Economics Micro & Macro (CliffsAP)

been laid off from employment. These people are all labeled frictionally unemployed. Essentially, frictional

unemployment is when workers are either searching for jobs or waiting to take jobs.

■ Structural unemployment:If Sally is working as a retail clerk and her store gets a new computerized register,

Sally needs to become acquainted with the new technology or she will face being structurally unemployed. This

category includes any worker who becomes unemployed due to a lack of skill with a new technology introduced

by his or her employer.

■ Cyclical unemployment:This results from the normal fluctuations of the business cycle. Cyclical unemployment

is caused by a decline in total spending in the economy and is likely to occur in the contraction phase of the busi-

ness cycle.

Full Employment

Because we have unemployment that is unavoidable (frictional and structural), between 4 percent and 5 percent of the
labor force can be unemployed and we can still be considered at full employment. Full employmentoccurs when there
is no cyclical unemployment and the economy is producing its potential output. When the economy is maximizing its
efficiency, virtually all resources available are employed.

Full employment is illustrated in Figure 3-3. In the graph, full employment is present in range 2. In range 2, we have a
slight increase in price level (to allow growth) and virtually all resources employed. At any point beyond range 2, we no
longer have growth for the economy; rather, the price level begins to rapidly increase (inflation) because all resources
have been employed.

Figure 3-3

Inflation

If you walk into a coffee shop and the price of your usual cup of coffee has increased from $2.25 to $3.50, it’s tempting
to blame inflation; however, this may not be the case. Inflation is the biggest macroeconomic problem that economists
face. Inflation is not an increase in price for one good, two goods, or even fifty goods. Inflationoccurs when the U.S.
Bureau of Economic Analysis examines the prices of its market basket of goods(which consists of approximately
300 goods), and discovers that the average price of this basket has risen. Indexes measure inflation by comparing
general price levels in any year with prices in a base year. The most common index used to measure inflation is the
Consumer Price Index (CPI). Here is the formula for calculating CPI:

Price

Level

Total Spending

GDP

Full

Employment

Range 1

Range 2

Range 3

Part II: Macroeconomics