# What does the CPI in the base year equal? Essay

Published: 2020-02-05 23:12:45
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CPI or the consumer price index is a measure of overtime change in prices of market basket of goods and services which are purchased by a typical household. The base year can be defined as the bench mark year which serves as the basis for comparison for prices in the other years. When calculating CPU we compute the ratios of current market prices for each good to its base year price and on summing up the ratios they are weighted by the share of goods in the base year expenditure.

The result is multiplied by 100 and hence the CPI for the base year is 100. 2. Show that if percentage rise in prices is equal to % rise in nominal income then ones real income does not change. Nominal income refers to the money received as wages, rent interest or profits while real income measures the amount of goods and services that nominal income can buy. It can also be defined as the purchasing power of nominal income. Real income= nominal income /% price index.

Suppose we raise the nominal income and the price index by 20% each the real income will remain constant. 3. How does structural unemployment differ from frictional unemployment? Structural unemployment is said to occur when structural changes in the economy arise eliminating some jobs for which the unemployed are not qualified while frictional unemployment refers to the unemployment that occurs when individuals with transferable skills change jobs or enter the labor force.

It is short term, desirable and experienced as people move from one job to the next. Structural unemployment demands or rather requires that individuals acquire new skills unlike the case of frictional unemployment when they are already qualified. (McConnell C and Brue S, 136). 4. What does it mean to say that the country is operating in full employment? A country is said to be operating in full employment when the only unemployment that it is experiencing is frictional and structural or rather there is no cyclical unemployment.

This means that the economy only operates at its natural unemployment rate. (McConnell C and Brue S, 139). 5. What is so natural about natural unemployment? Natural unemployment refers to the unemployment that occurs naturally or which occurs when the economy is operating at its potential output or the real GDP when the economy is fully employed. (McConnell C and Brue S, 137). 6. What is the difference between the employment rate and the labor force participation rate? The unemployment rate refers to the % of individual labor force that is unemployed.

Unemployment rate = unemployed/labor force *100 The labor participation on the other hand refers to the % of civilian noninstitutional population which is civilian labor force. 7. Criteria that must be met for someone to be characterized as unemployed. People are said to be unemployed if they are able and willing tow work. They must be in the category of the countrys labor force which comprises of both the employed and those seeking for jobs. They must be above 16 years and eligible to work.

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