenomenon is known as the
substitution bias.
– An alternative approach has been introduced
which takes this into consideration. This is
known as Chain-weighted CPI.
GDP Implicit Price Deflator vs.
Consumer Price Index
GDP Implicit Price Deflator is based upon all
goods and services produced in an economy.
CPI is based upon a representative group of
goods and services purchased by a typical
household
Converting Dollars from one
year to another
• Dollar value in latter year
= Dollar value in earlier year x [ CPI latter year / CPI earlier year]
Self-Test
Explain how the CPI is calculated.
What is a base year?
In year 1, your annual income is $45,000
and the CPI is 143.6; in year 2, your annual
income is $51,232 and the CPI is 150.7. Has
your real income risen, fallen, or remained
constant? Explain your answer.
Who Are the Unemployed?
Labor Force Participation Rate
Labor force participation rate - The
percentage of the civilian noninstitutional
population that is in the civilian labor force:
Civilian labor force
LFPR = --------------------------------------------- x 100
Civilian noninstitutional population
Unemployment
Unemployment Rate-The percentage of
the civilian force that is unemployed:
Number of unemployed persons
U = -------------------------------------------- X 100
Civilian labor force
Employment
Employment Rate -The percentage of the civilian
noninstitutional population that is employed:
Number of employed persons
(E) = ----------------------------------------------- X 100
Civilian noninstitutional population
Who are the Unemployed
Job loser. This is a person who was employed in the
civilian labor force and was either fired or laid off.
Job leaver. This is a person employed in the civilian
labor force who quits his or her job.
Reentrant. This is a person who was previously
employed, hasn’t worked for some time, and is
currently reentering the labor force.
New entrant. This is a person who has never held a
full-time job for two weeks or longer and is now in the
civilian labor force looking for a job.
Frictional Unemployment
Unemployment due to
the natural “frictions”
of the economy, which
is caused by changing
market conditions and
is represented by
qualified individuals
with transferable skills
who change jobs.
Structural Unemployment
Unemployment
due to structural
changes in the
economy that
eliminate some jobs
and create other
jobs for which the
unemployed are
unqualified.
Natural Unemployment
Unemployment caused by frictional and
structural factors in the economy.
Natural unemployment rate = Frictional
unemployment rate + Structural
unemployment rate.
Full Employment
The condition that
exists when the
unemployment rate
is equal to the
natural
unemployment
rate.
Cyclical Unemployment
Rate
The difference between the unemployment
rate and the natural unemployment rate.
Self-test Questions
What is the major difference between a
person who is frictionally unemployed
and one who is structurally unemployed?
If the cyclical unemployment rate is
positive, what does this imply? (The cyclical
rate of unemployment is the unemployment created by recessions and
booms. ... When the economy is booming, cyclical unemployment is positive and
inflation tends to accelerate; when the economy is in recession, cyclical
unemployment is negative and inflation tends to decelerate.)
