← Back to the Principles of Macroeconomics outline The Course Maker
← Principles of Macroeconomics outline
Week 3 · Lecture outline

Week 3 — Lecture Outline · Measuring Inflation & Unemployment

Principles of Macroeconomics · ECON 2 Fall 2026 · Prof. Ashford Fictional sample

Course: Principles of Macroeconomics (ECON 2) · Silver Oak University (fictional sample) · Prof. Ashford
Objective 3 — measure the price level and the labor market (CPI, inflation rate, unemployment rate, LFPR); classify types of unemployment · SLO A & B
Meeting pattern: two 75-min sessions (≈150 min). Segment minutes below total ~150 — scale to your room.

The deck (E), the tutorial (C), and the workshop (P) all teach from this outline. Every number here is pre-computed and independently verified (see _build/logs/week-03-numbers.txt).

Week at a glance
Big question How do economists measure "how expensive things are getting" and "how many people who want jobs have them" — and what do these numbers leave out?
By week's end students can (1) compute the CPI from a fixed basket of goods and read the inflation rate from CPI values; (2) explain why a CPI level and an inflation rate are different numbers; (3) compute the unemployment rate and the LFPR from raw labor-market counts; (4) classify unemployment as frictional, structural, or cyclical, and explain why discouraged workers are excluded from the labor force; (5) compute a real wage change from a nominal raise and an inflation rate.
Key vocabulary Consumer Price Index (CPI), base year, market basket, inflation rate, real vs. nominal, unemployment rate, labor force, labor-force participation rate (LFPR), discouraged worker, frictional unemployment, structural unemployment, cyclical unemployment, real wage
Materials whiteboard; the Week-3 readings/links; a calculator; an approved chatbot
Timing note 8 segments ≈ 150 min across two sessions. Trim Segment 7 (interaction) if short on time.

Segment 1 — HOOK: "Did your raise actually help you?" (10 min)

Open with a scenario: "Suppose your boss gives you a 4% raise this year. Good news, right? Now I tell you prices rose 5% this year. Did you come out ahead or behind?" Let the room debate — most will say "still ahead, you got a raise!" Hold the answer until Segment 5, where you'll compute it exactly. Use the tension to set up the week: two numbers — the price level and the job market — sit behind almost every economic headline you'll ever read, and both get misquoted constantly.

Name the week's two big instruments: the Consumer Price Index (CPI), which tracks the cost of living, and the unemployment rate, which tracks the job market. Both are measurement tools — this week is about getting the arithmetic and the definitions exactly right, before we get into policy debates (that starts later in the course).

Segment 2 — THE CPI: TRACKING THE COST OF LIVING (25 min)

Plain-language idea first: imagine buying the exact same basket of groceries every year and watching what it costs. If the total keeps rising, prices are rising — that's the whole idea behind the Consumer Price Index (CPI).

The CPI is built from a fixed "market basket" — a representative bundle of goods and services — priced every year at current prices. The base year is set to CPI = 100 by definition; every other year's CPI shows the basket's cost relative to that base year.

Build the model from a scenario (worked example — do every step on the board):

A tiny fictional economy's CPI basket contains: 10 pizzas at $8 each, 20 cups of coffee at $3 each, and 4 textbooks at $15 each.

  • Base-year basket cost: 10 × $8 = $80, plus 20 × $3 = $60, plus 4 × $15 = $60 → $80 + $60 + $60 = $200. By definition, CPI = 100 in the base year.
  • Year 2, same basket, new prices: pizza rises to $9, coffee to $3.30, books stay at $15. New cost: 10 × $9 = $90, plus 20 × $3.30 = $66, plus 4 × $15 = $60 → $90 + $66 + $60 = $216.

✅ VERIFIED NUMBERS (pre-computed; do not recompute live)

  • CPI (year 2) = (new basket cost ÷ base-year basket cost) × 100 = (216 ÷ 200) × 100 = 108.
  • Inflation rate (year 1 → year 2) = CPI − 100 = 108 − 100 = 8%. (Equivalently: (216 − 200) ÷ 200 × 100 = 8%.)
  • Year 3: the same basket now costs $226.80 → CPI = (226.80 ÷ 200) × 100 = 113.4.
  • Inflation rate (year 2 → year 3) = (113.4 − 108) ÷ 108 × 100 = 5.4 ÷ 108 × 100 = 5%. (Note: once you're past the base year, the inflation-rate formula is % change in CPI, NOT "new CPI minus 100" — that shortcut only works for the very first year after the base year.)

