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ECON102: Principles of Macroeconomics

Unit 3: Unemployment and Inflation   *The average person understands the economic concepts of unemployment and inflation: unemployment reflects number of people out of work, and inflation indicates a rising price level of goods and services.  Macroeconomics, however, distinguishes between the labor force, which includes both employed and unemployed (those able and willing to work but not currently working), and those not in the labor force (full time students, nonworking spouses, and retirees).  It also differentiates between frictional unemployment (or temporary unemployment), structural unemployment (affecting whole sectors of the economy), and cyclical unemployment (caused by downturns in the economy).

Inflation, or a rise in the general level of prices of goods and services, causes the purchasing power of the dollar (or any other monetary unit, like the euro, yen, or pound) to decline.  By distinguishing between nominal income (the actual amount of money) and real income (the amount of goods and services it can buy), macroeconomics helps measure the effects that inflation has on an economy and on its constituents’ standards of living.*

Unit 3 Time Advisory
This unit should take approximately 12.75 hours to complete.

☐    Subunit 3.1: 3.25 hours

☐    Subunit 3.2: 4.5 hours

☐    Subunit 3.3: 1 hour

☐    Assessments: 4 hours (Please spend no more than 2 hours for each assessment.)

Unit3 Learning Outcomes
Upon successful completion of this unit, the student will be able to: - Define the unemployment rate. - Identify and distinguish between the different forms of unemployment. - Analyze the problems associated with the unemployment rate. - Define, interpret, and calculate inflation rate and the consumer price index. - Describe the problems and biases associated with the consumer price index. - Explain the Phillips curve and the relationship between inflation and unemployment.

3.1 Defining and Measuring Unemployment   3.1.1 The Unemployment Rate   - Reading: Professor Robert Schenk’s CyberEconomics: “The Unemployment Rate” Link: Professor Robert Schenk’s CyberEconomics: “The Unemployment Rate” (PDF)

 Instructions: Read this note on the unemployment rate.  Click
the [“Review”](http://www.saylor.org/content/econ_schenk/Measuring/review06a_01a.htm) link
and answer two questions and assess your understanding of the
unemployment rate.  

 Terms of Use: The linked material above has been reposted by the
kind permission of Robert Schenk, and can be viewed in its original
form
[here](http://ingrimayne.com/econ/Measuring/Unemployment.html). 
Please note that this material is under copyright and cannot be
reproduced in any capacity without explicit permission from the
copyright holder.
  • Activity: Professor Robert Schenk’s CyberEconomics: “Exploring Unemployment” Link: Professor Robert Schenk’s CyberEconomics: “Exploring Unemployment” (PDF)

    Instructions: This is an optional exercise, but you will likely find it rewarding as you further explore this topic.  Click on the links mentioned in the assignment, keeping in mind the answers you need to seek while reading the data.

    Terms of Use: The linked material above has been reposted by the kind permission of Robert Schenk, and can be viewed in its original form here.  Please note that this material is under copyright and cannot be reproduced in any capacity without explicit permission from the copyright holder.

  • Web Media: Khan Academy’s “Unemployment” Khan Academy’s “Unemployment” (YouTube)

    Instructions: Watch this lecture, which is about unemployment.

    Watching this video should take approximately 13 minutes.

    Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License.  It is attributed to the Khan Academy.

3.1.2 Three Forms of Unemployment   - Reading: State University of New York at Oswego: Professor John Kane’s Lecture notes on Principles of Macroeconomics: “Chapter 8: Unemployment and Inflation” Link: State University of New York at Oswego: Professor John Kane’s Lecture notes on Principles of Macroeconomics: “Chapter 8: Unemployment and Inflation” (HTML)

 Instructions: Scroll down to the “Types of Unemployment” section
and read up to “The Record of Unemployment.”  

 Terms of Use: Please respect the copyright and terms of use
displayed on the webpage above.

3.1.3 Natural Rate of Unemployment   - Web Media: YouTube: ACDC Leadership’s “Types of Unemployment and the Natural Rate of Unemployment” Link: YouTube: ACDC Leadership’s “Types of Unemployment and the Natural Rate of Unemployment” (YouTube)

 Instructions: Watch this video, which is about the types of
unemployment and the natural rate of employment.  

 Watching this video should take approximately 2 minutes.  

