Chapter 11 – Unemployment & Labor Markets

BLS Household Survey

• 60,000 households monthly

• Population: 333,287,557

  • Age 17+: 269,523,012

  • Children: 63,764,545

  • Civilian Noninstitutional Population: 263,973,000

  • Labor Force: 164,287,000

    • Employed: 158,291,000

    • Unemployed: 5,996,000

    • Not in Labor Force: 99,686,000

Key Formulas:

• Unemployment Rate (UR) = (Unemployed / Labor Force) × 100 → 3.7%

• Labor Force Participation Rate (LFPR) = (Labor Force / Civilian Noninstitutional Pop) × 100 → 62.2%

Alternate Measures of Unemployment (U1–U6):

• U3: Official unemployment rate

• Marginally attached: sought work in the past year but no longer looking

• Underskilled: working below qualifications or hours desired

• Involuntarily part-time: want full-time but work part-time

• US Unemployed = Discouraged + Marginally Attached OR Discouraged + Involuntarily Part-Time

Labor Market Dynamics:

• Supply: >5M start new jobs, >5M leave jobs monthly

• Demand: Businesses hire/eliminate jobs daily

• Firms = demanders (hire based on Value of Marginal Product of Labor)

• Households = suppliers (opportunity cost = leisure/outside options)

• Wages = price of labor

Types of Unemployment:

• Frictional: moving between jobs, job search, skills mismatch, affected by UI

• Structural: wages above equilibrium, unions, job protection laws, minimum wage, monopsony vs competitive labor markets

• Cyclical: caused by recessions

Efficiency Wages:

• Paying above equilibrium → ↑ productivity, ↓ turnover

• Example: Ford $5 wage (1913) → absentee 10%, turnover 370%, ↑ productivity

• Can lower total labor costs but create structural unemployment

Unemployment Insurance (UI):

• Must be actively looking for work

• Temporary; doesn’t increase long-term unemployment

• Hysteresis: long unemployment → higher equilibrium UR

• Impacts: poverty risk, lower resources for children, lower life expectancy, higher government spending, less tax revenue

Chapter 12 – Inflation

Definition: Rise in average prices

• What is measured: Cost of Living (CPI) & Real Output (GDP Deflator)

Price Indices:

• CPI-U: All Urban Consumers (87%)

• CPI-W: Wage Earners & Clerical Workers (32%)

• PCE: Personal Consumption Expenditure (Core = net energy & food)

• PPI: Producer Price Index

• GDP Deflator

Historical Hyperinflation:

• Major wars, Fall of USSR, French Revolution (1795)

Calculating Inflation:

• Δ% = (New – Old) / Old × 100

• Example: Inflation2025 = (BasketPrice2025 – BasketPrice2024) / BasketPrice2024 × 100

Real vs Nominal:

• Real wage = adjusted for inflation

• Real wealth = adjusted for inflation

• Real revenues = adjusted for inflation

• Adjusting: Cash[New] = Cash[Old] × (CPI[Old] / CPI[New])

Costs of Inflation:

• ↑ cost of living, weakens paycheck if wages lag

• Avoid holding cash; invest in TIPS, low-risk mutual funds, real estate

• Real interest rate = Nominal – Inflation

• Borrowers benefit; lenders lose when inflation ↑

Measurement Issues:

• ShadowStats claims real inflation ≈ 10% using pre-1983 method

Chapter 14 – Investment & Productivity

Core Ideas:

• Explains why countries are rich and how to reduce recessions

• Investment fluctuates most during recessions; ↑ labor productivity

Productivity & Capital:

• Physical capital ↑ → labor more productive

• Increased capital intensity correlated with ↑ productivity

Business Cycles:

• Y = C + I + G + NX

• Investment ≈ 17.3% of GDP; cyclical

• Investment = resources for future production (not financial assets)

Capital Stock:

• Buildings, machines, software, animal herds; depreciates over time

• Examples: Intellectual Property $1,486B; Equipment $1,390B; Residential $1,052B; Structures $832B; Inventories $18B

Types of Investment:

• Business Investment: new capital

• Inventories: raw materials, WIP, unsold goods

• Housing Investment: building/improving houses/apartments

Loanable Funds Market:

• Savers = supply, borrowers = demand

• Interest rate = price of loans

• Return on savings = opportunity cost of spending

• Lower interest → more projects profitable; higher interest → more savings

Investment Timing:

• Future Value (FV) = PV × (1 + r)^t

• Present Value (PV) = FV / (1 + r)^t

• Rational Rule: PV of all payments ≥ total current cost

• Present value of royalties = first year revenue / (r + d)

Shifters:

• Supply: personal savings rate, global shocks, government budget surplus/deficit

• Demand: tech advances, new opportunities, expectations, corporate taxes, lending standards

Future Interest Rate Trends:

• Could ↓: global savings glut, less capital-intensive tech, sharing economy

• Could ↑: new growth opportunities, retiring boomers, green tech, AI expansion

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Chapters 9–10 Cheat Sheet: GDP & Economic Growth

Stock vs Flow

• Stock: Measured at a point in time (e.g., total wealth, # of tractors).

