Inflation- a sustained increase of the average level of prices.
Inflation rate- percentage by which the average price level, expressed as Price Index (PI) as risen between two periods.
Unemployment- an individual is considered unemployed if he/she is actively searching for a job and cannot find one.
Inflation:
How it is measured-
The average level of prices is measured through the price index.
Statisticians determine the basket of goods and services that a "typical household" buys. (CPI)
The average is weighted, as goods and services are not of equal significance to consumers.
This cost of purchasing the basket of goods is then expressed as an index number, to be compared to previous or future baskets.
Problems of measurement-
The "typical consumer" is fictitious. This person must be old and young, live in rural and urban areas, and must be relatively wealthy as well as relatively poor. If a government was trying to use the inflation rate figure to determine whether or not to increase pensions, the inflation rate encompasses not only the older people, but the rest of the country as well.
The weights used for the average price level are fixed. As a result the inflation rate of an increase in the price of some good is overestimated ( substitution bias).
New products are not immediately taken into account in the construction of the average price level.
Prices from new retail outlets, such as online stores (Amazon), may not be sufficiently sampled as these stores usually have lower prices. (new retail outlet bias)
Improved quality of goods and services may not be properly accounted for. (quality bias)
Types of inflation-
Demand-pull: the extent of the inflationary effect results from an increase in AD.
Cost-push: results from a decrease in AS.
Bias Definitions:
Substitution bias- Even though some consumers will switch away from it and purchase a cheaper substitute, its significance in the construction of the average will be the same. The official inflation rate may overestimate true inflation.
New retail outlet bias- new retail outlets usually have lower prices, possibly causing overestimation of true inflation.
Unemployment:
How it is measured: Houselhold surveys or by counting the number of people registered as unemployed and receiving benefits
# of unemployed X 100
Size of labor force
Problems with measurement:
Survey results are just estimates.
Some individuals may misrepresent their true status.
Governments have been accused of manipulating eligibility requirements to register as unemployed, skewing results.
Types of Unemployment:
Seasonal-Some firms can not operate during certain seasons (construction workers get laid off in the winter)
Frictional- People who are in between jobs.
Cyclical (Keynesian)- directly related to the business cycle. Higher unemployment accompanies a recession and vice versa.
Structural- those who remain unemployed long after the economy has started to recover.
Inflation:
Bias Definitions:
Unemployment:
# of unemployed X 100
Size of labor force