Types of UnemploymentandInflation The BAD BOYS OF THE ECONOMY

The Bad Boys!!! Inflation is the possible negative consequence of prosperity. Ultimately, if inflation is not held in check, it can lead to a recession Unemployment is the negative effect of a are recession. If not held it check, it makes economic growth very difficult. We tend to have one or the other. Fighting one can lead to causing the other

Inflation Inflation is an increase in the average price level of all products in an economy Inflation reduces the real purchasing power of the dollar. Inflation usually occurs when aggregate demand increases faster than aggregate supply. Deflation is possible but Rare.

Measuring Inflation Producer Price Index (PPI) The measure of the average change over time in the prices of goods and services used by producers. The measure of the average change over time in the prices of goods and services used by producers. Consumer Price index (CPI) – 3% Specifically measures a basket of 300 goods Specifically measures a basket of 300 goods The measure of the average change over time in the price of a fixed group of products. The measure of the average change over time in the price of a fixed group of products. Used to adjust wages and benefits such as Social Security and COLA’s. Used to adjust wages and benefits such as Social Security and COLA’s. COLA – Cost of Living Adjust. Protects you from the detrimental effects of inflation COLA – Cost of Living Adjust. Protects you from the detrimental effects of inflation

Types of Inflation Demand pull inflation: When aggregate demand increases faster than the economy’s productive capacity. “Too many dollars chasing too few goods” Cost-Push Inflation: When producers raise prices to cover higher resource costs. Wage price spiral: due to higher labor costs Price Expectations: Hyper Inflation

Effects of Inflation Changes in the purchasing power of the dollar: you can buy less The value of real wages: wages rarely keep up with inflation Increased Interest rates: discourage spending and investment. FED often raises rates FED often raises rates Banks raise rates to protect against inflation (see next Slide) Banks raise rates to protect against inflation (see next Slide) Savings and investments: discourages savings Increased Production costs: more expensive to produce goods

Who is Helped – Who is hurt? HelpedHurt uncertain/no impact Borrows – if at a fixed rates Banks – if lent at fixed rate Income with a COLA Government –debt and income taxes Government – fixed rate fees Adjustable rate Both lender and borrow Renters – if they have set lease rate Any income at a fixed rate Homeowners – if paid off *Elderly tend to be hit the hardest

UNEMPLOYMENT

Types of Unemployment Frictional: in between jobs Structural unemployment: due to changing technology Seasonal unemployment: short term jobs; migrant workers, holiday retail jobs, outdoor resort work Cyclical: unemployment due to economic downturns

What it means to be Employed Must be 16 or older Work for pay or profit for one or more hours Work in a family business without pay Have a job but not working due to illness, weather, vacations, or labor disputes

4–6% unemployment is expected 5 to 5.5 is considered Natural Rate/Full Employment Unemployment – the percentage of the civilian labor force that is not working at a given time. Civilian labor force – the total # of people 16 and up who are employed or actively seeking work (willing and able to work) Unemployment rate = # of unemployed # in the civilian labor force

Use the following data to calculate (a) the size of the labor force and (b) the official unemployment rate Total Population: 500 Population under 16 of age: 120 Not in labor force: 150 Unemployed: 23 Part-time workers: 10

ANSWERS Labor Force is 230= 500 – ( ) Official Unemployment Rate: 10% (23/230) x 100

Problems with the Unemployment Rate Discouraged workers – people who have held jobs but have given up looking for work Underemployed –Workers who have jobs beneath their skill level or who want full-time work and are working part-time. Full-time students are not part of the labor force, even if seeking work. Part Time Workers Uneven Burden