Current Events:
Dr. Nariman Behravesh is an Iranian-American economist, and the Chief Economist and Executive Vice President of Global Insight: Top 10 Economic Predictions for 2010
Chapter 16
Measuring Inflation and Unemployment
Chapter Overview
In this chapter students will learn how to define and measure both inflation and
unemployment. Some cautions about evaluating the statistics are also presented, in
particular the issue of discouraged workers.
Chapter Outline
Personal Consumption Expenditures Index (PCE, p. 432)
The Producer Price Index (PPI), (p. 432).
The Producer Price Index, during the December 2009 holiday season, was fairly positive, according to a video report by Reuters, 1:43.
On August 18, 2009, the US Producer Price Index came out worse than expected. The 0.9% monthly declines translates into a year-on-year decline of 6.8%. This together with the decline in the core PPI shows that the US is still deflating, 1:42.
What is PPI as opposed to CPI? Dr. Thomas Scheiding, Professor of Economics in the Business Department of Elizabethtown College in PA, explains what is the Producer Price Index (PPI) and Consumer Price Index (CPI), 7:28.
The GDP deflator shown in Figure 2 on p. 434 is our broadest measure of inflation. On p. 434, inflation from 1930 to Today--GDP Deflator is explained under Figure 2.
Adjusting for Inflation: Escalation and Deflation (p. 434)
Escalator Clauses (p. 434)
Many contracts, including commercial rental agreements, labor union contracts, and Social Security payments are subject to escalator clauses (p. 434).
Labor union contracts rose steadily over the years and wages were priced too highly in comparison with foreign competition with lower wages. For example, in 1967, the auto worker's union agreed to a cap on its COLA (cost-of-living adjustment or escalator clause), apparently not anticipating the inflation that would occur. By 1970, auto unions struck for higher wages which rose considerably higher than comparable wages for foreign auto workers.
Deflating Series: Nominal versus Real Values (p. 435)
The Consequences of Inflation (p. 435)
Senior Editor Paddy Hirsch, of marketplace.org, explains inflation, hyperinflation, and the CPI, 8:12.
Chris Martenson's excellent inflation summary, 6:54.
The National Inflation Association has video published the consequences of inflation on Detroit. The 2nd Part visually is a powerful example of how inflation has harmed one of America's formerly productive cities: Detroit.
Part 1, Intro:
Part 2/4, is a good summary of the entire series, 6:18.
Peter Schiff Discusses Hyperinflation On Fast Money 12/22/09, 4:36.
Hyperinflation in Germany 1923 (during the Weimar Republic is one of the classic examples of hyperinflation, 3:25.
Checkpoint: Inflation
Unemployment, p. 437
Unemployment, 2:50
The Historical Record, p. 437
2009 vs 1887: A Grim Look at History of Unemployment, 5:24
The Household Survey, p. 440
Defining and Measuring Unemployment, p. 440
Employed
Unemployed
Labor Force
Problems with Unemployment Statistics
Underemployment and Discouraged Workers
Checkpoint: Unemployment
Unemployment and the Economy
Types of Unemployment
Frictional Unemployment, p. 443
Structural Unemployment, p. 443
Cyclical Unemployment, p. 443
Summary of all: Types of Unemployment, 4:19
Defining Full Employment
The Natural Rate of Unemployment
NAIRU or Natural Rate of Unemployment, 2:58 (Micro video but applies to Macro as well).
History of the Natural Rate of Unemployment (a Micro video but it relates to Macro issues as well), 1:21
Checkpoint: Unemployment and the Economy
Job Gains and Losses: Establishment (or Payroll) Survey versus Household
Survey
Ideas for Classroom Discussion:
■ Illustrate the changing purchasing power of a dollar by using the CPI calculator
on the Web site of the Federal Reserve Bank of Minneapolis at http://www.
minneapolisfed.org/research/data/us/calc/.
The site enables you to enter an amount of money in a particular year and see
what it would be worth in another time period. You may want to prepare for this
by having students gather “data” in the form of prices their parents or grandparents remember; the “when I was a youngster I could go to the movies for 5 cents!” data. See what that would be worth today.
■ Illustrate a hyperinflation. Screen the PBS video “Commanding Heights” or look
at the page on the PBS Web site at http://www.pbs.org/wgbh/commandingheights/
shared/minitext/ess_germanhyperinflation.html.
Particular points of interest: there was a 1,000-billion German mark note in circulationand few people bothered to take the change when they spent it! Also note the mention of people buying real assets—including pianos—because of the
depreciating value of the currency.
Chapter Checkpoints
Inflation
Question: If you lived in a country where you saw the signs of a government beginning to spend excessively relative to its tax base and was funding this immense spending by printing new money, what would you do to protect yourself and your monetary assets?
The point is to check that students can: point out the link between hyperinflation
and excessive money creation.
Unemployment
Question: Does it seem reasonable to require that to be counted as unemployed, a
person must be actively seeking work? Why not simply count those who do not
have a job but indicate they would like to work?
The point is to check that students can: understand statistics are based on assumptions and methodologies. Also, this question serves to reinforce the definition of unemployment as currently used.
Unemployment and the Economy
Question: After the Berlin Wall fell and the Soviet Union split into several countries, the defense industry in the United States underwent a serious decline as part of the “peace dividend.” Many high-skilled engineers and other workers became unemployed as the industry retrenched. For many, their skills were so specialized that they were unable to find new jobs at their old salaries. Were these people frictionally, structurally, or cyclically unemployed? What policies might the government implement to reduce the impact of this type of unemployment?
The point is to check that students can: apply the definitions of the different types of unemployment to this specific scenario.
