1. © 2002 Prentice Hall Business PublishingPrinciples of Economics, 6/eKarl Case, Ray Fair Long-Run Output and Productivity Growth An ideal economy is one in which there is:An ideal economy is one in which there is: rapid growth of output per worker, rapid growth of output per worker, low unemployment, and low unemployment, and low inflation. low inflation.

2. © 2002 Prentice Hall Business PublishingPrinciples of Economics, 6/eKarl Case, Ray Fair Long-Run Output and Productivity Growth The average growth rate of output in the economy since 1900 has been about 3.4 percent per year.The average growth rate of output in the economy since 1900 has been about 3.4 percent per year. An area of economics called “growth theory” is concerned with the question of what determines this rate.An area of economics called “growth theory” is concerned with the question of what determines this rate.

3. © 2002 Prentice Hall Business PublishingPrinciples of Economics, 6/eKarl Case, Ray Fair Long-Run Output and Productivity Growth There are a number of ways to increase output. An economy can:There are a number of ways to increase output. An economy can: Add more workers Add more workers Add more machines Add more machines Increase the length of the workweek Increase the length of the workweek Increase the quality of the workers Increase the quality of the workers Increase the quality of the machines Increase the quality of the machines

4. © 2002 Prentice Hall Business PublishingPrinciples of Economics, 6/eKarl Case, Ray Fair Long-Run Output and Productivity Growth Output per worker hour is called “labor productivity.”Output per worker hour is called “labor productivity.” For the 1952-2000 period, labor productivity exhibits:For the 1952-2000 period, labor productivity exhibits: an upward trend, and an upward trend, and fairly sizable fluctuations around that trend. fairly sizable fluctuations around that trend. The growth rate was much higher in the 1950s and 1960s than it has been since the early 1970s.The growth rate was much higher in the 1950s and 1960s than it has been since the early 1970s.

5. © 2002 Prentice Hall Business PublishingPrinciples of Economics, 6/eKarl Case, Ray Fair Output per Worker Hour (Productivity), 1952-2000

6. © 2002 Prentice Hall Business PublishingPrinciples of Economics, 6/eKarl Case, Ray Fair Long-Run Output and Productivity Growth Part of the reason for the upward trend in productivity is an increase in the amount of capital per worker. With more capital per worker, more output can be produced per year.Part of the reason for the upward trend in productivity is an increase in the amount of capital per worker. With more capital per worker, more output can be produced per year. The other reason is that the quality of labor and capital has been increasing.The other reason is that the quality of labor and capital has been increasing.

7. © 2002 Prentice Hall Business PublishingPrinciples of Economics, 6/eKarl Case, Ray Fair Capital per Worker, 1952-2000

8. © 2002 Prentice Hall Business PublishingPrinciples of Economics, 6/eKarl Case, Ray Fair Long-Run Output and Productivity Growth A harder question to answer is why has the quality of labor and capital grown more slowly since the early 1970s.A harder question to answer is why has the quality of labor and capital grown more slowly since the early 1970s. The growth of the Internet, which brings about an increase in the quality of capital, should lead to a “new age” of productivity growth.The growth of the Internet, which brings about an increase in the quality of capital, should lead to a “new age” of productivity growth.

9. © 2002 Prentice Hall Business PublishingPrinciples of Economics, 6/eKarl Case, Ray Fair Recessions, Depressions, and Unemployment A recession is roughly a period in which real GDP declines for at least two consecutive quarters. It is marked by falling output and rising unemployment.A recession is roughly a period in which real GDP declines for at least two consecutive quarters. It is marked by falling output and rising unemployment. The business cycle describes the periodic ups and downs in the economy, or deviations of output and employment away from the long- run trend.The business cycle describes the periodic ups and downs in the economy, or deviations of output and employment away from the long- run trend.

10. © 2002 Prentice Hall Business PublishingPrinciples of Economics, 6/eKarl Case, Ray Fair Recessions, Depressions, and Unemployment Capacity utilization rates, which show the percentage of factory capacity being used in production, are one indicator of recession.Capacity utilization rates, which show the percentage of factory capacity being used in production, are one indicator of recession. A depression is a prolonged and deep recession. The precise definitions of prolonged and deep are debatable.A depression is a prolonged and deep recession. The precise definitions of prolonged and deep are debatable.

