Measuring Economic Performance: Unemployment http :// www.youtube.com/watch?v=hwWGzQ_FUtQ&feature=related&safety

1. Measuring Economic Performance: Unemploymenthttp://www.youtube.com/watch?v=hwWGzQ_FUtQ&feature=related&safety_mode=true&persist_safety_mode=1&safe=active VE4 Video: Unemployment

2. Unemployment Essential Questions • How is unemployment measured? • How is the unemployment rate calculated? • What is the significance of the unemployment rate on the economy? • What is the relationship between the unemployment rate and economic growth? • What are the three different types of unemployment and their causes?

3. Stop; Collaborate & Listen! • What is unemployment? • What is the unemployment rate in Gainesville? In Georgia? In the USA? • What is economic growth? • How is unemployment related to economic growth? • Is the US economy growing currently? • Why or why not?

4. Stop; Collaborate & Listen! • What is unemployment? When a person is actively looking for work who does not currently have a job • What is the unemployment rate in Gainesville? In Georgia? In the USA? • What is economic growth? Positive GDP • How is unemployment related to economic growth? Businesses fire workers if there is not enough demand for their product to justify paying them a wage (think Circular Flow Diagram) • Is the US economy growing currently? a little yes • Why or why not?

5. Defining & Measuring Unemployment • Employed = a person has a ______ • Unemployed = actively __________for work who do not currently have a ______ • Are retired persons receiving Social Security unemployed? • Disabled Veterans….unemployed? • Unemployment rate: % of the total number of people in the L________ force who are ___________ Formula: 100 x (# ___________/# ___________Force)

6. Defining & Measuring Unemployment • Employed = a person has a job • Unemployed = actively looking for work who do not currently have a job • Are retired persons receiving Social Security unemployed? NO • Disabled Veterans….unemployed? NO • Unemployment rate: % of the total number of people in the labor force who are unemployed Formula: 100 x (# unemployed/# Labor Force)

7. US Unemployment Rate http://www.cbsnews.com/video/watch/?id=6987699n&tag=contentMain;contentAux http://www.bls.gov/cps/

8. HOTS!!: Why is the Unemployment Rate Significant? (Use your graph!) • What is the trend in the bar graph? Describe the trend in the economy using GDP, Unemployment & Inflation. • When the unemployment rate is low, describe the economy. What stage of the business cycle is shown on the graph? • What is happening in the economy when the unemployment rate is rising? • What is happening in the economy when the unemployment rate is consistently high?

9. HOTS!!: Why is the Unemployment Rate Significant? (Use your graph!) • What is the trend in the bar graph? Describe the trend in the economy using GDP, Unemployment & Inflation. UR: In July of 2011, the UR went up, but then consistently dropped until August 2012 when it went back up to 8.3%. Since August of 2012, the UR has hovered between 7.8 and 7.9, and in February 2013, it dropped the lowest it has been 2011 to 7.7%. RGDP: with UR dropping steadily, the expectation would be that the employment is increasing, and thus RGDP increasing also. Inflation: As people gain employment, inflation will increase but hopefully not too quickly. • When the unemployment rate is low, describe the economy. What stage of the business cycle is shown on the graph? • Sustainable economic growth • (GDP is positive & steady), • jobs are plentiful, • What is happening in the economy when the unemployment rate is rising? • Consumers are buying less products, • businesses produce less, • workers begin to be laid off • GDP begins to decline • What is happening in the economy when the unemployment rate is consistently high? • Businesses have slowed production & fired many workers • Jobs cannot be found

10. The Imperfect Unemployment Rate VennD Define Underemployed: Define Discouraged Workers: Not counted in the Unemployment rate By not counting these people in the UR, what does that do to UR? Why is this a good thing AND a bad thing?

