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Macroeconomics Exam 2
Terms in this set (44)
What does it mean to be employed? What does it mean to be unemployed? What is a discouraged worker?
Employed means to have a job (even if it's part time or below your skill level). Unemployed means to be out of work and actively looking for a job. A discouraged worker is someone who is out of work but is not currently looking for a job (i.e., they've become discouraged and stopped looking)
What type of people are counted as out of the labor force?
Retirees, military, disabled, institutionalized, and discouraged workers are not part of the labor force
An economy has 1,600 people; 85 are unemployed and 915 are employed. What is the unemployment rate and what is the labor force participation rate?
Labor force = #employed + #unemployed = 915 + 85 = 1,000
Labor force participation rate = (labor force ÷ population) × 100 = (1,000 ÷ 1,600) × 100 = 62.5%
Unemployment rate = (#unemployed ÷ labor force) × 100 = (85 ÷ 1,000) × 100 = 8.5%
Germany has a population of 82 million. 45 million people are employed and there are 48 million people in the labor force.
a. What is Germany's labor force participation rate?
Germany has a population of 82 million. 45 million people are employed and there are 48 million people in the labor force.
a. What is Germany's unemployment rate?
48 mil-45mil all divided by 48 mil
What are the costs of unemployment?
Economic costs - lost wages, profit, and production; lost tax revenue; and increased transfer payments like unemployment benefits, food stamps, Medicaid, etc.
Psychological costs - depression; low self-esteem; stressful family life due to financial hardship
Social costs - potential increases in crime and social problems and the strain placed on the social organizations that address those things (i.e., the budgets of police, fire, and EMT services)
Know the definitions of the three types of unemployment. Be able to identify examples of each.
Frictional unemployment is the time it takes to match a job seeker to the right job (a college graduate hunting for a job); this type of unemployment can be economically beneficial. Cyclical unemployment due to a recession (a delivery worker who is laid off because the economy is in a downturn). Structural unemployment is long-term, chronic unemployment because of language barriers, discrimination, or because workers don't have the necessary skills that current job openings require.
What is the trend in agriculture jobs as a share of the labor force since the BLS first began? What can we say about the citizenship status of farm workers in recent years versus in the early 1990s?
The share of agriculture jobs in the overall labor force has declined substantially. Today, farmworkers only represent around 0.05% of all workers. About 2/3 of farmworkers are immigrants compared to around 50% in the early 1990s.
Who has made up the majority of people leaving the labor force during the pandemic? How do the pandemic job losses compare to job losses seen during the 2007-2009 recession?
The majority of people leaving the labor force are older workers and women. Compared to the 2007-2009 recession, job losses due to the pandemic are more concentrated in service industries where women are more likely to work. In the previous recession, most job losses were seen in male-dominated industries like construction and manufacturing.
What is the consumer price index (CPI) and what does it measure?
The CPI is a measure of the cost of living in a particular period. It's calculated as the cost of a fixed basket of goods/services in some year divided by the cost of that same basket in the base year then multiplying by 100.
1. Suppose a basket of goods consists of 8 sweaters, 4 gallons of milk, and 20 subway trips. In 2003, a sweater costs $80, milk costs $2.50 per gallon, and a subway trip costs $1.50 per trip. In 1995 (the base year), a sweater costs $35, milk costs $0.89 per gallon, and a subway trip costs $0.50 per trip. What is the CPI in 2003? How would you interpret the value?
CPI2003 = (2003 basket value ÷ 1995 basket value) × 100
2003 basket value = (8 × $80) + (4 × $2.50) + (20 × $1.50) = $640 + $10 + 30 = $680
1995 basket value = (8 × $35) + (4 × $0.89) + (20 × $0.50) = $280 + $3.56 + 10 = $293.56
CPI2003 = ($680 ÷ $293.56) × 100 = 2.316 × 100 = 231.6
Prices are 131.6% higher in 2003 than they were in 1995 (the base year). You get 131.6% by subtracting the base year's CPI (CPI is always 100 in the base year) from the 2003 CPI (231.6).
