Chapter 28: Unemployment

The unemployment rate is the percentage of those who would like to work who do not have jobs. The bureau of Labor Statistics calculates this statistic monthly based on a survey of thousands of households. The unemployment rate is an imperfect measure of joblessness. Some people who call themselves unemployed may actually not want to work, and some people who would like to work have left the labor force after an unsuccessful search and therefore are not counted as unemployed. In the U.S. economy, most people who become unemployed find work within a short period of time. Nonetheless, most unemployment observed at any given time is attributable to the few people who are unemployed for long periods of time. One reason for unemployment is the time it takes workers to search for jobs that best suit their tastes and skills. This frictional unemployment is increased as a result of unemployment insurance, a government policy designed to protect workers' incomes. A second reason our economy always has some unemployment is minimum-wage laws. By raising the wage of unskilled and inexperienced workers above the equilibrium level, minimum wage laws raise the quantity of labor supplied and reduce the quantity demanded. The surplus of labor represents unemployment. A third reason for unemployment is the market power of unions. When unions push the wages in unionized industries above the equilibrium level, they create surplus of labor.

Chapter 27: The Basic Tools of Finance

Because savings can earn interest, a sum of money today is more valuable than the same sum of money in the future. A person can compare sums from different times using the concept of present value. The present value of any future sum is the amount that would be needed today, given prevailing interest rates, to produce that future sum. Because of diminishing marginal utility, most people are risk averse. Risk-averse people can reduce risk by buying insurance, diversifying their holdings, and choosing a portfolio with lower risk and lower return. The value of an asset equals the present value of the cash flows the owner will receive. For a share of stock, these cash flows include the stream of dividends and the final sale price. According to the efficient markets hypothesis, financial markets process available information rationally, so a stock price always equals the best estimate of the value of the underlying business. Some economists question the efficient markets hypothesis, however, and believe the irrational psychological factors also influence asset prices.

Article Review #6: Newsflash From The December ‘Jobs’ Report—–The US Economy Is Dead In The Water

Similar to the recent chapter’s ideas of seasonal adjustments to account for the quarterly GPA, Stockman’s articles criticizes the use of “seasonal adjustments” in the creation of jobs during the month of December. Stockman exposes the BLS for using almost random numbers to make the economy seem to be in a stronger state than it really is. Creating a fake positive image for the current state of the economy is a worrisome tactic, and I feel like it would be better if information was not blown up to be made pretty. I feel like Stockman is a bit biased at this point. The man is always criticizing Keynesian economists, and seems to hold something negative against them. It’s helpful to see the current situation from Stockman’s point of view, but it would be better if there was an included different side of the argument. As of December 2015, the economy is resting on the top of the business cycle; the country is due for another recession. Fake statistics will not change this, especially due to a lack of breadwinner jobs. Currently, jobs produce less money than they did years ago; supposedly, the income from approximately 2.5 jobs now is worth 1 job from the 1960s when adjusted for inflation and continuous technological advancement. Business sales as well as business shipments are decreasing at an alarming rate.

Chapter 26: Saving, Investment, and the Financial System

The US financial system is made up of many types of financial institutions, such as the bond market, the stock market, banks, and mutual funds. All these institutions act to direct the resources of households that want to save some of their income into the hands of households and firms that want to borrow. National income accounting identities reveal some important relationships among macroeconomic variables. In particular, for a closed economy, national saving must equal investment. Financial institutions are the mechanism through which the economy matches one person's saving with another person's investment. The interest rate is determined by the supply and demand for loanable funds. The supply of loanable funds comes from households that want to save some of their income and lend it out. The demand for loanable funds come from households and firms that want to borrow for investment. To analyze how any policy or event affects the interest rate, one must consider how it affects the supply and demand for loanable funds. National saving equals private saving plus public saving. A government budget deficit represents negative public saving and, therefore, reduces national saving and the supply of loanable funds available to finance investment. When a government budget deficit crowds out investment, it reduces the growth of productivity and GDP.

Chapter 24: Measuring the Cost of Living

The consumer price index shows the cost of a basket of goods and services relative to the cost of the same basket in the base year. The index is used to measure the overall level of prices n the economy. The percentage change in the consumer price index measures the inflation rate. The consumer price index is an imperfect measure of the cost of living for three reasons. First, it does not take into account consumers' ability to substitute toward goods that become relatively cheaper over time. Second, it does not take into account increases in the purchasing power of the dollar due to the introduction of new goods. Third, it is distorted by unmeasured changed in the quality of goods and services. Because of these measurement problems, the CPI overstates true inflation. Like the consumer price index, the GDP deflator measures the overall level of prices in the economy. Although the two price indexes usually move together, there are important differences. The GDP deflator differs from CPI because it includes goods and services produced rather than goods and services consumed. As a result, imported goods affect consumer price index but not the GDP deflator. In addition, while the consumer price index uses a fixed basket of goods, the GDP deflator automatically changes the group of goods and services over time as the composition of GDP changes.

Chapter 23: Measuring a Nation's Income

Chapter 23 discusses GDP and income. Because every transaction has a buyer and a seller, the total expenditure in the economy must equal the total income in the economy. Gross Domestic Product measure an economy's total expenditure on newly produced goods and services and the total income earned from the production of these goods and services. More precisely, the GDP is the market value of all final goods and services produced within a country in a given period of time. GDP is divided among four components of expenditure: consumption, investment, government purchases, and net exports. Consumption includes spending on goods and services by households, with the exception of purchases of new housing. Investment includes spending on new equipment and structures, including household's purchases of new housing. Government purchases include spending on goods and services by local, state, and federal governments. Net exports equal the value of goods and services produced domestically and sold abroad, subtracted by the value of goods and services produced abroad and sold domestically. Exports - Imports = Net exports. Nominal GDP uses current prices to value the economy's production of goods and services. Real GDP uses constant base-year prices to value the economy's production of goods and services. The GDP deflator measures the level of prices in the economy.