11. The Imperfect UR: Underemployed Workers • Ex: The economy is weak & John has seen his hours cut from 40 to 10. He is still employed but has he seen a dramatic decrease in his income? • Ex: Lauren has her Master’s degree, but can only find work as a bartender in a coffee shop. She still has a job, but do her s_____ match her w_____? • John and Lauren are u_________ & therefore are / are not counted in the unemployment rate Should John and Lauren be counted as unemployed?

12. The Imperfect UR: Underemployed Workers • Ex: The economy is weak & John has seen his hours cut from 40 to 10. He is still employed but has he seen a dramatic decrease in his income? YES • Ex: Lauren has her Master’s degree, but can only find work as a bartender in a coffee shop. She still has a job, but do her skills match her work? NOOOO • John and Lauren are underemployed & therefor are not counted in the unemployment rate Should John and Lauren be counted as unemployed?

13. The Imperfect UR: Discouraged Workers • Lauren has been unsuccessfully seeking work for over a year, and she finally decided to ____. But, would she take a job if there was one to take? • Lauren is d_________ and not ________in the unemployment rate. • The presence of u__________workers and d__________ workers causes the official unemployment rate to appear l_____ or b_______ than the actual labor market conditions. Explain this cartoon above.

14. The Imperfect UR: Discouraged Workers • Lauren has been unsuccessfully seeking work for over a year, and she finally decided to give up. But, would she take a job if there was one to take? • Lauren is discouraged and not counted in the unemployment rate. • The presence of underemployed workers and discouraged workers causes the official unemployment rate to appear lower or better than the actual labor market conditions. Explain this cartoon above.

15. The Imperfect Unemployment Rate VennD Define Discouraged Workers: person of legal employment who is not actively seeking employment or who does not find employment after long-term unemployment Define Underemployed: When an employment situation is insufficient for a worker in hours offered or required skill set is below what the worker possesses. Not counted in the Unemployment rate By not counting these people in the UR, what does that do to UR? Makes it appear artificially low Why is this a good thing AND a bad thing? Good – helps consumer confidence. Bad – not an accurate representation of the true economy

16. Activity: Calculating Labor Markets Calculate: Unemployment rate. Unemployment rate with discouraged workers.

17. Activity: Calculating Labor Markets Calculate: Unemployment rate. 14,837 / 153,170 = 9.7% Unemployment rate with discouraged workers. (14,837 + 1,065) / 153,170 + 1,065) =10.3 %

18. EM1d: Identify structural, cyclical and frictional unemployment.

19. EM1d: Identify structural, cyclical and frictional unemployment.

21. Unemployment In the US: Use the Map Using this website, answer the questions that follow. http://data.bls.gov/map/MapToolServlet?survey=la&map=state&seasonal=s Which state has the lowest unemployment? Why? Which state has the highest unemployment? Why? 3. What is the unemployment rate in Georgia? Interpret this number. 4. Which region of the US is still experiencing high unemployment?

22. Homework  • Answer Unemployment Essential Questions 1-5 • Answer Unit Essential Questions 5 & 11 (slide 5) • Complete all notes and activities not finished in class • Fill in your Vocab sheet • Read your notes at breakfast • Don’t ever quit!

23. Measuring Economic Performance: Inflation

24. 1c-d :Inflation Essential Questions • What are the economic costs of inflation? • How does inflation creates winners and losers? • Why do policy makers try to maintain a stable rate of inflation? • What is the difference between real and nominal values of income, wages, and interest rates? • What are the problems of deflation and disinflation?

25. More Terms to Know • Inflation is the overall rise in prices. • Deflation is the overall decline in prices. • Disinflation is the process of reducing rapid inflation to a smaller, less damaging, amount of inflation. • Disinflation would be necessary if inflation was 10% and policy makers acted to bring it down to 3%.