The CPI in 1947 is 22 and the CPI in 1948 is 24. Calculate the rate of inflation between 1947 and 1948.
inflation = [(CPInew - CPIold)/CPIold] ×100 = [(24 - 22)/22] ×100 = 9.1%
What is disinflation? What is deflation?
Disinflation means the rate of inflation is slowing down (i.e., prices are rising, but not as quickly). Deflation means that prices, on average, are falling.
What is a nominal value? What is a real value?
A nominal value is measured in terms of its current dollar value. A real value is measured in physical terms (quantities of goods and services).
Mary earned $6.50 per hour in 1986 when the CPI was 110. She earned $6.85 per hour in 1990 when the CPI was 131. What is Mary's real wage in 1986 versus 1990?
1986 real wage = $6.50 ÷ (110 ÷ 100) = $5.91. 1990 real wage = $6.85 ÷ (131 ÷ 100) = $5.23.
What is deflating? What is indexing?
Deflating converts a nominal value to a real value. Indexing increases a nominal quantity each period by the percentage increase in a specified price index; it prevents the purchasing power of the nominal quantity from being eroded by inflation.
What is a relative price? If average prices rise by 2.5% and the price of a movie rises by 1.8%, what can we say about (a) inflation and (b) the relative price of a movie?
The relative price of a good is a comparison of its price to the prices of other goods and services. (a) prices are increasing, meaning we're experiencing inflation and (b) the relative price of a movie has decreased.
Make sure you know the costs to society of inflation.
Some of the "true" costs of inflation we discussed were shoe-leather costs, noise in the price system, interference with long-term planning, and unexpected redistributions of wealth.
What is core inflation? Why are food and energy prices more volatile than other prices?
Core inflation is when food and energy prices are removed from a price index. These prices tend to be volatile. Supply of food/agricultural products is impacted by environmental factors. A harsh frost one season can kill off a good portion of the orange crop in Florida, for example. Similarly, energy prices - like for oil - can be subject to supply shocks. The Organization of Petroleum Exporting Countries (OPEC) is a big player in the oil industry. If they increase or decrease supply, it can cause large swings in oil prices. On the demand side, a particularly cold winter or hot summer may cause big increases in demand, which drives up the price. It's often the case, however, that big changes in price will revert during the next period (or several periods). Hence, policymakers remove these prices as including them can give an inaccurate picture of what's going on.
Which country experienced the fastest annual rate of growth between 1950 and 2010? Which country experienced the slowest annual rate of growth?
China grew at the fastest pace (4.9%) and Ghana grew the slowest (0.9%).
Joe puts $400 into a bank account that earns a 2% compound annual rate of interest. How much will be in Joe's account after 30 years?
Future value = current value × (1 + i)n = $400 × (1 + 0.02)30 = $724.54
How is standard of living measured? How is average labor productivity measured?
Standard of living (output per person) is measured as GDP ÷ population. Average labor productivity (output per worker) is measured as GDP ÷ # of workers.
Are government policies that boost the economy's growth rate by small amounts worth pursuing?
Yes. The power of compounding means that small changes in the growth rate can mean big increases in living standards down the road.
Suppose 45% of a population is employed and average labor productivity is $18,000. What is real GDP per person?
GDP per person = average labor productivity × share of population employed
GDP per person = $18,000 × 0.45 = $8,100
What is the driving force behind long-run increases in GDP per person?
Increases in average labor productivity
What do economists agree is the most important source of productivity improvements?
What are property rights?
Property rights tell you who owns what and how those things can be used.
What caused productivity growth to speed up in the late 1990s?
Advances in information and communication technology
Is GDP a perfect measure of well-being? What does it leave out? What "good outcomes" is GDP positively correlated with?
