Ch 13: Economic Challenges Economic Issues

Types of Unemployment Frictional Unemployment: Occurs when people change jobs, get laid off from their current jobs, take some time to find the right job after they finish their schooling, or take time off from working for a variety of other reasons Structural Unemployment: Occurs when workers' skills do not match the jobs that are available. Technological advances are one cause of structural unemployment

Types of Unemployment (cont.) Seasonal Unemployment: Occurs when industries slow or shut down for a season or make seasonal shifts in their production schedules Cyclical Unemployment: Unemployment that rises during economic downturns and falls when the economy improves

Why is unemployment important? A nation’s unemployment rate is an important indicator of the health of the economy. The Bureau of Labor Statistics polls a sample of the population to determine how many people are employed and unemployed. The unemployment rate is the percentage of the nation’s labor force that is unemployed. The unemployment rate is only a national average. It does not reflect regional economic trends.

What is a “good” level of unemployment? Economists generally agree that in an economy that is working properly, an unemployment rate of around 4 to 6 percent is normal. Sometimes people are underemployed, that is working a job for which they are over-qualified, or working part-time when they desire full-time work. Discouraged workers are people who want a job, but have given up looking for one. Full employment is the level of employment reached when there is no cyclical unemployment. Unemployment still won’t be 0%

Quick Review 1. Unemployment that occurs when workers’ skills do not match the jobs that are available is known as (a) frictional unemployment. (b) structural unemployment. (c) seasonal unemployment. (d) cyclical unemployment. 2. The unemployment rate (a) is the percentage of the labor force that is unemployed. (b) is the number of people who are unemployed. (c) includes only discouraged workers. (d) is the percentage of the labor force that is underemployed.

Prices and Inflation Inflation is a general increase in prices. Purchasing power, the ability to purchase goods and services, is decreased by rising prices. Price level is the relative cost of goods and services in the entire economy at a given point in time.

Measuring Inflation A price index is a measurement that shows how the average price of a standard group of goods changes over time. The consumer price index (CPI) is computed each month by the Bureau of Labor Statistics. The CPI is determined by measuring the price of a standard group of goods meant to represent the typical “market basket” of an urban consumer. Changes in the CPI from month to month help economists measure the economy’s inflation rate. The inflation rate is the percentage change in price level over time.

Market Basket: FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals and snacks) HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture) APPAREL (men's shirts and sweaters, women's dresses, jewelry) TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance) MEDICAL CARE (prescription drugs & medical supplies, services, glasses, eye care, hospital services) RECREATION (tvs, cable tv, pets/products, sports equipment, admissions) EDUCATION & COMMUNICATION (college tuition, postage, phone services, computer software and accessories) Other GOODS & SERVICES (tobacco/ smoking products, haircuts personal services, funeral expenses)

Exclusions: CPI does not include investment items, such as stocks, bonds, real estate, and life insurance. These items relate to savings and not to day-to-day consumption expenses.

CPI

Calculating Inflation Rate Calculating inflation is a simple rate of change calculation ((CPI Year 2 – CPI Year 1)/(CPI Year 1)) * 100 For example: If CPI was $150 for 2006 and $165 for 2007 Inflation rate equals *(165-150)/(150)) * 100 = 10%, which is a high rate of inflation

CPI Problems: Doesn’t reflect changes in consumption patterns. Doesn’t consider new products. Doesn’t take account of improved quality. Doesn’t measure impact of price changes on some assets. (Homes)

Review What are the 4 kinds of unemployment? Give an example of each kind What is used to measure inflation?

What causes inflation & hyperinflation? Quantity Theory Cost Push Theory Demand Pull Theory

Theory 1 The Quantity Theory The quantity theory of inflation states that too much money in the economy leads to inflation. Adherents to this theory maintain that inflation can be tamed by increasing the money supply at the same rate that the economy is growing.

Theory 2 The Cost-Push Theory According to the cost-push theory, inflation occurs when producers raise prices in order to meet increased costs. Cost-push inflation can lead to a wage-price spiral — the process by which rising wages cause higher prices, and higher prices cause higher wages.