The misconception to kill, right here, out loud: a CPI level is not an inflation rate. CPI = 108 does not mean "8% inflation is happening today" — it means "prices are 8% higher than in the base year." The inflation rate is the percentage change in the CPI from one period to the next. Write both numbers on the board side by side and make students say which is which.

Segment 3 — THE UNEMPLOYMENT RATE & THE LABOR FORCE (25 min)

Plain-language idea first: not having a job doesn't automatically make you "unemployed" in the economist's sense. A retiree, a full-time student, a stay-at-home parent by choice — none of these count as unemployed. You have to be actively searching for work and not finding it.

Build the model from a scenario (worked example — every step shown):

A fictional economy called Meadowland has an adult (16+) population of 200 million. Of these, 114 million are employed, and 6 million are unemployed — meaning they don't have a job and are actively searching for one.

  • Labor force = employed + unemployed = 114 + 6 = 120 million. (Note what's excluded: anyone not working and not searching — retirees, full-time students not seeking work, and, critically, discouraged workers — is simply outside the labor force altogether, not counted as "unemployed.")
  • Unemployment rate = unemployed ÷ labor force × 100 = 6 ÷ 120 × 100 = 5%.
  • Labor-force participation rate (LFPR) = labor force ÷ adult population × 100 = 120 ÷ 200 × 100 = 60%. (This tells us what share of the adult population is even IN the labor market — working or looking — as opposed to out of it entirely.)

Name the trap: a discouraged worker — someone who wants a job, has looked before, but has given up searching — is not counted as unemployed and is not counted in the labor force at all. This matters a lot: if a wave of discouraged workers leaves the labor force, the measured unemployment rate can fall even though the job market hasn't actually improved — because the denominator (the labor force) shrank. This is a real, honestly-taught limitation of the official rate, not a partisan claim.

The three types of unemployment (name and define each with a one-line example):
- Frictional — short-term, between-jobs unemployment as people search for a better match (a recent graduate interviewing for their first job). Considered a normal, even healthy, feature of a dynamic labor market.
- Structural — a mismatch between workers' skills/location and available jobs, often from long-run shifts in technology or industry (a coal-plant worker whose skills don't match nearby tech-sector openings).
- Cyclical — unemployment that rises and falls with the business cycle — job losses concentrated in recessions (a factory laying off workers during an economy-wide downturn). (We'll build the business-cycle model that drives this in Weeks 5–6.)

Segment 4 — REAL VS. NOMINAL, APPLIED TO YOUR PAYCHECK: THE REAL WAGE (15 min)

Callback to the hook: now answer it. A worker gets a 4% nominal raise, but inflation this year is 5%.

✅ VERIFIED NUMBERS (pre-computed; do not recompute live)

  • Real wage change ≈ nominal wage change − inflation rate = 4% − 5% = −1%.
  • Interpretation: even though the paycheck number went up, the worker can actually buy about 1% less than before — their real (purchasing-power-adjusted) wage fell, even as their nominal (dollar-amount) wage rose.

Say it in words (the SLO-A habit): "A raise measured in dollars is a nominal change; what that raise can actually buy is the real change — and you can't know if you're really ahead without comparing your raise to inflation." This is the exact same real-vs-nominal habit from Week 2's GDP deflator, now applied to something personal.

Segment 5 — TECHNOLOGY WORKFLOW + AI-CRITIQUE (20 min)

Live demo (spreadsheet or by hand): build a two-column table — "Item / Base-year cost / Year-2 cost" — for the pizza/coffee/books basket, sum both columns, and compute CPI = (new ÷ base) × 100. Then build a second small table — "Employed / Unemployed / Labor force / Population" — and compute the unemployment rate and LFPR live.