GDP is not a perfect measure of well-being. It leaves out non-market transactions, leisure time, underground economic activities, resource depletion, and income inequality to name a few. However, higher GDP tends to be positively correlated with longer life expectancies, higher literacy rates, higher material standards of living, and lower rates of infant mortality rates.
Be able to give some examples of government policies to increase human capital, physical capital, and technology.
The government can provide public education and job training programs to increase human capital; offer tax incentives to encourage saving or simply construct physical capital projects themselves (like bridges, highways, dams, etc.); and increase technology by funding basic research projects.
How do real earnings in 2014 compare to real earnings in 1929 and 1960?
2014 real earnings are double what they were in 1960 and 5 times real earnings in 1929.
During which period did real wages grow the fastest? When did they grow the slowest?
Real wages grew the fastest from 1960-1973; they grew the slowest from 2007-2014.
Know the five main labor market trends discussed in class.
The five trends are: (1) increasing real wages in industrialized countries; (2) slowing wage growth since 1973 and higher levels of employment; (3) increased wage inequality in the U.S.; (4) substantial growth in employment, although it's slowing; and (5) higher average rates of unemployment in Western European countries compared to the U.S.
Know the two factors that labor demand depends on: productivity (marginal product) and output price (P). What is marginal product? What is value of marginal product and how is it calculated?
Marginal product (MPL) is the additional output produced by hiring an additional worker. Value of marginal product (VMPL) is the additional revenue generated by selling the output produced by an additional worker. VMPL = P × MPL.
Maria's Salon is deciding whether to hire a new stylist. The going wage for a stylist is $130 per day. Salon clients are charged an average of $25. If a new stylist is brought on, 8 more clients could be served. Should the salon hire a new stylist?
The MPL is the 8 additional clients that could be served. The VMPL = $25 × 8 = $200. So a new stylist generates $200 additional of revenue and it would only cost $130 to hire this person. Therefore, the salon should hire him/her.
What happens to labor demand when output price (a) increases and (b) decreases?
(a) labor demand increases when output price increases; (b) labor demand decreases when output price decreases.
What happens to labor demand when productivity (a) increases and (b) decreases?
(a) labor demand increases when productivity increases; (b) labor demand decreases when productivity decreases.
How is the labor supply curve shaped? What factors shift the labor supply curve?
The labor supply curve slopes upwards. A shift in labor supply is caused by any change in the number of workers willing to work at each wage. Examples include an increase in the working age population (Baby Boom, higher rates of immigration, people working longer, etc.) and increases in the share of working-age population willing to work (female labor force participation has increased in the last 50 years).
What happens in the labor market if immigration rates increase (i.e., is labor demand or labor supply affected and how does equilibrium change)? What if people start retiring in higher amounts? What happens if people acquire more human capital? What if there is an increase in economy-wide spending?
Higher immigration rates will increase labor supply leading to a decrease in the equilibrium real wage and a higher equilibrium level of employment. Higher rates of retirements reduces labor supply which leads to a higher equilibrium real wage and a lower equilibrium level of employment. More human capital means a more productive workforce so labor demand will increase, which increases the equilibrium real wage and the equilibrium level of employment. More spending will drive of the prices of goods and services, which will cause firms to hire more workers.
How does globalization affect the wages and employment for workers in (a) importing industries and (b) exporting industries?
Globalization (a) reduces the wages of workers in importing industries and (b) increases the wages of workers in exporting industries.
What is worker mobility?
The movement of workers between jobs, firms, and industries
What is skill-biased technological change?
Technological changes that affect the marginal products of high-skilled and low-skilled workers differently
How do government regulations (like health/safety rules and anti-discrimination laws) affect labor markets?
These things tends to decrease the demand for labor
Why is unemployment in Western Europe higher than in the United States?
Labor unions in Western European countries tend to be more powerful and government regulations are more rigid than in the U.S.
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