Macroeconomic Policy in the Global Economy Issue Paper
zack1011
ITRN503_2020-Spring_session-04_business-fluctuations.pdf
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ITRN 503: Investment and Macroeconomics Auerswald
Professor Philip Auerswald
Session No. 4:
Unemployment, Inflation, and Business Fluctuations
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ITRN 503: Investment and Macroeconomics Auerswald
Session #32
Outline
• Issue paper: One sentence questions • Unemployment • Inflation and the Quantity Theory of Money • Business Fluctuations
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Defining Unemployment
Session #33
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US Unemployment Duration 2005 and 2010
Session #34
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Session #35
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ITRN 503: Investment and Macroeconomics Auerswald
Session #36
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Session #37
Hiring and Firing Costs Increase Long-Term Unemployment
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Introduction
• Robert Mugabe, president of Zimbabwe had a problem. – His policies pushed his country, once called the breadbasket of
Africa, to the verge of starvation. – With nothing left to tax he turned to the last refuge of needy
governments, the printing press. – Result: Hyperinflation
• Inflation went from 50 percent a year to 50 percent a month to 50 percent a day!
Cowen and Tabarrok
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Session #39
Faster Growth in Real GDP Reduces Unemployment
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Percent Job Losses in Post WWII Recessions
Session #310
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Session #311
Female Labor Force Participation Rates Have Increases Rapidly
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Introduction
• In this chapter, we learn… – How inflation is defined and measured – What causes inflation – The costs and benefits of inflation – Why governments sometimes resort to
inflation.
Cowen and Tabarrok
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ITRN 503: Investment and Macroeconomics Auerswald
Defining and Measuring Inflation • Inflation: an ↑in the average level of prices. • Measured using the following formula.
• The average change of all prices. – Some prices go up and some go down. – Think of an elevator containing many prices that change relative to
each other. As the elevator rises, all of the prices rise. The following figure may help.
100 P
PP rate Inflation
1-t
1-tt ´ -
= Where Pt is the
average price level in year t
Cowen and Tabarrok
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ITRN 503: Investment and Macroeconomics Auerswald
Defining and Measuring Inflation At any one point in time some prices
are going up and some are going
down. Inflation is an
increase in the price level.
Cowen and Tabarrok
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ITRN 503: Investment and Macroeconomics Auerswald
Defining and Measuring Inflation
• Price Indexes are used to measure inflation. – An index is a number that compares the price level in one period
relative to the prices in some base year. – An index is only a number; it is not expressed in dollars. – There are several price indexes
• Consumer price index (CPI) • Producer price index (PPI) • GDP deflator
– Let’s take a closer look at each of these…
Cowen and Tabarrok
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ITRN 503: Investment and Macroeconomics Auerswald
Defining and Measuring Inflation
1.CPI: The average price of goods bought by a typical American consumer. – Covers 80,000 goods. – Weighted so that higher priced items count more.
2.Producer price indexes (PPI): The average price received by producers. – Includes intermediate goods as well as final goods.
3.GDP deflator: Measures the average price of all final goods and services.
Cowen and Tabarrok
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ITRN 503: Investment and Macroeconomics Auerswald
Defining and Measuring Inflation
Cowen and Tabarrok
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ITRN 503: Investment and Macroeconomics Auerswald
Defining and Measuring Inflation
Cowen and Tabarrok
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Defining and Measuring Inflation
• Inflation in the United States and Around the World • Using the CPI to calculate real prices
• Real price is the price of a good that has been corrected for inflation.
– Example: » 1982 price of gasoline was $1.25/gal » 2006 it was double that at $2.50/gal. » CPI was 100 in 1982 and 202 in 2006. » Conclusion: The real price of gasoline was about the same in
2006 as it was in 1982.
Cowen and Tabarrok
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ITRN 503: Investment and Macroeconomics Auerswald
Defining and Measuring Inflation
• Inflation in the United States and Around the World (cont.) – Hyperinflation: extremely high rates of inflation that make inflation
in the U.S. look pretty tame by comparison. – A lot of governments have fallen into the trap of inflating their
currency in order to pay debts. – The next table shows some pretty dramatic examples.
Cowen and Tabarrok
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ITRN 503: Investment and Macroeconomics Auerswald Defining and Measuring Inflation
• Inflation in the United States and Around the World (cont.)
Cowen and Tabarrok
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ITRN 503: Investment and Macroeconomics Auerswald
Defining and Measuring Inflation
• Inflation in the United States and Around the World (cont.) • Hungary’s hyperinflation is the highest on record.
– What cost 1 Hungarian pengo in 1945 cost 1.3 septillion pengos at the end of 1946.
– Prices doubled every 15 hours!
World's highest denomination banknote
Hungary (1946) 100 Quintillion pengo
100,000,000,000,000,000,000 Cowen and Tabarrok
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qTakeaway
• Workers and firms adjust to predictable inflation by incorporating inflation rates into wages and contract agreements.
• Anything above a mild sustained inflation is bad for the economy.
Cowen and Tabarrok
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