11. © 2002 Prentice Hall Business PublishingPrinciples of Economics, 6/eKarl Case, Ray Fair Real GDP and Unemployment Rates, 1929-1933 Real GDP and Unemployment Rates, 1929–1933 THE EARLY PART OF THE GREAT DEPRESSION, 1929–1933 PERCENTAGE CHANGE IN REAL GDP UNEMPLOYMENT RATE NUMBER OF UNEMPLOYED (MILLIONS) 19293.21.5 1930  8.6 8.94.3 1931  6.4 16.38.0 1932  13.0 24.112.1 1933 .4 25.212.8 Note: Percentage fall in real GDP between 1929 and 1933 was 26.6 percent.

12. © 2002 Prentice Hall Business PublishingPrinciples of Economics, 6/eKarl Case, Ray Fair Real GDP and Unemployment Rates, 1980-1982 Real GDP and Unemployment Rates, 1980–1982 THE RECESSION OF 1980–1982 PERCENTAGE CHANGE IN REAL GDP UNEMPLOYMENT RATE NUMBER OF UNEMPLOYED (MILLIONS) CAPACITY UTILIZATION (PERCENTAGE) 19795.86.185.2 1980  0.2 7.17.680.9 19812.57.68.379.9 1982  2.0 9.710.772.1 Note: Percentage increase in real GDP between 1979 and 1982 was 0.1 percent. Sources: Historical Statistics of the United States and U.S. Department of Commerce, Bureau of Economic Analysis.

13. © 2002 Prentice Hall Business PublishingPrinciples of Economics, 6/eKarl Case, Ray Fair Defining and Measuring Unemployment The most frequently discussed symptom of a recession is unemployment.The most frequently discussed symptom of a recession is unemployment. An employed person is any person 16 years old or olderAn employed person is any person 16 years old or older 1. who works for pay, either for someone else or in his or her own business for 1 or more hours per week, 2. who works without pay for 15 or more hours per week in a family enterprise, or 3. who has a job but has been temporarily absent, with our without pay.

14. © 2002 Prentice Hall Business PublishingPrinciples of Economics, 6/eKarl Case, Ray Fair Defining and Measuring Unemployment An unemployed person is a person 16 years old or older who:An unemployed person is a person 16 years old or older who: 1. is not working, 2. is available for work, and 3. has made specific efforts to find work during the previous 4 weeks. A person who is not looking for work, either because he or she does not want a job or has given up looking, is not in the labor force.A person who is not looking for work, either because he or she does not want a job or has given up looking, is not in the labor force.

15. © 2002 Prentice Hall Business PublishingPrinciples of Economics, 6/eKarl Case, Ray Fair Defining and Measuring Unemployment

16. © 2002 Prentice Hall Business PublishingPrinciples of Economics, 6/eKarl Case, Ray Fair Employed, Unemployed, and the Labor Force, 1953-1999 Employed, Unemployed, and the Labor Force, 1953–1999 (1)(2)(3)(4)(5)(6) POPULATION 16 YEARS OLD OR OVER (MILLIONS) LABOR FORCE (MILLIONS) EMPLOYED (MILLIONS) UNEMPLOYED (MILLIONS) LABOR-FORCE PARTICIPATION RATE UNEMPLOYMENT RATE 1953107.163.061.21.858.92.9 1960117.269.665.83.959.45.5 1970137.182.878.74.160.44.9 1980167.7106.999.37.663.87.1 1982172.3110.299.510.764.09.7 1990189.2125.8118.87.066.55.6 1999207.8139.4133.55.967.14.2 Note: Figures are civilian only (military excluded). Source: Economic Report of the President, 2000, p. 346.

17. © 2002 Prentice Hall Business PublishingPrinciples of Economics, 6/eKarl Case, Ray Fair Unemployment Rates for Different Demographic Groups Unemployment Rates by Demographic Group, 1982 and 2000 YEARS NOVEMBER 1982 JULY 2000 Total10.84.2 White9.63.6 Men20+9.02.6 16–1922.711.7 Women20+8.13.5 16–1919.710.2 African-American Men20.28.6 20+19.37.1 16–1952.428.5 Women20+16.57.0 16–1946.327.2 Source: U.S. Department of Labor, Bureau of Labor Statistics. Data are not seasonally adjusted.

18. © 2002 Prentice Hall Business PublishingPrinciples of Economics, 6/eKarl Case, Ray Fair Unemployment Rates in States and Regions Regional Differences in Unemployment, 1975, 1982, and 1991 197519821991 U.S. avg. 8.59.76.7 Cal.9.99.97.5 Fla.10.78.27.3 Ill.7.111.37.1 Mass.11.27.99.0 Mich.12.515.59.2 N.J.10.29.06.6 N.Y.9.58.67.2 N.C.8.69.05.8 Ohio9.112.56.4 Tex.5.66.96.6 Sources: Statistical Abstract of the United States, various editions.