26. The Level of Prices Don’t Matter... Example: Alex has an income of $20 per week to spend on gasoline ($2 per gallon) or café lattes (at $4 per cup). • The most gas he could buy: ___gallons • The most lattes he could buy: ___cups • To buy one more latte, he must give up: ___gallons of gas • 1 gallon of gas uses up ___% of his income • 1cup of latte uses up ____% of his income • What would happen if his income doubled and so did the price of gasoline and the price of a café latte?

27. The Level of Prices Don’t Matter... • Example: Alex has an income of $20 per week to spend on gasoline ($2 per gallon) or café lattes (at $4 per cup). • The most gas he could buy: 10 gallons • The most lattes he could buy: 5 cups • To buy one more latte, he must give up: 2 gallons of gas • 1 gallon of gas uses up 10% of his income (2/20 = .10) • 1cup of latte uses up 20% of his income (4/20 = .20) • What would happen if his income doubled and so did the price of gasoline and the price of a café latte? • Absolutely nothing!

28. ...But the Rate of Change of Prices Does! • But what if the price of gas and café lattes doubled ($4 per gallon and $8 per cup), while Alex’s income stays the same ($20)? • What is the most gas he could buy?________________ • The most lattes he could buy?______________________ • To buy one more latte, he must give up?__________________ • 1 gallon of gas uses up _____% of his income. • 1 cup of latte uses up _____% of his income. • The price of a cup of latte, relative to the price of a gallon of gas is unchanged. But!.....Relative to his __________, these items are now ___________ as costly! • Inflation has radically decreased his ____________________because his ___________ did not rise to keep pace. In a very REAL sense, he is ____________ off. • What should he do?

29. ...But the Rate of Change of Prices Does • But what if the price of gas and café lattes doubled ($4 per gallon and $8 per cup), while Alex’s income stays the same ($20)? • The most gas he could buy: 5 gallons of gas • The most lattes he could buy: 2.5 cups • To buy one more latte, he must give up: 2 gallons of gas • 1 gallon of gas uses up 20% of his income (4/20 = .20). • 1 cup of latte uses up 40% of his income(8/20 = .40) • The price of a cup of latte, relative to the price of a gallon of gas is unchanged. But!.....Relative to his income, these items are now twice as costly! • Inflation has radically decreased his purchasing power because his income did not rise to keep pace. In a very REAL sense, he is WORSEoff. • What should he do?

30. Inflation Rate and Price Levels What has happened overall to price levels from 1970 to 2009? What has happened to the inflation rate from 2012 to 2014?

31. Inflation Rate and Price Levels What has happened to price levels from 1970 to 2009? Price levels have continuously increased over time. What has happened to the inflation rate from 1970 to 2009? The inflation rate however (the percent change in inflation) has increased and decreased (fluctuated)

32. How Is Inflation Measured?Read & Answer Inflation is the overall price level of goods and services. But how do we measure it? The CPI (Consumer Price index)is a price index computed every month by the Bureau of Labor Statistics (BLS) using a bundle representing purchases made monthly by a representative consumer. This bundle is typically called a “market basket”. The CPI is a better tool for measuring inflation than the simple GDP deflator because the CPI attaches weights to certain items, meaning that an increase in housing prices affects more Americans than an increase in Tobacco prices. The BLS collects prices every month of around 70,000 goods and services from around 20,000 different stores in 44 different geographic locations.

33. How Is Inflation Measured? What is inflation? 2. How do we measure it? 3. What is the bundle called? 4. Why is CPI the best measure of inflation? 5. How often does the BLS collect prices and on how many prices do they collect?

34. How Is Inflation Measured? 1. What is inflation? Inflation is the overall price level of goods and services. 2. How do we measure it? The CPI (Consumer Price index)is a price index computed every month by the Bureau of Labor Statistics (BLS) using a bundle representing purchases made monthly by a representative consumer. 3. What is the bundle called? This bundle is typically called a “market basket”. 4. Why is CPI the best measure of inflation? The CPI is a better tool for measuring inflation than the simple GDP deflator because the CPI attaches weights to certain items, meaning that an increase in housing prices affects more Americans than an increase in Tobacco prices. 5. How often does the BLS collect prices and on how many prices do they collect? The BLS collects prices every month of around 70,000 goods and services from around 20,000 different stores in 44 different geographic locations.

