Introduction to Macroeconomics

Chapter 13
Chapter Outline
13.1 Measuring the Unemployment Rate, the Labor Force Participation
Rate
13.2 Types of Unemployment
13.4 Measuring Inflation
13.5 Using Price Indexes to Adjust for the Effects of Inflation
13.6 Nominal Interest Rates versus Real Interest Rates
13.7 Does Inflation Imposes Costs on the Economy?
Measuring Unemployment and Inflation
Last chapter, we learned about how to measure total output—a critical
first step in understanding the economy.

In this chapter, we continue along these lines, learning about how to

measure unemployment and inflation.

These are very important and commonly used macroeconomic

concepts; we want to solidify what they mean, so that we can talk
intelligently about them.
13.1 Measuring the Unemployment Rate and the Labor Force Participation Rate

There are more than 100 million people Egypt and monitoring and reporting on their activities
regularly would be very difficult and costly.

Instead, the Central Agency for Public Mobilization and Statistics (CAPMAS) reports estimates
of employment, unemployment, and other statistics related to the labor force each quarter.

Labor force: The sum of employed and unemployed workers in the economy.

Of these statistics, the most watched is known as the unemployment rate: the percentage of
the labor force that is unemployed.
The Labor Force Survey
Each quarter, CAPMAS conducts the Labor Force Survey:
https://www.capmas.gov.eg/Pages/Publications.aspx?page_id=5106
• ~22,500 households selected to be “representative”
• Household members of “working age” (16+ years old)
• Asked about employment during “reference week”
• Also asked about recent job search activities

People are then classified as:

• Employed: Worked 1+ hours in reference week (or were temporarily away from their
jobs).
• Unemployed: Someone who is not currently at work but who is available for work and
who has actively looked for work during the previous month.
• Not in the labor force, if neither of the above apply
The Employment Status of the Civilian Working-Age Population

• Discouraged Working-age
population
workers: People
who are available
for work but have
not looked for a job Labor force Not in labor force

during the previous

four weeks because
they believe no Not available for work
jobs are available Employed Unemployed
(homemakers,
retirees, full-time
Available for work but
not currently working
for them. students, etc

Not currently looking

for work (childcare,
Discouraged workers transportations
problems, other
reasons)
The Employment Status of the Civilian Working-Age Population

• Based on these estimates, we calculate several important macroeconomic

indicators.

• The most watched is the unemployment rate:

Number of unemployed
• Unemployment rate = ∗ 100
Labor force

• Also important is the labor-force participation rate: the percentage of the

working-age population in the labor force…
Labor force
• LFPR = ∗ 100
Working−age population
 0
2
4
6
8
10
12
14

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
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1998
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2000
Unemployment rate in Egypt

2001
2002
2003
2004
Unemployment rate in Egypt

2005
2006
2007
2008
2009
2010
2011
• Source: World Bank, World Development Indicators

2012
2013
2014
2015
2016
2017
2018
2019
13.2 Types of Unemployment
Identify the three types of unemployment.

The three types of unemployment are:

• Frictional unemployment: Short-term unemployment that arises from the process of
matching workers with jobs.

• Structural unemployment: Unemployment that arises from a persistent mismatch between

the skills or attributes of workers and the requirements of jobs.

• Cyclical unemployment: Unemployment causes by a business cycle recession.

We will examine each in turn over the coming slides.
Frictional Unemployment
Frictional unemployment: Short-term unemployment that arises from the process
of matching workers with jobs.

Frictional unemployment occurs mostly because of job search: entering or re-

entering the labor force or being between jobs.

It also occurs because of seasonal unemployment: some jobs fluctuate in

availability due to seasonal demand, like ski instructor or farm work.
• To control for this, the economists use seasonally-adjusted employment figures.

Some frictional unemployment actually increases economic efficiency by allowing

for better job matches.
Structural Unemployment
Structural unemployment: Unemployment that arises from a persistent mismatch
between the skills or attributes of workers and the requirements of jobs.

Structural unemployment is associated with longer unemployment spells.

Workers who are structurally unemployed may require retraining in order to obtain
“modern” jobs.

Example: In the film and TV animation industry, jobs in hand-drawn 2-D illustration
have fallen, and jobs in computer-assisted 3-D animation have risen. Even workers
with the best hand-drawing skills may find themselves structurally unemployed.
Cyclical Unemployment and the Natural Rate
of Unemployment
Cyclical unemployment: Unemployment caused by a business cycle
recession.