Theory 3 The Demand-Pull Theory The demand-pull theory states that inflation occurs when demand for goods and services exceeds existing supplies. https://www.youtube.com/watch?v=T8-85cZRI9o&index=7&list=PL8dPuuaLjXtPNZwz5_o_5uirJ8gQXnhEO

Economic Principles Mankiw’s Principles 9 and 10 Prices Rise When the Government Prints Too Much Money. When a government creates large quantities of the nation's money, the value of the money falls. As a result, prices increase, requiring more of the same money to buy goods and services. Society Faces a Short-Run Tradeoff Between Inflation and Unemployment. Reducing inflation often causes a temporary rise in unemployment. This tradeoff is crucial for understanding the short-run effects of changes in taxes, government spending and monetary policy.

Winners and Losers High inflation is a major economic problem, especially when inflation rates change greatly from year to year Purchasing Power In an inflationary economy, a dollar loses value. It will not buy the same amount of goods that it did in years past. Interest Rates When a bank's interest rate matches the inflation rate, savers break even. When a bank's interest rate is lower than the inflation rate, savers lose money. Income If wage increases match the inflation rate, a worker's real income stays the same. If income is fixed income, or income that does not increase even when prices go up, the economic effects of inflation can be harmful.

INFLATION WINNERS AND LOSERS: Fixed-rate mortgage holders Retired people on fixed income College students who got fixed rate loan

Quick Review 1. Inflation is (a) the process by which rising wages cause higher prices. (b) the price increase of a typical group of goods. (c) a general increase in prices. (d) the ability to purchase goods and services. 2. Too much money in the economy is the cause of inflation according to (a) the quantity theory. (b) the demand-pull theory. (c) the quantum theory. (d) the cost-push theory.

Poverty The Poverty Threshold The Poverty Rate The poverty threshold is an income level below which income is insufficient to support a family or household. The Poverty Rate The poverty rate is the percentage of people in a particular group who live in households below the official poverty line.

Major Causes of Poverty Lack of Education The median income of high-school dropouts in 1997 was $16,818, which was just above the poverty line for a family of four. Avg. income for high school dropout in 2012: $20,000. Location On average, people who live in the inner city earn less than people living outside the inner city. Shifts in Family Structure Increased divorce rates result in more single-parent families and more children living in poverty. Economic Shifts Workers without college-level skills have suffered from the ongoing decline of manufacturing, and the rise of service and high technology jobs. Racial and Gender Discrimination Some inequality exists in wages between whites and minorities, and men and women.

Inequality Income Inequality The Lorenz Curve illustrates income distribution. Income Gap A 1999 study showed that the richest 2.7 million Americans receive as much income after taxes as the poorest 100 million Americans. Differences in skills, effort, and inheritances are key factors in understanding the income gap.

Government Programs (Review) Employment Assistance The minimum wage and federal and state job-training programs aim to provide people with more job options Welfare Reform Temporary Assistance for Needy Families (TANF) is a program which gives block grants to the states, allowing them to implement their own assistance programs Workfare programs require work in exchange for temporary assistance

Quick Review 1. An income level below which income is insufficient to support a family or household is known as the (a) income gap. (b) poverty rate. (c) poverty threshold. (d) income inequality. 2. What is one major cause of poverty? (a) Economic Shifts like the rising expectation of college education (b) The Wage-Price Spiral (c) Investment in the Stock Market (d) An increase in savings in banks and not in mutual funds

Who counts? "Employed" includes: Not Counted includes: Full-time part-time (at least 1 hour a week for pay) underemployed Not Counted includes: Students - not working or looking Retired - not working or looking Institutionalized Homemakers - "working" and not looking Underground economy - working but not counted Discouraged workers

Unemployment Rate This means to figure out the Unemployment Rate we need to. Subtract the labor force by the employed to figure out the unemployed (Labor Force-Employed) Then divide the unemployed by the overall labor force (Labor Force-Employed)/Labor Force Multiply it by 100 to get a percent (Labor Force-Employed)/Labor Force x 100=Unemployment Rate

What does unemployment and inflation look like in the Business Cycle? The 4 phases of the business cycle: 1. A peak is when business activity reaches a temporary maximum, unemployment is low, inflation high. 2. A recession is a decline in total output, unemployment rises and inflation falls. 3. The trough is the bottom of the recession period, unemployment is at its highest, inflation is low. 4. expansion (recovery) is when output is increasing, unemployment begins to fall and later inflation begins to rise. Unemployment increases during business cycle recessions and decreases during business cycle expansions (recoveries). Inflation decreases during recessions and increases during expansions (recoveries).

REVIEW https://www.youtube.com/watch?v=3GTgniuxA50