chapter 20: lr and sr concerns growth, productivity, unemployment, and inflation
TRANSCRIPT
Chapter 20: LR and Chapter 20: LR and SR Concerns SR Concerns
Growth, Productivity, Growth, Productivity, Unemployment, and Inflation Unemployment, and Inflation
Business Cycles Business Cycles
The economy naturally fluctuates The economy naturally fluctuates in the short run .in the short run .
Business CyclesBusiness Cycles
During times of During times of expansionexpansion – GDP is – GDP is growinggrowing– Unemployment fallsUnemployment falls– Sometimes inflation risesSometimes inflation rises
During times of During times of contraction contraction – GDP is – GDP is fallingfalling– Unemployment risesUnemployment rises– Sometimes inflation falls (could rise, Sometimes inflation falls (could rise,
though and cause stagflation)though and cause stagflation)
UnemploymentUnemployment
EmployedEmployed = any person 16 or = any person 16 or older whoolder who– Works for pay (for someone else or Works for pay (for someone else or
in own business for 1 or more hours in own business for 1 or more hours per week)per week)
– Works without pay for 15 or more Works without pay for 15 or more hours per week in a family businesshours per week in a family business
– Has a job but has been temporarily Has a job but has been temporarily absent, with or without pay absent, with or without pay
UnemploymentUnemployment
UnemployedUnemployed = a person 16 or = a person 16 or older who is not working, is older who is not working, is available for work, and has made available for work, and has made efforts to find work during the last efforts to find work during the last 4 weeks4 weeks
Unemployment Unemployment
Not in the labor force = a person Not in the labor force = a person not looking for work, because not looking for work, because he/she does not want a job or has he/she does not want a job or has given up lookinggiven up looking
Labor Force = # people employed + Labor Force = # people employed +
# people unemployed # people unemployed Population = labor force + not in Population = labor force + not in
labor forcelabor force
UnemploymentUnemployment
Unemployment rate = Unemployment rate =
unemployedunemployed
employed + unemp.employed + unemp.
Labor force participation rate =Labor force participation rate =
labor forcelabor force
population over age 16population over age 16
Unemployment Unemployment
Discouraged-Worker EffectDiscouraged-Worker Effect – Discouraged workers are people who Discouraged workers are people who
have have stopped lookingstopped looking for work (so for work (so they don’t count as unemployed)they don’t count as unemployed)
– Result: Result: ↓↓ in the measured in the measured unemployment rate unemployment rate
– So at any given time, we might have So at any given time, we might have more people who actually want a job more people who actually want a job than is measured by the than is measured by the unemployment rateunemployment rate
UnemploymentUnemployment
Discouraged workers make up Discouraged workers make up about 1 percent of the labor forceabout 1 percent of the labor force– During recessions, it can be higherDuring recessions, it can be higher
Should we add this to the Should we add this to the unemployment rate to get a more unemployment rate to get a more accurate number?accurate number?
Types of Unemployment: Types of Unemployment: Some unemployment is Some unemployment is inevitable!inevitable! Frictional unemploymentFrictional unemployment – –
usually short-term issues, like usually short-term issues, like people changing jobs, graduating people changing jobs, graduating from college and looking for a job, from college and looking for a job, people moving, etc.people moving, etc.– This type of unemployment will This type of unemployment will
ALWAYS occur and is normal!ALWAYS occur and is normal!
Types of Types of UnemploymentUnemployment Structural UnemploymentStructural Unemployment – –
unemployment that results from the unemployment that results from the changing structure of the economychanging structure of the economy– Ex: people’s skills do not match the skills Ex: people’s skills do not match the skills
necessary for jobsnecessary for jobs– Can be caused by:Can be caused by:
new technologynew technology new resourcesnew resources changes in consumer demandchanges in consumer demand globalizationglobalization lack of education lack of education
Types of Types of UnemploymentUnemployment Natural rate of unemploymentNatural rate of unemployment
– the unemployment that occurs – the unemployment that occurs as a normal part of a functioning as a normal part of a functioning economy. economy.
Sometimes it’s the sum of Sometimes it’s the sum of frictional + structural frictional + structural unemployment (I would add unemployment (I would add seasonal unemployment, too.)seasonal unemployment, too.)
Types of Types of Unemployment Unemployment Cyclical unemploymentCyclical unemployment – the – the
increase in unemployment that increase in unemployment that occurs during recessions and occurs during recessions and depressions (corresponds with the depressions (corresponds with the business business cyclecycle) )
During a recession – firms produce During a recession – firms produce less b/c demand for g&s is lower, so less b/c demand for g&s is lower, so they need fewer workers (lay offs)they need fewer workers (lay offs)
Costs of Costs of unemployment unemployment Social consequences of Social consequences of
unemploymentunemployment– Effects are unevenly distributed among Effects are unevenly distributed among
populationpopulation– Prolonged unemployment during severe Prolonged unemployment during severe
recessions (depressions) can also cause recessions (depressions) can also cause anxiety, depression, physical and anxiety, depression, physical and psychological health issues, drug and psychological health issues, drug and alcohol abuse, and suicidealcohol abuse, and suicide
Benefits of Benefits of recessions???recessions??? Recessions usually slow the rate of Recessions usually slow the rate of
inflationinflation Some argue that recessions increase Some argue that recessions increase
efficiency by driving the least efficient efficiency by driving the least efficient firms out of business and forcing firms out of business and forcing surviving firms to improvesurviving firms to improve
Recessions cause a decrease in Recessions cause a decrease in demand for imports (improves balance demand for imports (improves balance of trade…more later)of trade…more later)
Quick review from Quick review from today…today… What type of unemployment?What type of unemployment?