In normal recoveries after a recession, unemployment due to cyclical factors

will fall.

When all unemployment is due to frictional and structural factors, we say

that the economy is at full employment. This means there will always be
some unemployment in the economy.
• Economists call this the natural rate of unemployment: The normal rate of
unemployment, consisting of frictional unemployment and structural
unemployment.
• The general consensus of economists is that the U.S. natural rate of unemployment
is somewhere between 4.0 percent and 5.0 percent.
Introduction to Macroeconomics
Chapter 13 – part 2
Chapter Outline
13.1 Measuring the Unemployment Rate, the Labor Force Participation
Rate
13.2 Types of Unemployment
13.4 Measuring Inflation
13.5 Using Price Indexes to Adjust for the Effects of Inflation
13.6 Nominal Interest Rates versus Real Interest Rates
13.7 Does Inflation Imposes Costs on the Economy?
13.4 Measuring Inflation

In the previous chapter we introduced the idea of the price level: a measure of the average
prices of goods and services in the economy.

We refer to the percentage increase in the price level from one year to the next as the inflation
rate.

Two commonly-used measures for inflation are:

• The consumer price index (CPI)
• The producer price index (PPI)
 Figure 13.7 The CPI Market Basket

The consumer price index

(CPI) is a measure of the
average of the prices a
typical urban family of four
pays for the goods and
services they purchase.

The chart shows the

composition of the basket of
goods used to create the
CPI. This basket of goods
derives from a monthly
survey by CAPMAS
Calculating the CPI
To calculate the CPI in a given year, we need:
• A basket of goods
• The cost to purchase the basket of goods in a base year
• The prices in the current year

The CPI in the current year is the cost to purchase the basket of goods
this year, divided by the cost in the base year. By convention, we
multiply this by 100, so that the CPI in the base year is 100.
A Simple CPI Calculation (1 of 2)
Blank Blank Base Year
Blank Blank 2018 Blank 2019
(2010)

Expenditures (on base-year Expenditures (on base-year

Product Quantity Price Expenditures Price quantities) Price quantities)
Eye examinations 1 $50.00 $50.00 $100.00 $100.00 $85.00 $85.00
Pizzas 20 10.00 200.00 15.00 300.00 14.00 280.00
Books 20 25.00 500.00 25.00 500.00 27.50 550.00
TOTAL Blank Blank $750.00 Blank $900.00 Blank $915.00

The table above gives the information we need to create the CPI
in 2018 and 2019, using the basket of goods from 2010.

Formula Applied to 2018 Applied to 2019

Expenditures in the current year  $900   $915 

CPI = ×100   ×100 =120   ×100 =122
Expenditures in the base year  $750   $750 
A Simple CPI Calculation (2 of 2)
Formula Applied to 2018 Applied to 2019

Expenditures in the current year  $900   $915 

CPI = ×100   ×100 =120   ×100 =122
Expenditures in the base year  $750   $750 

Based on these data, the inflation rate from 2018 to 2019 is the
percentage change in the CPI:

 122 − 120 
  100 = 1.7%
 120 

Since the CPI measures consumer prices, it is often referred to as the

cost of living index. CPI-inflation is sometimes used to generate “fair”
increases in wages for workers and government benefits.
13.5 Using Price Indexes to Adjust for the Effects of
Inflation
Suppose someone received a salary of $25,000 in 1991. This would have
bought much more than a salary of $25,000 in 2016.
We can use the CPI to estimate the purchasing power of that $25,000 in
2016 dollars:

 CPI in 2016 
Value in 2016 dollars = Value in 1991 dollars   
 CPI in 1991 
 240 
= $25,000    = $44,118.
 136 

So $25,000 in 1991 would have bought about as much as $44,000 in

2016.
13.6 Nominal Interest Rates versus Real Interest Rates

When you lend money to someone, they typically agree to pay you back with interest. If the
interest rate is 6 percent, for example, then a $1,000 loan paid back in a year will be paid back
with $1,060.
6 percent is the nominal interest rate: the stated interest rate on a loan.

We can adjust for inflation by calculating the real interest rate, equal to the nominal interest
rate minus the inflation rate.
• This is an approximation, but it is quite accurate for low interest and inflation rates.

If prices rise by 2 percent from this year to next, then your real interest rate on the loan is only 4
percent. This more accurately reflects the cost of borrowing and lending money.