1. Economic Challenges Problems facing the U.S. economy.

2. Economic Challenges What problems does our economy have to worry about? What problems does our economy have to worry about? Recession/Depression Recession/Depression Inflation Inflation Unemployment Unemployment

3. Unemployment Measured by Bureau of Census (every month, 60,000 American households are surveyed) Measured by Bureau of Census (every month, 60,000 American households are surveyed) must be 16 years old must be 16 years old employed employed unemployed unemployed not in labor force not in labor force

4. Unemployment Problems Problems people who desire to work but are not actively seeking work (discouraged workers) people who desire to work but are not actively seeking work (discouraged workers) person under 16 not counted person under 16 not counted part-time workers wishing to work full-time part-time workers wishing to work full-time person who works 1 hr. per week is classified as employed person who works 1 hr. per week is classified as employed Cost of unemployment Cost of unemployment social tragedy; loss of esteem; crime social tragedy; loss of esteem; crime lost economic productivity—unused resources lost economic productivity—unused resources crops unharvested, machinery lay idle, willing workers can’t work crops unharvested, machinery lay idle, willing workers can’t work

5. Types of Unemployment Frictional—temporarily between jobs; desirable Frictional—temporarily between jobs; desirable occurs from quitting w/o back-up; being fired or laid off occurs from quitting w/o back-up; being fired or laid off solution: more efficient, systematic procedure for connecting job seekers with openings solution: more efficient, systematic procedure for connecting job seekers with openings hiring agencies (Manpower, Kelly, Unemployment) hiring agencies (Manpower, Kelly, Unemployment) Cyclical—results from business cycles; insufficient total spending (aggregate demand) Cyclical—results from business cycles; insufficient total spending (aggregate demand) GDP decreases=loss of jobs GDP decreases=loss of jobs solution: increase aggregate demand through fiscal or monetary policy solution: increase aggregate demand through fiscal or monetary policy Structural—mismatch between job seekers & available jobs Structural—mismatch between job seekers & available jobs geographic-high unemployment in east, but lots of jobs geographic-high unemployment in east, but lots of jobs solution: attract potential employers into these areas or get employees to move solution: attract potential employers into these areas or get employees to move skill level-technology creates efficiency for those trained; also can be over-qualified skill level-technology creates efficiency for those trained; also can be over-qualified solution: retrain or educate workers solution: retrain or educate workers Seasonal—farm workers, construction, resort & vacation workers Seasonal—farm workers, construction, resort & vacation workers solution: spread production out evenly throughout year instead of concentrating on certain months solution: spread production out evenly throughout year instead of concentrating on certain months not always possible not always possible

6. Inflation Inflation—“rise in prices”, decline in the purchasing power of the dollar Inflation—“rise in prices”, decline in the purchasing power of the dollar not rise in price of one good, rise in price of all goods not rise in price of one good, rise in price of all goods

7. Inflation: How it’s measured. Consumer Price Index (CPI) Consumer Price Index (CPI) average increase in the prices of goods & services commonly purchased by American consumers average increase in the prices of goods & services commonly purchased by American consumers measured each month by Dept. of Labor measured each month by Dept. of Labor 400 commonly bought goods & services 400 commonly bought goods & services Producer Price Index (PPI) Producer Price Index (PPI) measure of the average change over time in the prices of goods/services bought by producers measure of the average change over time in the prices of goods/services bought by producers

8. Inflation Annual inflation rate--% increase in the total cost of all items measured from one year to the next. Annual inflation rate--% increase in the total cost of all items measured from one year to the next. 3-4% inflation is desirable, shows economy is doing well and growing 3-4% inflation is desirable, shows economy is doing well and growing inflation ideally would be offset by rising wages inflation ideally would be offset by rising wages

9. Inflation: Causes Demand-Pull “buyer’s inflation”—aggregate demand (total spending) is too high. It exceeds the total dollar value of all goods & services that the economy is capable of producing at the full-employment level of production Demand-Pull “buyer’s inflation”—aggregate demand (total spending) is too high. It exceeds the total dollar value of all goods & services that the economy is capable of producing at the full-employment level of production demand exceeds supply “too many dollars chasing too few goods” demand exceeds supply “too many dollars chasing too few goods” Vietnam War-full employment producing as much as it could, but there was a demand for consumer and war goods Vietnam War-full employment producing as much as it could, but there was a demand for consumer and war goods Cost-Push “sellers inflation”—when production costs rise and sellers increase their prices to maintain their profit level. Cost-Push “sellers inflation”—when production costs rise and sellers increase their prices to maintain their profit level. reasons are production costs increase reasons are production costs increase increase in minimum wage (or wages in general), scarce natural resources increase in minimum wage (or wages in general), scarce natural resources supply shock—crop failures, natural disasters, political unrest that drives up costs of production supply shock—crop failures, natural disasters, political unrest that drives up costs of production wage-price spiral—higher wages drive up costs, driving up prices, causing workers to ask for higher wages. wage-price spiral—higher wages drive up costs, driving up prices, causing workers to ask for higher wages.

10. Inflation: Types Galloping Inflation—a very high inflation ranging from 25% to 100% a year or more Galloping Inflation—a very high inflation ranging from 25% to 100% a year or more Great Britain & Italy experienced around 25% during early 1980s. Great Britain & Italy experienced around 25% during early 1980s. Israel & some South American countries experienced this during mid 1980s Israel & some South American countries experienced this during mid 1980s Hyperinflation—a destructive form of inflation that makes money worthless Hyperinflation—a destructive form of inflation that makes money worthless experienced in Germany during 1920s experienced in Germany during 1920s rose 40 billion times in 2 years rose 40 billion times in 2 years cheaper to wallpaper house in money than buy the wallpaper cheaper to wallpaper house in money than buy the wallpaper Stagflation—economic condition in which high inflation and high unemployment coexist. Stagflation—economic condition in which high inflation and high unemployment coexist. stagflation occurred during the oil embargos of the 1970s when we had a stagnant (slow growing economy), and extremely high oil prices stagflation occurred during the oil embargos of the 1970s when we had a stagnant (slow growing economy), and extremely high oil prices

11. Inflation: Effects decreasing purchasing power decreasing purchasing power affects those on fixed income, others get COLAs affects those on fixed income, others get COLAs decreasing value of real wages decreasing value of real wages increased interest rates increased interest rates decreased saving and investing decreased saving and investing inflation climbs faster than interest rates inflation climbs faster than interest rates increased production costs increased production costs inflation increases costs of production, they pass this on to consumers inflation increases costs of production, they pass this on to consumers

12. Questions: What does consumer price index measure? What does consumer price index measure? What type of unemployment is desirable? What type of unemployment is desirable? What is considered “full employment?” What is considered “full employment?” What type of unemployment happens during a recession like ours? What type of unemployment happens during a recession like ours? What is demand-pull inflation? What is demand-pull inflation? What is cost-push inflation? What is cost-push inflation? What is an ideal rate of inflation? What is an ideal rate of inflation?