Inflation and Unemployment

Inflation

·         Inflation – rise of general level of prices

·         Inflation rate – measures percentage in the price level over time. Key indicator of the economy’s health.

·         Deflation – decline in general price level.

·         Disinflation – when the inflation rate declines.

·         CPI – measures inflation by tracking yearly price of a fixed basket of goods and services. Indicates changes in cost of living and price level.

·         Rule of 70 – used to calculate number of years it would take for a price level to double at any given rate.

·         Real interest rate – unadjusted cost of borrowing or lending money.

·         Demand pull inflation – caused by an excess of demand over output that pulls prices upward.

·         Cost push inflation – caused by rise in per unit production cost due to increasing resource cost.

·         Hurt by inflation – Fixed income, lenders, creditor’s, savers

·         Help by inflation – borrowers 

Unemployment

·         Unemployment – percentage of people who do not have a job but are in the labor force.

·         Labor force – number of people in a country that are classified as employed or unemployed.

·         Not in Labor Force – kids, military personnel, mentaly insane, prisoner, retirees, stay at home parents, the discouraged

·         Unemployment rate – number of unemployed/ number of unemployed + number of employed *100. 4-5% standard rate.

·         Frictional – between jobs. Quit job looking for a better one. Graduating college looking for a job.

·         Structural – associated with a lack of skills or a declining industries. High school dropout who can’t read or write. Technology changes.

·         Seasonal- school bus drivers, life guards, construction workers.

·         Cyclical – associated with downturns in the business cycle. Bad for society and individuals.

·         Full employment – occurs when there is no cyclical unemployment present in the economy.

·         Natural rate of unemployment – 4-5%

·         Bad unemployment – not enough consumption (GDP), creates too much poverty, creates too much government assistance.

·         Good unemployment – less pressure to raise wages, more workers or future expansions.

·         Okun’s Law – for every 1% of unemployment above natural rate of unemployment causes a 2% decline in real GDP.