35. Measuring CPI & the Base Year • The CPI market basket shows which goods and services a typical consumer spends their money on. As you can see in the pie graph, the majority of Americans’ income is spent on ____________, __________, and ______________ (about 75%). • The base year CPI value is always equal to 100. So if the BLS decided that the year 2000 was going to be the base year, then that means that the CPI in 2000 would be equal to 100. • If the CPI in 2011 is 144.5, then prices in 2011 are ______% higher in 2011 than in 2000. • Formula % Change: Year 2 – Year 1 / Year 1 x 100 = percent change

36. Measuring CPI & the Base Year • The CPI market basket shows which goods and services a typical consumer spends their money on. As you can see in the pie graph, the majority of Americans’ income is spent on housing, food, and transportation (about 75%). • The base year CPI value is always equal to 100. So if the BLS decided that the year 2000 was going to be the base year, then that means that the CPI in 2000 would be equal to 100. • This means that if the CPI in 2011 is 144.5, then prices in 2011 are 44.5 percent higher in 2011 than in 2000. • Year 2 – Year 1 / Year 1 x 100 = percent change 144.5 – 100 /100 x 100 = 44.5% change from 2000 to 2011.

37. Calculating Inflation Rate Newest Year – Older Year Price level in year 2 - Price level in year 1 • Inflation rate = X 100 Price level in year 1 Older year The price of milk in the summer of 2010 was 2.25 per gallon. In 2012 it increased to 3.85. Calculate the inflation rate for milk between 2010 and 2012. Why is it important to know the inflation rate from year to year?

38. Calculating Inflation Rate Price level in year 2 - Price level in year 1 • Inflation rate = X 100 Price level in year 1 The price of milk in the summer of 2010 was 2.25 per gallon. In 2012 it increased to 3.85. Calculate the inflation rate for milk between 2010 and 2012. 3.85 – 2.25 2.25 X 100 = 71% Why is it important to know the inflation rate from year to year? Because inflation make YOUR MONEY WORTH LESS and worthless

39. Inflation Costs Graphic Organizer Inflation Costs

40. Inflation Costs Graphic Organizer Shoe leather cost: the wear & tear caused by the extra running around that consumers have to do when people are looking for the right price to buy the product they need . Inflation Costs Unit of Account Cost: Inflation makes money a less reliable unit of measurement. Menu Costs: costs incurred by the sellers just to update the posted prices.

41. Inflation Costs: Shoe - Leather • With this inflation, what should Alex do? • He might spend a lot of time looking for less expensive substitutes. He might drive around town looking for a coffee shop with prices that haven’t doubled. • He might decide that he needs to get his $20 of income out of his wallet (where it is quickly become worthless) and into something else that might hold value better. • All of this extra time and effort comes at a cost to the consumer! • Shoe leather cost refers to the wear & tear caused by the extra running around that consumers have to do when people are looking for the right price to buy the product they need & trying to avoid holding money • Aka: the increased costs of transactions caused by inflation.

42. Inflation Costs: Menu • With inflation, what would the sellers of gas and café lattes need to do? • Change their menus or signs. • Not expensive for the gas station • For a restaurant or coffee shop: very expensive to print new menus • And what if this price inflation persists? Maybe prices are rising 10% every few months and menus need to be constantly changed as a result.  • These are costs incurred by the sellers just to update the posted prices.