 Terms of Use: Please respect the copyright and terms of use
displayed on the webpage above.
  • Reading: U.S. Bureau of Labor Statistics: “Unemployment Statistics” and “News Release: Employment Situation Monthly”

    Link: U.S. Bureau of Labor Statistics: “Unemployment Statistics” (PDF)  and “News Release: Employment Situation Monthly” (PDF).

    Instructions: Read the paragraph under “Unemployment” on this page.  Make sure to read each section in its entirety.  You may also consider viewing the original webpage to explore some of the other hyperlinks for statistics on unemployment.  It is important to understand the mechanism of how unemployment is determined and how economists measure unemployment.

    Terms of Use: This work is in the public domain.

  • Reading: The Saylor Foundation’s “Unemployment Rate” Link: The Saylor Foundation’s “Unemployment Rate” (PDF)
     
    Instructions: Read this text, which includes statistics from the Bureau of Labor Statistics, in order to get a better understanding of how the unemployment rate is calculated.

3.1.4 Problems with the Unemployment Rate   - Reading: Professor Robert Schenk’s CyberEconomics: “Weaknesses of Unemployment Statistics” Link: Professor Robert Schenk’s CyberEconomics: “Weaknesses of Unemployment Statistics” (PDF)

 Instructions: This reading explains the shortcomings of
unemployment statistics.  Read it in entirety to learn about the
problems associated with the unemployment rate and then work on the
questions presented in the
[“Review”](http://www.saylor.org/content/econ_schenk/Measuring/review06a_02a.htm) section
and the
[“Explore”](http://www.saylor.org/content/econ_schenk/Measuring/unemquiz.htm) section.  

 Terms of Use: The linked material above has been reposted by the
kind permission of Robert Schenk, and can be viewed in its original
form
[here](http://ingrimayne.com/econ/Measuring/Unemployment2.html). 
Please note that this material is under copyright and cannot be
reproduced in any capacity without explicit permission from the
copyright holder.
  • Assessment: Econ100’s “Chapter 7: Measuring Employment and Unemployment” Link: Econ100’s “Chapter 7: Measuring Employment and Unemployment” (HTML)

    Instructions: Click on the “Quiz” tab on the left-hand menu and then go to “Chapter 7” to take the test.  Attempt all three levels of the quiz for a thorough assessment of your understanding of the material covered in this unit.

    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

3.2 Inflation   - Reading: State University of New York at Oswego: Professor John Kane’s Lecture notes on Principles of Macroeconomics: “Chapter 8: Unemployment and Inflation” Link: State University of New York at Oswego: Professor John Kane’s Lecture notes on Principles of Macroeconomics: “Chapter 8: Unemployment and Inflation” (HTML)

 Instructions: Scroll down to the heading entitled “Inflation” to
read about the types of inflation, the costs of inflation, and
hyperinflation.  Note that this resource covers the topics in
sub-subunit 3.2.1.  

 Terms of Use: Please respect the copyright and terms of use
displayed on the webpage above.
  • Reading: Principles of Macroeconomics: “Chapter 5, Section 2: Price-Level Changes” Link: Principles of Macroeconomics: “Chapter 5, Section 2: Price-Level Changes” (PDF)

    Instructions: Read the section entitled “Price Indexes” to learn how to compute some price indices.  This section focuses on the consumer price index (CPI), the rate of inflation or deflation, and the biases associated with the CPI.  Note that this resource covers the topics in sub-subunits 3.2.2 and 3.2.3.

    Terms of Use: This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-Share-Alike 3.0 License without attribution as requested by the work’s original creator or licensee.

  • Web Media: Khan Academy’s “Introduction to Inflation” Khan Academy’s “Introduction to Inflation” (YouTube)

    Instructions: Watch this video, which serves as an introduction to inflation.

    Watching this video should take approximately 8 minutes.

    Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License.  It is attributed to the Khan Academy.

  • Web Media: Khan Academy’s “Breakdown of Gas Prices” Khan Academy’s “Breakdown of Gas Prices” (YouTube)

    Instructions: Watch this video, which is about the breakdown of gas prices.

    Watching this video should take approximately 13 minutes.

    Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License.  It is attributed to the Khan Academy.

  • Web Media: Khan Academy’s “Short-Run Oil Prices” Link: Khan Academy’s “Short-Run Oil Prices” (YouTube)

    Instructions: Watch this video, which is about short-run oil prices.

