1. Facing Economic Challenges Economics Chapter 12 Notes

2. Economic Challenges - Unemployment ▫Unemployment has a variety of causes.  Some level of unemployment is expected, even when an economy is healthy. ▫As the nation goes through business cycles, it faces the problems of unemployment and inflation.  Persistent unemployment can lead to poverty.  During periods of inflation, wages buy less.

3. Measuring Unemployment The Unemployment Rate ▫Civilian labor force—people over 16 who are working, looking for work ▫Bureau of Labor Statistics determines unemployment rate  divides number of unemployed workers by total in civilian labor force  does not count discouraged who have stopped looking or underemployed ▫ Underemployed—work part-time, want full- time or work below skill level

4. Measuring Unemployment Full Employment ▫ Full employment—no unemployment caused by decreased economic activity ▫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

5. Types of Unemployment Type 1: Frictional Unemployment ▫Frictional unemployment not a threat to economic stability. ▫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

6. 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

7. 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

8. Types of Unemployment Type 4: Cyclical Unemployment ▫Employers lay off workers during low points in business cycle ▫During recession, hard to find new jobs since demand for labor drops ▫Unemployment period varies by type; average relatively short  over one third of unemployed find work in five weeks or less

9. 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  differs by size of household  adjusted annually

10. 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–mother families

11. The Problem of Poverty 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 from manufacturing to service jobs has resulted in lower wages for low-skilled workers

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

13. Antipoverty Programs Programs for Low-Income Households ▫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

14. 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  Social Security, Medicare funded by payroll taxes; reduced poverty  Unemployment insurance paid mostly by taxes on employer

15. Antipoverty Programs Other Programs ▫Some programs supplement the largest programs, including:  Community Services Block Grants, job training, Empowerment Zones ▫In 1996, federal welfare programs changed to welfare-to-work  workfare requires welfare recipients to do some work  Temporary Assistance for Needy Families has five- year limit

16. Inflation – a rise in the general level of prices of goods and services in an economy over a period of time

17. Inflation Types of Inflation – Demand-pull Inflation- general rise in prices as a result of demand excesses supply in economic system. Cost-push Inflation- inflation as a result of a rise in prices of costs of production. RELATED CONCEPTS OF INFLATION ▫Moderate, Creeping & Galloping Inflation  All refer to the speed of inflation ▫Hyperinflation- over 50 percent per month ▫Deflation - decrease in general price level; happens rarely

18. HOW DO WE MEASURE INFLATION? CPI / PPI Consumer price index- measured price changes for selected consumer goods. Producer price index-- measured price changes received by domestic producers. GDP DEFLATOR ▫is a measure of the price of all the goods and services included in gross domestic product (GDP)

19. 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

20. 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

21. What Is the Impact of Inflation? Effect 3: Decreasing Real Returns on Savings ▫Interest on savings tends to increase during inflationary times ▫Inflation worries people about drop in standard of living, retirement