Facing Economic Challenges Economics Chapter 13 Notes

Economic Challenges Three economic challenges discussed in this chapter: Unemployment Poverty and Income Distribution Inflation

Economic Challenges - Unemployment Unemployment has a variety of causes. Some level of unemployment is expected, even when an economy is healthy. Underemployed—work part-time, want full-time or work below skill level

Measuring Unemployment The Unemployment Rate Measure of unemployment Includes those over 16 who are not working, are able to work and actively seeking work Does not include military, those in prison, those who are not seeking a job.

Measuring Unemployment Full Employment Always some degree of unemployment: people relocate; look for better job; can’t find appropriate job Unemployment rate of 4 to 6 percent considered full employment in U.S. other rates in countries with different labor markets, economic policies

Types of Unemployment Type 1: Frictional Unemployment People “in between” jobs. Includes: Childrearing parents returning to work new college graduates looking for first job experienced workers who want to switch jobs Reflects workers’ freedom to find best job for them at highest wage

Types of Unemployment Type 2: Seasonal Unemployment Demand for some jobs changes dramatically from season to season construction work falls off in winter tourism peaks at certain times of year; varies by region migrant farm work drops off in winter; migrant families suffer

Types of Unemployment Type 3: Structural Unemployment As businesses become more efficient, require fewer workers new technologies replace workers or require them to retrain new industries requiring specialized education do not employ unskilled change in consumer demand can shift type of workers needed offshore outsourcing sometimes leaves people out of work

Types of Unemployment Type 4: Cyclical Unemployment As the nation goes through business cycles, it faces the problems of unemployment and inflation. Employers lay off workers during low points in business cycle

Section 2: Poverty and Income Distribution What Is Poverty? The Poverty Threshold People considered in poverty if income falls below poverty threshold Also called the poverty line Calculated based on costs of nutritious food, other necessities

The 2009 Poverty Guidelines for the 48 Contiguous States and the District of Columbia Number in Family Poverty Line 1 $10,830 2 $14,570 3 $18,310 4 $22,050

What Is Poverty? The Poverty Rate Poverty rate—percent of people in households below poverty threshold based on population as a whole Poverty does not hit all sectors of society equally. Most at risk: Children, minorities; inner-city, rural, and single–parent families

Factors Affecting Poverty Education—the higher the level of education, the higher the income Discrimination against minorities, women sometimes face wage discrimination, occupational segregation Demographic trends—single-parent families have more economic problems Change in Labor Force from manufacturing to service jobs has resulted in lower wages for low-skilled workers

Income Distribution Income distribution—how income is divided among people in a nation Income inequality—unequal distribution of income; some always exists

Income Distribution

Assistance for people in poverty Food stamp program gives card, government deposits funds in account card can be used only to buy food at grocery stores Medicaid offers health care; funded by federal and state governments Earned-income tax credit—refunds taxes deducted from paychecks money usually spent in own communities, helping boost their economies

General Antipoverty Programs Social Security program pays benefits to retirees, survivors, disabled Medicare is government health insurance for seniors Unemployment insurance helps laid-off workers while looking for job

Section 3: Inflation Definition of inflation: A sustained rise in the general price level, or a sustained fall in the purchasing power of money.

What Is the Impact of Inflation? Effect 1: Decreasing Value of the Dollar Rising consumer price index represents declining value of the dollar People on a fixed income are especially vulnerable each dollar they have buys less every year Inflation helps people who borrow at a fixed rate of interest

What Is the Impact of Inflation? Effect 2: Increasing Interest Rates Lenders raise interest rates to ensure profit on loans Businesses avoid borrowing to expand or make capital improvements Consumers less likely to finance high-priced items Monthly credit card payments go up as rates rise

What Is the Impact of Inflation? Effect 3: Decreasing Real Returns on Savings Interest on savings tends to increase during inflationary times Any interest you earn on investments is worth less than it was before

The Effects of Inflation in the 1970s Background In the 1970s, the United States experienced the longest period of inflation in its history. By 1979, inflation had risen to 10 percent per year or higher. Prices of consumer goods rose dramatically. Those on fixed incomes were particularly affected. What’s the Issue How did inflation affect people and businesses in the 1970s? Thinking Economically Name one example from each document that shows how inflation has a negative impact on the economy. Inflation is a general rise in price levels. Are the examples of price increases in documents B and C symptoms of inflation or isolated price increases? Compare the tone of documents A and C. Do economists care as much about inflation as consumers? Explain.