19. © 2002 Prentice Hall Business PublishingPrinciples of Economics, 6/eKarl Case, Ray Fair Discouraged-Worker Effects The discouraged-worker effect lowers the unemployment rate. Discouraged workers are people who want to work but cannot find jobs, grow discouraged, and stop looking for work, thus dropping out of the ranks of the unemployed and the labor force.The discouraged-worker effect lowers the unemployment rate. Discouraged workers are people who want to work but cannot find jobs, grow discouraged, and stop looking for work, thus dropping out of the ranks of the unemployed and the labor force.

20. © 2002 Prentice Hall Business PublishingPrinciples of Economics, 6/eKarl Case, Ray Fair The Duration of Unemployment Average Duration of Unemployment, 1979–1999 YEARWEEKSYEARWEEKS 197910.8199012.0 198011.9199113.7 198113.7199217.7 198215.6199318.0 198320.0199418.8 198418.2199516.6 198515.6199616.7 198615.0199715.8 198714.5199814.5 198813.5199914.4 198911.9 Sources: U.S. Department of Labor, Bureau of Labor Statistics.

21. © 2002 Prentice Hall Business PublishingPrinciples of Economics, 6/eKarl Case, Ray Fair Types of Unemployment Frictional unemployment is the portion of unemployment that is due to the normal working of the labor market; used to denote short-run job/skill matching problems.Frictional unemployment is the portion of unemployment that is due to the normal working of the labor market; used to denote short-run job/skill matching problems. Structural unemployment is the portion of unemployment that is due to changes in the structure of the economy that result in a significant loss of jobs in certain industries.Structural unemployment is the portion of unemployment that is due to changes in the structure of the economy that result in a significant loss of jobs in certain industries.

22. © 2002 Prentice Hall Business PublishingPrinciples of Economics, 6/eKarl Case, Ray Fair Types of Unemployment Cyclical unemployment is the increase in unemployment that occurs during recessions and depressions.Cyclical unemployment is the increase in unemployment that occurs during recessions and depressions. The natural rate of unemployment is the unemployment that occurs as a normal part of the functioning of the economy. Sometimes taken as the sum of frictional unemployment and structural unemployment.The natural rate of unemployment is the unemployment that occurs as a normal part of the functioning of the economy. Sometimes taken as the sum of frictional unemployment and structural unemployment.

23. © 2002 Prentice Hall Business PublishingPrinciples of Economics, 6/eKarl Case, Ray Fair The Benefits of Recessions Recessions may help to reduce inflation.Recessions may help to reduce inflation. Some argue that recessions may increase efficiency by driving the least efficient firms in the economy out of business and forcing surviving firms to trim waste and manage their resources better.Some argue that recessions may increase efficiency by driving the least efficient firms in the economy out of business and forcing surviving firms to trim waste and manage their resources better. Also, a recession leads to a decrease in the demand for imports, which improves a nation’s balance of payments.Also, a recession leads to a decrease in the demand for imports, which improves a nation’s balance of payments.

24. © 2002 Prentice Hall Business PublishingPrinciples of Economics, 6/eKarl Case, Ray Fair Two Serious Inflationary Periods Since 1970 Inflation Rates, 1974–1976 and 1980–1983 RECESSION BEGINS INFLATION RATE 197411.0 19759.1 19765.8 198013.5 198110.3 19826.2 19833.2 Source: See Table 18.8.

25. © 2002 Prentice Hall Business PublishingPrinciples of Economics, 6/eKarl Case, Ray Fair Inflation Inflation is an increase in the overall price level.Inflation is an increase in the overall price level. Deflation is a decrease in the overall price level.Deflation is a decrease in the overall price level. Sustained inflation is an increase in the overall price level that continues over a significant period.Sustained inflation is an increase in the overall price level that continues over a significant period.

26. © 2002 Prentice Hall Business PublishingPrinciples of Economics, 6/eKarl Case, Ray Fair Inflation and the Business Cycle Inflation During Three Expansions INFLATION RATE 19723.2 19736.2 197411.0 19765.8 19776.5 19787.6 197911.3 198013.5 19844.3 19853.6 19861.9 19873.6 19884.1 19894.8 Source: See Table 18.8.

27. © 2002 Prentice Hall Business PublishingPrinciples of Economics, 6/eKarl Case, Ray Fair Price Indexes Price indexes are used to measure overall price levels. The price index that pertains to all goods and services in the economy is the GDP price index.Price indexes are used to measure overall price levels. The price index that pertains to all goods and services in the economy is the GDP price index. The consumer price index (CPI) is a price index computed each month by the Bureau of Labor Statistics using a bundle that is meant to represent the “market basket” purchased monthly by the typical urban consumer.The consumer price index (CPI) is a price index computed each month by the Bureau of Labor Statistics using a bundle that is meant to represent the “market basket” purchased monthly by the typical urban consumer.

