ECON 240 Assignment 1 The full-employment rate is an arbitrary level of employment that takes into account frictional and structural unemployment. It is used to calculate equilibrium in the changing labor market. It is difficult to calculate the full-employment rate. Economists first find the natural rate of unemployment; in so many words means that those members of the labor force that really want a job have one. If there is an agreed natural unemployment rate of 5% and the unemployment rate is 8% then it can be said that there are workers that desire a job and are unable to find one. Conversely, if the natural unemployment rate is 5% and the unemployment rate is 3% then theoretically everyone who is interested in obtaining a job has one.
From 1950 to 1960 the full-employment rates fell between 3 and 5%. However, in the 1970 s, the post World War II baby boomers began to enter the labor force, as well as half of the eligible women began working. This added a great deal of young and inexperienced people to the job pool. The natural unemployment rate then increased to somewhere around 7%. Now, in the early 21 st century, those baby boomers will be retiring from the labor force, decreasing the natural rate of unemployment and the full-employment rate.
The Gross Domestic Product (GDP) is the total market value of all final goods and services produced by factors of production located within a nation s borders. This can be calculated using either the expenditure approach, or the income approach. However, some production is not included in the GDP. If it is only calculating the products sold in the market, then the DIY production is not calculated. One of the largest sections of our national income that GDP cannot calculate is the underground economy, or money made by illegal activities. This would include the money exchanged as a result of drugs or prostitution and also the evasion of taxes on legal activities as well.
Many economists believe this amount of money exchanged to be quite substantial. The GDP ignores depreciation and fails to take into account the value of obsolete capital. GDP does not reflect all costs such as the effect our production has on the environment. Another disadvantage to using GDP in measuring our well being is that the GDP values all output equally. Market price determines the value of an output. Each dollar that is spent is counted the same.
Of course, as with any event, there are always beneficiaries and losers. Such is the case when inflation occurs as well. When we are in a state of inflation, the average of all prices of goods and services in our economy is rising. Who can benefit and who can lose depends on which type of inflation is occurring. Anticipated inflation is the rate of inflation that we believe will occur.
Unanticipated inflation is just that; it is inflation that we were not expecting to occur. If there is a period of unanticipated positive inflation, creditors would lose and those borrowing credit would win. Banks, Venture Capitalists, and Credit card companies all stand to lose money on the money that they have loaned. Businesses and households and possibly State Governments gain because the nominal interest rate they are being charged does not fully compensate for the inflation that actually occurred.
Conversely, when there is a period of negative unanticipated positive inflation, the borrowers lose and the creditors gain. If you were planning on borrowing money, you would need to know the real rate of interest that you will have to pay. The real rate of interest is calculated by taking the nominal rate of interest minus the anticipated rate of inflation. If you borrow money at 5%, and you anticipate an inflation rate of 5%, then your real rate of interest would be zero.
If you knew that prices were going to go up, it would be advantageous to borrow money at a fixed interest rate. Therefore, if inflation occurs while you are paying back your money each month, you would be paying less back because of the tendency of money to depreciate when inflation occurs.