43. Inflation Costs: Unit of Account • Inflation makes money a less reliable unit of measurement. • Example: taxation of certain assets: Suppose you own a house that was worth $100,000 and your gov’t imposed a property tax of 1%. Each year you expected to pay $1000 in property taxes. • Over the course of a short period of time, maybe 2 years, real estate prices go way, WAY up. Now your house, on paper, is worth $200,000 but it’s the very SAMEhouse. It’s not a better house than it was 2 years ago. • Your state reassesses property taxes and now claims that you owe $2000 every year! • If your income didn’t double as your house value was doubling, you are WORSE OFF because the property tax system didn’t take into account that it was inflationthat caused your house to increase in value.

44. Homework: INFLATION!!!!What are the cartoons saying about the economy, inflation, and deflation?

45. Homework  • Answer Inflation Essential Questions 1 • Answer Unit Essential Questions 4 & 5 (slide 5) • Interpret the inflation cartoons. • Complete all notes and activities not finished in class • Fill in your Vocab sheet • Read your notes at lunch • Don’t ever quit!

46. Winners & Losers from Inflation • Scenario: You lend a buddy $100, and he/she promises you pay you back in a year. You should charge him/her interest. Why? (2 reasons) • 1. • 2. • So the interest rate has 2 parts: 1. the part to compensate Y____ for the service you are providing, 2. & the part that offsets the I___________that is expected to occur Sum of these two parts is the nominal interest rate: • Nominal interest rate = real interest rate + expected inflation

47. Winners & Losers from Inflation • Scenario: You lend a buddy $100, and he/she promises you pay you back in a year. You should charge him/her interest. Why? (2 reasons) • You miss out on YOUR $100. Your loaning service, and delayed consumption, should entitle you to compensation. • Inflation will erode the purchasing power of the original $100, so that when you are paid back, the money will not buy as much as it did a year before. • So the interest rate has 2 parts: 1. the part to compensate YOU for the service you are providing, 2. & the part that offsets the INFLATIONthat is expected to occur Sum of these two parts is the nominal interest rate: • Nominal interest rate = real interest rate + expected inflation

48. Winners & Losers from Inflation Part 2 • Suppose you and your friend agree that inflation next year will be 5% and you agree that your lending services are worth another 3%. • You charge your friend: _____ + ______ = ______ • After a year’s time, 3 scenarios could have happened. Scenario 3: you expected 5% inflation and you experienced 8% inflation. What happened to the purchasing power of the $100 you lent? Who wins? Who loses? Scenario 1: you expected 5% inflation and you experienced exactly 5% inflation. What happened to the purchasing power of the $100 you lent? Who wins? Who loses? Scenario 2: you expected 5% inflation and you experienced only 1% inflation. What happened to the purchasing power of the $100 you lent? Who wins? Who loses?

49. Winners & Losers from Inflation Part 2 • Suppose you and your friend agree that inflation next year will be 5% and you agree that your lending services are worth another 3%. • You charge your friend: 5 + 3 = 8% • After a year’s time, 3 scenarios could have happened. Scenario 3: you expected 5% inflation and you experienced 8% inflation. What happened to the purchasing power of the $100 you lent? Your purchasing power has actually decreased because your friend paid you back less than enough to compensate for the inflation. Who wins? Who loses? You lose. Your friend wins because he should have paid MORE in interest but did not. (a contract is a contract) Scenario 1: you expected 5% inflation and you experienced exactly 5% inflation. What happened to the purchasing power of the $100 you lent? The purchasing power of the $100 you lent was unchanged when your friend paid you back exactly enough to compensate for the inflation. Who wins? Who loses? No one wins. No one loses. Scenario 2: you expected 5% inflation and you experienced only 1% inflation. What happened to the purchasing power of the $100 you lent? Your purchasing power has actually increased because your friend paid you back more than enough to compensate for the inflation. Who wins? Who loses? You win because the $ your friend paid back to you has more power to buy. He loses.

50. SUM IT UP!Winners and Losers from Inflation • When actual inflation is below expected inflation, the ____________ gains and the _______________ loses. • When actual inflation is above expected inflation, the ________________ loses and the ________________ gains. • WHY?