    Watching this video should take approximately 12 minutes.

    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

3.2.1 Inflation Defined   Note: Inflation is determined by increases in the general prices of an economy.  Inflation does not take into account the core rate, which is essentially the costs of food, gasoline, or insurance.  Please note that this topic is covered in the readings for subunit 3.2.

3.2.2 Measuring Changes in the Price Level   Note: This topic is also covered in the materials under subunit 3.2 and sub-subunit 3.2.3.

3.2.3 Consumer Price Index (CPI)   Note: This topic is also covered under subunit 3.2 and sub-subunit 3.2.4.

  • Reading: Australian Bureau of Statistics: Consumer Price Index Concepts, Sources, and Methods: “Chapter 4: Price Index Theory”

    Link: Australian Bureau of Statistics: Consumer Price Index: Concepts, Sources, and Methods:Chapter 4:  Price Index Theory” (PDF)
     
    Instructions:  Click on the link above, and read Chapter 4 in its entirety. 

    Terms of Use: Please respect the copyright and terms of use displayed on the web pages above.

  • Web Media: Khan Academy’s “Actual CPI-U Basket of Goods” Khan Academy’s “Actual CPI-U Basket of Goods” (YouTube)

    Instructions: Watch this video, which discusses an actual CPI-U basket of goods.

    Watching this video should take approximately 8 minutes.

    Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License.  It is attributed to the Khan Academy.

3.2.4 Problems with the CPI   *Note: This information also touches on the topic outlined for sub-subunit 3.2.3.  Consumer Price Index (CPI) calculations are restricted to the consumers’ purchasing behavior only in the context of price increases of goods and services from one period of time to another.  CPI does not take into account the producer price index, or PPI.  The PPI is a measure of the average change over time in the selling prices received by domestic producers for their output.

An upside having so many indices to measure inflation is that each one of the GDP deflator (GDP price index), CPI, and PPI serves as a measure of the same inflationary tendencies, but measures it in a slightly different way.*

3.2.5 Costs of Inflation   - Reading: Research Department of the Federal Reserve Bank of Cleveland: Economic Commentary: “On the Costs of Inflation” Link: Research Department of the Federal Reserve Bank of Cleveland: Economic Commentary: “On the Costs of Inflation” (PDF)

 Instructions: Read the entire article, which discusses how
inflation can distort the allocation of resources and adversely
affect economic efficiency.  

 Terms of Use: The material above is reposted from the website of
[The Federal Reserve Bank of
Cleveland](http://www.clevelandfed.org/).  The original version can
be
found [here](http://www.clevelandfed.org/Research/commentary/2001/0515.htm). 
The Federal Reserve Bank of Cleveland has stipulated that users may
reproduce this content and/or portions thereof without limitation
provided that users comply with the terms of use
posted [here](http://www.clevelandfed.org/utilities/terms_of_use.cfm?DCS.nav=Footer).

3.3 Inflation and Unemployment   - Reading: Principles of Macroeconomics: “Chapter 16, Section 1: Relating Inflation and Unemployment”

Link: *Principles of Macroeconomics*: [“Chapter 16, Section 1:
Relating Inflation and
Unemployment”](http://www.saylor.org/site/textbooks/Principles%20of%20Macroeconomics.pdf) (PDF)  

 Instructions: Read this section for a discussion of inflation and
unemployment.  The relationship between inflation and unemployment
will be explained in detail later in the course.  

 Terms of Use: This text was adapted by The Saylor Foundation under
a [Creative Commons Attribution-NonCommercial-Share-Alike 3.0
License](http://creativecommons.org/licenses/by-nc-sa/3.0/) without
attribution as requested by the work’s original creator or licensee.

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  • Assessment: Econ100’s “Chapter 6: Measuring GDP, Economic Growth and Inflation” Link: Econ100’s “Chapter 6: Measuring GDP, Economic Growth and Inflation” (HTML)

    Instructions: Click on the “Quiz” tab on the left-hand menu and take each of the four quizzes under the “Chapter 6” link.  Note that some of the questions pertain to measuring GDP, a subject covered in the previous unit.  Please attempt the questions in all four levels of the quiz for a thorough assessment of your understanding of the material covered in this unit.

    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.