Page 105 - DMGT551_RETAIL_BUSINESS_ENVIRONMENT

Retail Business Environment

Notes Unemployment

The level of employment is the next crucial macroeconomic variable. The employment level is
often quoted in terms of the unemployment rate. The unemployment rate itself is defined as the
fraction of labor force not working (but actively seeking employment). Contrary to what one
may expect, the labor force does not consist of all able-bodied persons of working age. Instead,
it is defined as consisting of those working and those not working but seeking work. Thus, it
leaves out people who are not working but also not seeking work—termed by economists as
being “voluntarily” unemployed. For purposes of government macroeconomic policies, only
people who are “involuntarily” unemployed are of primary concern.
For different reasons, it is not possible to bring down the unemployment rate to zero in the best
of circumstances. Realistically, economists normally expect a fraction of labor force to remain
unemployed—this fraction for the U.S. labor market has been estimated to be 6 percent.

Did u know? The 6 percent unemployment rate is often referred to as the benchmark
unemployment rate. In effect, if the unemployment level is at 6 percent, the economy is
considered to be at full employment.

Inflation Rate

The inflation rate is defined as the rate of change in the price level. Most economies face positive
rates of inflation year after year. The price level, in turn, is measured by a price index, which
measures the level of prices of goods and services at given time.

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Caution The number of items included in a price index varies depending on the objective
of the index.

Usually three kinds of price indexes, having particular advantages and uses are periodically
reported by government sources. The first index is called the consumer price index (CPI), which
measures the average retail prices paid by consumers for goods and services bought by them. A
couple of thousand items, typically bought by an average household, are included in this index.
A second price index used to measure the inflation rate is called the producer price index (PPI).
It is a much broader measure than the consumer price index. The producer price index measures
the wholesale prices of approximately 3,000 items. The items included in this index are those
that are typically used by producers (manufacturers and businesses) and thus it contains many
raw materials and semi-finished goods. The third and broadest measure of inflation is the called
the implicit GDP price deflator. This index measures the prices of all goods and services included
in the calculation of the current output of goods and services in the economy, the GDP.

The three measures of the inflation rate are most likely to move in the same direction, even
though not to the same extent. Differences can arise due to the differing number of goods and
services included for the purpose of compiling the three indexes. In general, if one hears about
the inflation rate number in the popular media, it is most likely to be the number based on the
CPI.

The Interest Rate

The concept of interest rates used by economists is the same as the one widely used by ordinary
people. The interest rate is invariably quoted in nominal terms—that is, it is not adjusted for

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