Dr. T. Mitchell Bonneville High School, Idaho Falls, Idaho Measuring and Monitoring Economic Performance

FACING ECONOMIC CHALLENGES Chapter 13 Section 1

Stimulating Economic Growth Thomas Robert Malthus: Essay on a natural limit to economic growth. As time went on, agriculture would produce less food per person, and millions would be thrown into poverty and starvation.

Measuring Unemployment Unemployment rate is the percentage of labor force that is jobless and actively looking for work.

Measuring Unemployment Underemployed are those who work part-time or those who work at a job below their skill level.

Measuring Unemployment Full employment does not mean zero unemployment rate. Even is a healthy economy there is some level of unemployment.

Measuring Unemployment Full employment sometimes people are unemployed when they move, sometimes the available job skills do not match up to the worker skills.

Measuring Unemployment Some segments of the population, such as children younger than 16, the retired, and those incapable of working, are not counted unemployed.

Types of Unemployment Frictional unemployment: temporary unemployment of people changing jobs. Seasonal unemployment: unemployment linked to seasonal work. Structural unemployment: a situation where jobs exist but workers looking for work do not have the necessary skills for these jobs. Cyclical unemployment: unemployment caused by a part of the business cycle with decreased economic activity.

Efficiency Unemployment is inefficient. It wastes human resources, one of the key factors of economic growth Inequity Unemployment does not follow equal opportunity rules. Those with the least experience loss their jobs first. Discouraged Workers Those seeking jobs may begin to lose faith in their abilities to get a job. Impact of Unemployment

POVERTY AND INCOME DISTRIBUTION Chapter 13 Section 2

What is Poverty? Unemployment leads to poverty, a situation in which a person lacks the income and resources to achieve a minimum standard of living. This standard varies from country to country because of different ways of life.

What is Poverty? The U. S. government has established its own standard for poverty based on income levels. This poverty level is the official minimum income needed for the basic necessities of life in the U. S.

What is Poverty? The poverty threshold, also called the poverty line is the amount of income the government has determined to be necessary to meet basic needs. The threshold, first formulated in the 1960’s, was calculated by finding the cost of nutritionally sound food and then multiplying by three, on the assumption that food costs are about a third of person’s expenses. The threshold differs according to the size of the household, and is adjusted annually to reflect changing prices.

What is Poverty? The poverty rate is the percentage of people living in households that have incomes below the poverty threshold. Using census information, the poverty rate can be estimated for individuals, households, and segments of the population, such as African-Americans children or single-parent homes. Poverty, like unemployment, does not hit all segments of society equally. Children are especially at risk.

Factors Affecting Poverty Education Usually a direct relationship between level of education and income Discrimination Certain groups sometimes face wage discrimination or occupational discrimination Demographic Trends In 1950s only a quarter of marriages ended in divorce, today half of marriages end in divorce. Changes in Labor Force Labor force has changed from mainly manufacturing to mainly service industries. Service work pays lower wages.

Income Distribution The U. S. has one of the highest median family incomes in the world, yet million live in poverty. Income distribution is the way income is divided among people in a nation.

The Lorenz Curve The Lorenz Curve graphically illustrates the degree of inequity in a nation. An equal distribution of income would show a straight diagonal line. However, income is not equally divided. The lower the Lorenz curve dips away from the diagonal line of equity, the greater the level of income inequity.

Antipoverty Programs Welfare, government economic and social programs that provide assistance to the needy. Some programs are heavily criticized for wasting money and harming recipients. In the 1980s and 90s, the government changed to tax breaks, grants, job- training, and other self- help initiatives in addition to cash benefits.

Antipoverty Programs Food banks Rent assistance Housing grants Food stamps Energy assistance Meals on wheels Welfare-to-work Workfare Temporary Assistance for Needy Families, has a five- year limit.

CAUSES AND CONSEQUENCES OF INFLATION Chapter 13 Section 3

What is Inflation and How Is It Measured? Inflation is a sustained rise in the general price level or a fall in the purchasing power of money. Inflation can be measured using two very useful tools” Consumer Price Index Producer Price Index

Consumer Price Index Consumer Price Index (CPI), is a measure of changes in the prices of goods and services commonly purchased by consumers. The U. S. government surveys thousands of people to find out what goods and services they buy on a regular basis. The government then creates a “market basket” of about 400 different goods and services purchased.

Consumer Price Index The basket is adjusted for how much of a household’s budget goes to purchase each type of item. Each month, government workers research the current prices of the items in the basket. Current prices are compared to prices in the reference base, which reflects the level of prices in the three years since 1982 to Those numbers are given the value of 100.

Producer Price Index Producers also experience inflation. The kind of inflation is measured in the Producer Price Index (PPI), a measure of changes in the wholesale prices. The PPI is constructed in basically the same was as the CPI, but it reflects the prices producers receive for their goods.

Producer Price Index The difference lies in the fees consumers pay, such as sales tax or shipping charges. Like the CPI, the PPI is tied to a reference base of producer prices. The indices are grouped together by stage of production (finished goods, intermediate goods, and raw materials). Because producers tend to encounter inflation before consumers, PPI tends to lead CPI as and indicator of inflation. Economists use CPI and PPI to calculate the inflation rate, the rate of change in prices over a set period of time.

What causes Inflation? Economists generally distinguish between two kinds of inflation, each with a different cause. When the inflationary forces are on the demand side of the economy, the result is demand-pull inflation, a situation where total demand is rising faster than the production of goods and services.

What causes Inflation? When the forces that lead to inflation originate on the supply side of the economy, the result is cost-push inflation, a situation where increases in production costs push up prices.

Demand-pull Inflation In demand-pull inflation, total demand rises faster than the production of goods and services, creating a scarcity that then drives up prices. It takes producers some time to recognize a rise in demand and to gear up for higher production. If the government creates too much money during the lag period there will be too much money chasing too few goods, and prices will rise. The creation of excess money is the main reason for demand-pull inflation.

Cost-Push Inflation In cost-push inflation, prices are pushed upward by rising production costs. When production costs increase, producers make less of a profit. If consumer demand is strong, producers may raise their prices in order to maintain their profits. Cost-push inflation is often the result of supply shocks – sharp increases in prices of raw material or energy. Wages are a large part of the production costs for many goods, so rising wages can lead to cost-push inflation.

Impact of Inflation Decreased Value of the Dollar Increasing Interest Rates Decreasing Real Returns on Savings

Word! Live long and prosper.