AI-critique moment (do this with the class): Ask an approved chatbot: "A country's CPI basket cost $200 in the base year and $216 this year. What is the CPI, and what is the inflation rate? Separately, if 114 million people are employed and 6 million are unemployed out of a 200 million adult population, what is the unemployment rate and the labor-force participation rate?" Then audit it together: the right answers are CPI = 108, inflation = 8%, unemployment rate = 5%, LFPR = 60%. Chatbots frequently report the CPI level (108) as "the inflation rate" without subtracting the base of 100, or divide the unemployed by the total population (200M) instead of the labor force (120M) when computing the unemployment rate — an easy, common slip. Make the class catch both errors and state the correct reasoning. The habit all term: the tool drafts, you judge.

Segment 6 — NAMED MISCONCEPTIONS + CURES (10 min)

Run this as a rapid board list, one line each — cure right after each trap:

  • Trap: "CPI = 108 means 108% inflation." Cure: CPI is an index level relative to the base year (=100); the inflation rate is the percent change in that level (108 → 8% inflation from the base year).
  • Trap: "Everyone without a job is unemployed." Cure: only those actively searching count as unemployed; a discouraged worker who stopped looking is excluded from the labor force entirely — not counted as unemployed OR employed.
  • Trap: "A falling unemployment rate always means the job market improved." Cure: it can fall because discouraged workers left the labor force (shrinking the denominator), not because more people found jobs — a genuine, factual limitation of the headline rate.
  • Trap: "A raise always makes you better off." Cure: only if the real wage (nominal raise minus inflation) is positive — a 4% raise during 5% inflation is a real pay cut.

Segment 7 — INTERACTION: classify-and-compute (12 min)

Pose two rapid-fire rounds. Round 1 (classify): read four short scenarios and have pairs shout "frictional," "structural," or "cyclical" — (1) a new college grad interviewing for two months before landing a job (frictional); (2) a factory town where machines replaced assembly-line workers and remaining jobs need different skills (structural); (3) mass layoffs across industries during an economy-wide downturn (cyclical); (4) a chef between restaurant jobs for three weeks (frictional). Round 2 (compute): give a fresh mini labor-market table (adult population, employed, unemployed) and have pairs race to compute the unemployment rate and LFPR. This previews both the quiz and Discussion 3's "who bears each burden" framing.

Segment 8 — CALLBACKS, TEASE & THE WEEK'S WORK (10 min)

  • Callback: every tool this week measures something the news reports constantly — but each one has a precise definition (a CPI level ≠ an inflation rate; "unemployed" requires active searching) that headlines routinely blur.
  • Tease next week: "Now that we can measure prices and jobs, next week we ask a bigger question: how does an economy get richer over time? Growth rates, productivity, and a shortcut called the rule of 70."
  • The week's work: Lecture Tutorial (CPI → inflation rate → unemployment rate → LFPR → types of unemployment → real wage), Practice (6 reps), Quiz 3, Discussion 3, Assignment 3, and Workshop 3 ("The CPI & the Unemployment Rate from Raw Data").

Instructor FAQ — common stumbles

  • "Isn't a CPI of 108 just '8% inflation'?" Only if you're comparing to the base year. Once you're past year 2, the inflation rate is the percent change between two CPI values (e.g., 108 → 113.4 is a 5% inflation rate, not "5.4 points"). Always compute % change, never subtract raw CPI values and call it a rate past the first comparison.
  • "If someone doesn't have a job, aren't they unemployed?" Not in the technical sense — they must be actively searching. Retirees, full-time students not seeking work, and people who've stopped looking (discouraged workers) are outside the labor force, not "unemployed."
  • "So a falling unemployment rate is always good news?" Not necessarily — it's worth checking the LFPR alongside it. If LFPR is also falling, some of the "improvement" may be discouraged workers leaving the labor force rather than genuine hiring. This is a factual measurement caveat, not a partisan claim about any policy.
  • "What's the difference between structural and cyclical unemployment?" Structural is about a mismatch (skills, location, or industry) that can persist regardless of the business cycle; cyclical rises and falls with the economy-wide business cycle (built starting Week 5). Frictional is just the normal churn of matching workers to jobs.
  • "My nominal wage went up — why would I ever be worse off?" Because "up" only tells you the dollar amount rose. Whether you can actually buy more depends on how fast prices rose too — that's the real-wage calculation: nominal % change minus inflation %.

~ Prof. Ashford's edition · Fall 2026 · built with thecoursemaker.com