Extended Examples in the Chapter
Job Gains and Losses: Establishment (or Payroll) Survey versus Household
Survey
The term “jobless recovery” came into common use around 2004, and referred to
continuing job loss even after the economy moved from a recession into a recovery
(you’d expect job gains in such circumstances). There is a measurement problem in
assessing this situation. The Labor Department tries to assess the labor market by
surveying businesses (the demand for labor, in theory) and by surveying households
(the supply of labor). In recent years the two measures have not been tracking in
the same way. It is suggested that the Establishment Survey overstates job loss, particularly since people who lose a job but start their own businesses may not be
counted. However, self-employment may be a low-paying alternative to a person’s
previous occupation, leading some to suggest that the Household Survey overstates
how well the economy is doing.
The sources cited for this section are “Two Measures of Employment: How
Different Are They?” by Tao Wu (Federal Reserve Bank of San Francisco Economic
Letter, August 27, 2004) and Edmund L. Andrews, “Two Tales of American Jobs”
(The New York Times, February 22, 2004, page BU-6). The first source is available
on the Web at http://www.frbsf.org/publications/economics/letter/2004/el2004-23.html.
Examples Used in the End-of-Chapter Questions
Question 10 references how the Bureau of Labor Statistics measures unemployment.
For more detail, see the Web site at http://www.bls.gov/cps/cps_htgm.htm.
For Further Analysis
Calculating a Very Simple Inflation Measure
This example (in the student handout at the end of this chapter) can be used as a
small group exercise or as an individual exercise. It is designed to complement the text’s material on how to measure inflation by giving students a hands-on opportunity to see how an index is constructed. This exercise uses no weighting but it can easily be expanded to allow you to explore the meaning of a weighted average. By asking students to research prices of goods they will also get a feel for the data collection performed by the Bureau of Labor Statistics.
Web-Based Exercise
This example below requires students to find current data on the inflation rate and the unemployment rate. You may wish to combine this exercise with a current
events article to add more of a research and analytical component. Points for possible discussion to extend the material in the text would include: different measures of the CPI (for urban consumers, etc.); seasonal adjustment; core inflation measures; state and regional unemployment numbers. You may also wish to discuss whether the two measures move together or inversely to each other.
How Is the Economy Doing?
Two of the most important measures of how well the economy is doing are the inflation rate and the unemployment rate. Go to the Bureau of Labor Statistics Web site at http://www.bls.gov/bls/whatsnew.htm to answer the following:
1) What is the current inflation rate? Put it in the context of previous period’s
data.
2) What is the current unemployment rate? Compare that to the last period’s
data.
Answer: Student responses will vary depending on when this assignment is
given.
1) As of the middle of June 2007, the Consumer Price Index showed an
increase of 0.6% in May, which made it 2.7% higher than it was in May
2006. For data see the Web site at http://www.bls.gov/news.release/cpi.
toc.htm.
2) As of the middle of June 2007 the unemployment rate was 4.5%,
unchanged since May. For data see the Web site at http://www.bls.gov/
news.release/laus.toc.htm.
Tips
Current events are often the best way to motivate students with regard to the material in this chapter. Consider reading an article about current inflation and/or unemployment (even take a short “quiz” on it) and then repeat the activity
after covering the course material. Students may enjoy feeling that they can read
a business story and understand the statistics being discussed.
Handout 16.1
Calculating a Very Simple Inflation Measure
Resources
Dr. Marc Faber on CNBC on 30 December 2009, 10:38.
The American Revolution and Hyperinflation by a young American, 6:17.
Project for AP Economics 2009 (the class or school that made this video is not identified; I do not know where it is from):
Lyrics:
The productivity, is the GDP
Take the sum up of the C I G
There's no X in a closed economy
Open it up and free trade is what you'll see
The CPI is your price index
Shows you what you pay for a bottle of windex
Compared to the price level of last year
We should keep it at 100, now y'hear?
**Macroeconomics, study as a whole,
The wealth of a nation, or so I'm told
A one letter change and we're looking at a firm
But macro's what we're here for, sit back and learn.
A phillips curve, shows you the tradeoffs
'tween inflation/unemployment, yeah those layoffs.
Take the two rates, do not perplex,
The sum is known as the misery index
Did you know that money has speed?
Actually, it's called, velocity
P Q over M, that's what V
is equal to in, this economy
**
Something that's important yeah to me
is known to you as the MPC
It is the Marginal Propensity
to consume and shop and spend money
If aggregate demand, and aggregate supply
shift to the right, then GDP's up high
Don't know bout chu, but more output is fly
That's the way it is so don't ask me why
**
Say's law says supply creates demand
It's something that you should probably understand
Gave classical theory the the upper hand
'Til Keynes came along, what a man
Short run was the game of his theory
Didn't think that the world's economy
Functioned at its full capacity
Pessimistic Negativity?
Break it down...
Inflation the nation
cuz theres a justification
Of its short term relation
Between unemployment otherwise
Oh, dont get a bruther-wise
When rational expectation-wise
The sacrifice ratio-nality
Due to contractionary policy
Is smaller than expected in the theory
Of rational expectation, oh
Just ask my man Volcker,
Who went up to that suckah
Stagflation and smackd hah [her],
Like Alan Greenspan,
Who went up to tha man,
Inflation, and he demanded
Some respect, or lest
He get charged of vehicular manslaughter
Of inflations mother and daughter.
To OPEC he said, who's your father, boy?
1. Review the AP Economics Ch. 15 Short Answer Quiz Prep Page on Shanawiki; the page has been locked for the review; the Quiz is on Friday.