• Flow: Measured over time (e.g., new tractors built this year, GDP).

GDP (Gross Domestic Product)

• Measures new production of final goods/services in a period.

• Uses market prices: GDP = Σ (Price × Quantity).

• Intermediate goods not counted separately (counted in final good).

• Measured for past 12 months, released quarterly.

• Current GDP ≈ $28.7T.

3 Approaches

1. Expenditure: Y=C+I+G+NX

   • C = Consumption   I = Investment   G = Gov. purchases   NX = Exports – Imports

2. Income: Labor Income + Capital Income = Total Income

3. Value-Added: Value Added = Sales – Cost of Inputs

Examples

Factory sells frame: $100 (Value Added $100) → Retail sells bike $350 (VA $250) → Consumer buys $400 (VA $50) → Final GDP $400.

Economy Composition

• Services = 82.5%   Goods = 17.5%.

• Shadow/illegal markets not in GDP (hard to measure).

• GDP limits: excludes informal activity, environment, happiness, beauty, air, etc.

• Higher GDP ≠ wellbeing, but productive capacity allows purchase of what we value (education, healthcare, preservation).

GDP Details

• GDP=P×Q

• Nominal GDP: measured in current prices.

• Real GDP: measured in constant prices.

• Average Price: P̄=Pt+Pt−12

• Growth Relationship: Nominal GDP Growth = Real GDP Growth + Inflation.

• Example: Couch $1500→$1530, Q=100→103:
  Nominal GDP = 150k→157.59k;
  Avg Price $1515 → Real GDP = 151.5k→156.045k.

• Avg Real GDP Growth (1948–2023): 3.1%; (1948–75): 3.8%; (1976–2023): 2.7%.

📗 Chapter 10: Economic Growth

Why It Matters

• Growth → real prosperity, higher living standards, less poverty, more security & opportunity.

Historical Roots

• Ag Revolutions:
  PNG (6000 BC) Sugarcane/Bananas;
  Mesoamerica (4500 BC) Maize/Beans;
  Peru (3500 BC) Potatoes/Llamas;
  E. Africa (3100 BC) Millet/Rice/Sorghum/Wheat;
  E. N. America (2000 BC) Pumpkins.

• Industrial Revolution: Fertilizers → population growth; textiles → machines; Watt steam engine; railroads → cheaper transport, connected markets.

• Led to: urbanization, political engagement, tech progress, middle class.

Production Function

Y=F(L,H,K)

• L: Labor (workers, hours).

• H: Human Capital (education, literacy, on-the-job training).

• K: Physical Capital (tools, machines).

• Constant Returns to Scale: double inputs → double output.

• Diminishing Marginal Returns: double one input →

• Get more labor: population growth, births, immigration, ↑ participation.

• Human Capital: literacy & education boost productivity.

• Physical Capital: tools/machinery complement labor → efficiency ↑.

• Growth Ingredients: Productivity, Human Capital, Physical Capital, Labor, Output.

Solow Model (Robert Solow, Nobel 1987)

• Physical capital has diminishing returns → long-run growth needs efficiency gains.

• Efficiency sources: better tech, new methods, better institutions.

• Constant Returns to Scale: double inputs → double outputs.

• Diminishing Returns: more inputs help less each time.

• Catch-Up Effect: poorer nations can grow faster if institutions/tech allow.

• Most long-run growth = tech & institutions.

Institutions & Growth

• Inclusive institutions: promote innovation, growth, fair opportunity.

• Extractive institutions: elites hoard surplus → stagnation.

• Good property rights + political stability = investment & innovation.

• When businesses seek political favor > competition, growth suffers.

Environment & Growth

• More productivity → more resources for environmental protection.

• U.S. forest area stable ~100 years; tech reduced CO₂.

• Productive capacity → sustainability if paired with innovation.

Malthus & Limits

• Thomas Malthus (18th c.): predicted finite resources → subsistence forever.

• Reality: technology & institutions overcame resource limits.

Asian Tigers (1960–2022)

• Japan, Singapore, Hong Kong, Korea → rapid GDP/capita growth.

• Solow’s catch-up not universal; some nations stayed poor due to institutions.

• Real global difference = poverty rates, not potential quality of life.

Key Formulas

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