Chapter 7 Flashcards
what is the working age population
age 15 and up
employed
working full time or part time at a paid job
unemployed
not doing paid work and actively searching for a job or on temporary lay off or about to start a new job
not in the labour force
does not fit into employed or unemployed categories (full time students, homemakers, retiree)
unemployment rate formula
unemployed/ labour force x100
labour force formula
employed + unemployed
labour force participation rate
labour force/ working age population x100
unemployment rate misses
- involuntary part-time workers
- discouraged workers
frictional unemployment
- due to normal labour turnover and job search
- HEALTHY
structural unemployment
- due to technological change or international competition making worker’s skills outdates/ useless
- HEALTHY
seasonal unemployment
- due to seasonal changes in weather
- HEALTHY
cyclical unemployment
- due to business cycle fluctuations in economic activity
- UNHEALTHY
natural rate of unemployment
- unemployment rate at FULL EMPLOYMENT
- full employment is not 0% unemployment but 0% cyclical unemployment
when real GDP = potential GDP
output gap: NONE
unemployment rate: natural rate of unemployment (full employment)
when real GDP is below potential GDP
output gap: RECESSIONARY GAP
unemployment rate: above natural rate (cyclical unemployment)
when real GDP is above potential GDP
output gap: INFLATIONARY GAP
unemployment rate: below natural rate (less than normal healthy unemployment)
inflation
both a peristent rise in average prices and a fall in the value of money
ALWAYS CAUSED BY THE INCREASE IN QUANTITY OF MONEY
- when inflation occurs:
1. you must spend more to get the same products and services as before
2. your money is worth less
consumer price index (CPI)
- measure of average prices of fixed shopping basket of products
formula: basket total cost current year/ basket total cost base year x100
- CPI fixed quantities in the shopping basket to isolate the impact of changing prices only on cost of living
- inflation rates based on the CPI overstates increases in cost of living
inflation rate
annual % change in CPI
formula: inflation = CPI for current year -CPI for previous year/ CPI for previous year x100
nominal interest rate
observed interest rate that equal # of $’s received per year in interest as % of # of $ saved
real interest rate
- nominal interest rate adjusted for effects on inflation
- nominal interest rate - inflation rate
deflation
persistent fall in average prices and a rise in value of money
- deflation benefits savers but hurts borrowers and is worse than low inflation
FORMULA FOR ANY ECONOMY WITH MONEY
M x V = P x Q (real GDP)
M: quantity of money
V: velocity of money
P: average price
Q: aggregate quantity of real output
P x Q represents nominal GDP
velocity of money
number of times per year a dollar is spent on final goods and services
