Unemployment Rate,

And Onto Starting A Macro Model

Lecture 10
Dr. Jennifer P. Wissink
2015 Jennifer P. Wissink, all rights reserved.

September 24, 2015

Announcements (MACRO) Fall 2015

If you have a conflict with Prelim 1, make sure you...

Read the syllabus concerning your options
And then use the link you can find on our BlackBoard site (see left hand
menu choices) and register for Option 1 or Option 2.
Note: You WILL NOT get any reply from us all you need to do is sign up. If
you want proof you signed up, print the screen you see once you submit the
form.

FINAL EXAM INFO: We have been assigned Saturday December 12

at 2:00pm. Everyone is expected to take the exam at that time
UNLESS you have an official Cornell reason for a makeup.
See: https://registrar.cornell.edu/Sched/rules.html
For those eligible for the makeup, the date and time of the makeup is
being determined. It will almost surely be either Wednesday or Thursday
the NEXT week. No finals will be scheduled PRIOR to Saturday
December 12 at 2pm. Please book travel plans/internships/jobs/whatever
with that in mind.

i>clicker questions
Assume the base year does not equal 2014.
When calculating real GDP for 2014 you use quantities from the base year and
prices from 2014.
A. True
B. False

The value of real GDP and current GDP will be the same in the base year.
A. True
B. False

If the US has been experiencing inflation, real GDP in 2014 will be smaller than
nominal GDP in 2014.
A. True
B. False

The Process of Deflating & The

Implicit GDP Deflator Index

Deflating: changing a measure from a current or

nominal value to a real value by use of a deflator.
implies you have a deflator!

To deflate (if you have a deflator):

Conveniently: the government reports the following

$nominal GDP
$real GDP
So subbing-in and cross-multiplying we get...

And...to make it an index just multiply it by 100!

Nominal GDP, Real GDP & The IGDPDI

Using An Index Like The Implicit GDP Deflator Index

In 1975/76 Cornell tuition + fees + room &

board cost approximately $5,000 per YEAR!
So, based solely on the implicit GDP deflator
index, what should Cornell have cost in
2011/12?

ANOTHER Measure of Inflation:

The Consumer Price Index

The consumer price index (CPI) is a price index

computed each month by The Bureau of Labor Statistics
using a bundle that is meant to represent the market
basket purchased monthly by the typical urban
consumer.

Its the most popular fixed-weight price index.

The CPI market basket shows how a typical consumer

divides his or her money among various goods and
services.

FIGURE 7.1 The CPI Market Basket

TABLE 7.5 The CPI, 19502012

1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970

Percentage
Change
in CPI
1.3
7.9
1.9
0.8
0.7
0.4
1.5
3.3
2.8
0.7
1.7
1.0
1.0
1.3
1.3
1.6
2.9
3.1
4.2
5.5
5.7

CPI
24.1
26.0
26.5
26.7
26.9
26.8
27.2
28.1
28.9
29.1
29.6
29.9
30.2
30.6
31.0
31.5
32.4
33.4
34.8
36.7
38.8

1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991

Percentage
Change
in CPI
4.4
3.2
6.2
11.0
9.1
5.8
6.5
7.6
11.3
13.5
10.3
6.2
3.2
4.3
3.6
1.9
3.6
4.1
4.8
5.4
4.2

CPI
40.5
41.8
44.4
49.3
53.8
56.9
60.6
72.6
65.2
82.4
90.9
96.5
99.6
103.9
107.6
109.6
113.6
118.3
124.0
130.7
136.2

1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012

Percentage
Change
in CPI
3.0
3.0
2.6
2.8
3.0
2.3
1.6
2.2
3.4
2.8
1.6
2.3
2.7
3.4
3.2
2.8
3.9
-0.4
1.7
3.1
2.1

Note: 1982-1984=100

CPI
140.3
144.5
148.2
152.4
156.9
160.5
163.0
166.6
172.2
177.1
179.9
184.0
188.9
195.3
201.6
207.3
215.3
214.5
218.1
224.9
229.6

Calculating the Consumer Price Index

The Implicit GDP Deflator Index vs The CPI

Cool Tool: The BLS Inflation Calculator

About the CPI inflation calculator: http://www.bls.gov/

The CPI inflation calculator uses the average Consumer Price Index for a given calendar year. This data
represents changes in prices of all goods and services purchased for consumption by urban households. This
index value has been calculated every year since 1913. For the current year, the latest monthly index value is
used.

Why Do We Care So Much About Inflation?

Its potential to change the distribution of income.

Its special effects on debtors & creditors.
The costs of keeping up might be self-fulfilling.
Resources (time and money) are used up in the mere act of
posting and keeping up with price changes and searching
for low prices.
Increased likelihood that people dont know (or cant keep up
with) changing relative prices, so they dont allocate
efficiently.
Increased uncertainty, pessimism and risk, perhaps making
people tentative and investment riskier depresses
expenditure on consumption and investment.
Real Culprit: asymmetric and unanticipated inflation
What about DEFLATION? Its got its problems, too more
on that later.

Unemployment

Defining & Measuring Unemployment

Who does it in the U.S.?

United States Department of Labor, Bureau of Labor Statistics

is the principal Federal agency responsible for measuring labor
market activity, working conditions, and price changes in the
economy. Its mission is to collect, analyze, and disseminate
essential economic information to support public and private
decision-making. As an independent statistical agency, BLS
serves its diverse user communities by providing products and
services that are objective, timely, accurate, and relevant.

An employed person is any person 16 years old or older

who:
1.
2.
3.

works for pay, either for someone else or in his or her own
business for 1 or more hours per week,
works without pay for 15 or more hours per week in a family
enterprise, or
has a job but has been temporarily absent, with or without pay.

Defining & Measuring Unemployment

An unemployed person is a person 16 years old or

older who:
1.
2.
3.

is not working,
is available for work, and
has made specific efforts to find work during the previous
4 weeks.
NOTE: Persons who were waiting to be recalled to a job
from which they had been laid off need not have been
looking for work to be classified as unemployed.

A person who is not looking for work, either because

he or she does not want a job or has given up looking,
is not in the labor force.

Defining & Measuring Unemployment

la b o r fo rc e = e m p lo y e d + u n e m p lo y e d
p o p u la tio n = la b o r fo rc e + n o t in la b o r fo rc e *
*Included are persons 16 years of age and older residing in the 50 States and the District of
Columbia who are not inmates of institutions (for example, penal and mental facilities,
homes for the aged), and who are not on active duty in the Armed Forces.

u n e m p lo y m e n t ra te =

u n e m p lo y e d
e m p lo y e d + u n e m p lo y e d

la b o r fo rc e p a rtic ip a tio n ra te =

la b o r fo rc e
p o p u la tio n