28. © 2002 Prentice Hall Business PublishingPrinciples of Economics, 6/eKarl Case, Ray Fair Price Indexes The consumer price index (CPI) is the most popular fixed-weight price index.The consumer price index (CPI) is the most popular fixed-weight price index. Other popular price indexes are producer price indexes (PPIs). These are indexes of prices that producers receive for products at all stages in the production process. The three main categories are finished goods, intermediate materials, and crude materials.Other popular price indexes are producer price indexes (PPIs). These are indexes of prices that producers receive for products at all stages in the production process. The three main categories are finished goods, intermediate materials, and crude materials.

29. © 2002 Prentice Hall Business PublishingPrinciples of Economics, 6/eKarl Case, Ray Fair The Consumer Price Index (CPI) The CPI, 1950–1999 YEAR PERCENTAGE CHANGE IN CPI CPIYEAR CPIYEAR CPI 19501.324.119673.133.419844.3103.9 19517.926.019684.234.819853.6107.6 19521.926.519695.536.719861.9109.6 19530.826.719705.738.819873.6113.6 19540.726.919714.440.519884.1118.3 1955  0.4 26.819723.241.819894.8124.0 19561.527.219736.244.419905.4130.7 19573.328.1197411.049.319914.2136.2 19582.828.919759.153.819923.0140.3 19590.729.119765.856.919933.0144.5 19601.729.619776.560.619942.6148.2 19611.029.919787.665.219952.8152.4 19621.030.2197911.372.619963.0156.9 19631.330.6198013.582.419972.3160.5 19641.331.0198110.390.919981.6163.0 19651.631.519826.296.519992.2166.6 19662.932.419833.299.6 Sources: Bureau of Labor Statistics, U.S. Department of Labor.

30. © 2002 Prentice Hall Business PublishingPrinciples of Economics, 6/eKarl Case, Ray Fair The Costs of Inflation People’s income increases during inflations, when most prices, including input prices, tend to rise together.People’s income increases during inflations, when most prices, including input prices, tend to rise together. Inflation changes the distribution of income. People living on fixed incomes are particularly hurt by inflation.Inflation changes the distribution of income. People living on fixed incomes are particularly hurt by inflation.

31. © 2002 Prentice Hall Business PublishingPrinciples of Economics, 6/eKarl Case, Ray Fair The Costs of Inflation The benefits of many retired workers, including social security, are fully indexed to inflation. When prices rise, benefits rise.The benefits of many retired workers, including social security, are fully indexed to inflation. When prices rise, benefits rise. The poor have not fared so well. Welfare benefits are not indexed and have not kept pace with inflation.The poor have not fared so well. Welfare benefits are not indexed and have not kept pace with inflation.

32. © 2002 Prentice Hall Business PublishingPrinciples of Economics, 6/eKarl Case, Ray Fair The Costs of Inflation Unanticipated inflation—an inflation that takes people by surprise—can hurt creditors.Unanticipated inflation—an inflation that takes people by surprise—can hurt creditors. Inflation that is higher than expected benefits debtors; inflation that is lower than expected benefits creditors.Inflation that is higher than expected benefits debtors; inflation that is lower than expected benefits creditors. The real interest rate is the difference between the interest rate on a loan and the inflation rate.The real interest rate is the difference between the interest rate on a loan and the inflation rate.

33. © 2002 Prentice Hall Business PublishingPrinciples of Economics, 6/eKarl Case, Ray Fair The Costs of Inflation Inflation creates administrative costs and inefficiencies. Without inflation, time could be used more efficiently.Inflation creates administrative costs and inefficiencies. Without inflation, time could be used more efficiently. The opportunity cost of holding cash is high during inflations. People therefore hold less cash and need to stop at the bank more often.The opportunity cost of holding cash is high during inflations. People therefore hold less cash and need to stop at the bank more often. People are not fully informed about price changes and may make mistakes that lead to a misallocation of resources.People are not fully informed about price changes and may make mistakes that lead to a misallocation of resources.

34. © 2002 Prentice Hall Business PublishingPrinciples of Economics, 6/eKarl Case, Ray Fair The Costs of Inflation The recessions of 1974 to 1975 and 1980 to 1982 were the price we had to pay to stop inflation. Stopping inflation is costly.The recessions of 1974 to 1975 and 1980 to 1982 were the price we had to pay to stop inflation. Stopping inflation is costly.