– Giant Eagle lays off 3 workers b/c of 3 new Giant Eagle lays off 3 workers b/c of 3 new self-checkout lanes.self-checkout lanes.
– Mrs. Eskra decides to change her career Mrs. Eskra decides to change her career from teacher to Economist and it’s taking from teacher to Economist and it’s taking a little while for her to find a new job in a little while for her to find a new job in that field.that field.
– A friend gets laid off from her job at the A friend gets laid off from her job at the mall. The company says that they are just mall. The company says that they are just not making enough money during the not making enough money during the recession to keep her hired. recession to keep her hired.
Quick Review…Quick Review…
Which type of unemployment is Which type of unemployment is the most concerning to the the most concerning to the government?government?
Why are the other two types of Why are the other two types of unemployment not as concerning?unemployment not as concerning?
Why would the government want Why would the government want to know to know which which types of types of unemployment are present?unemployment are present?
HomeworkHomework
Take notes on pages 447-452 Take notes on pages 447-452 (End of chapter) and make sure (End of chapter) and make sure your notes are complete from in your notes are complete from in class to cover the beginning of class to cover the beginning of the chapter as well!the chapter as well!
InflationInflation
Inflation – an increase in the Inflation – an increase in the overall overall price levelprice level– Happens when many prices increase Happens when many prices increase
simultaneously simultaneously Deflation – decrease in the overall Deflation – decrease in the overall
price levelprice level
How do we measure How do we measure inflation?inflation? Economists use price Economists use price indexes indexes – –
measurements that show how the measurements that show how the average price of a standard group average price of a standard group of goods changes over time of goods changes over time
The most common is the The most common is the Consumer Price IndexConsumer Price Index ( (CPICPI))
The CPIThe CPI
CPI uses a bundle of goods meant CPI uses a bundle of goods meant to represent the “market basket” to represent the “market basket” purchased monthly by the typical purchased monthly by the typical urban consumerurban consumer
It differs from the GDP deflator, It differs from the GDP deflator, which pertains to all goods and which pertains to all goods and services in the economy (not just services in the economy (not just consumer)consumer)
CPI Market BasketCPI Market Basket
Housing, 40.9
Apparel, 4.2Transportation, 17.3
Medical Care, 6
Recreation, 5.9
Education and Communication, 5.8
Other g&s, 4.3
Food and beverages, 15.6 Housing
Apparel
Transportation
Medical Care
Recreation
Education andCommunication
Other g&s
Food and beverages
CPI Market BasketCPI Market Basket
Category ExamplesFood and drinks Cereals, coffee, chicken, milk,
restaurant meals
Housing Rent, homeowners’ costs, fuel oil
Apparel and upkeep Men’s shirts, women’s dresses, jewelry
Transportation Airfares, new and used cars, gasoline, auto insurance
Medical care Prescription medicines, eye care, physicians’ services
Entertainment Newspapers, toys, musical instruments
Education and communication Tuition, postage, telephone services, computers
Other goods and services Haircuts, cosmetics, bank fees
The CPIThe CPI
The CPI may overstate changes in the The CPI may overstate changes in the cost of living because it does not cost of living because it does not account for the fact that people account for the fact that people substitute away from more expensive substitute away from more expensive items over time and buy cheaper items over time and buy cheaper goods.goods.– Ex: Groceries have recently become a lot Ex: Groceries have recently become a lot
more expensive, so more people are more expensive, so more people are choosing to purchase more food items at choosing to purchase more food items at WalMart or more generic brands. WalMart or more generic brands.
PPIsPPIs
Producer Price Indexes (PPIs) include Producer Price Indexes (PPIs) include prices that producers receive for prices that producers receive for products in the production processproducts in the production process– Finished goods, intermediate materials, Finished goods, intermediate materials,
and crude materials and crude materials – Advantage: detect price increases Advantage: detect price increases
earlierearlier– Leading indicators of future consumer Leading indicators of future consumer
pricesprices
What causes inflation?What causes inflation?
Quantity theory – too much money is in Quantity theory – too much money is in the economythe economy
Demand-pull theory – inflation occurs Demand-pull theory – inflation occurs when demand for goods and services when demand for goods and services exceeds existing supplies exceeds existing supplies
Cost-push theory – inflation occurs when Cost-push theory – inflation occurs when producers raise prices in order to meet producers raise prices in order to meet increased costsincreased costs
Together these cause a wage-price spiral Together these cause a wage-price spiral
Costs of inflation Costs of inflation
Inflation causes the goods and Inflation causes the goods and services we buy to be more services we buy to be more expensiveexpensive
But usually people’s income also But usually people’s income also rises during inflation (Does it rises during inflation (Does it adjust as quickly?)adjust as quickly?)– COLAs = cost of living adjustmentsCOLAs = cost of living adjustments
Who is hurt by Who is hurt by inflation?inflation? Fixed income earners – the Fixed income earners – the
elderly elderly – Retired workers live on private Retired workers live on private
pensions pensions – Monthly checks will never increase Monthly checks will never increase – Some ARE indexed to inflation (like Some ARE indexed to inflation (like
Social Security)Social Security)
Debtors and CreditorsDebtors and Creditors
When inflation is When inflation is anticipatedanticipated, , creditors charge an interest rate creditors charge an interest rate that covers the decrease in value that covers the decrease in value due to inflation due to inflation
Real interest rate Real interest rate = the = the difference between interest rate on difference between interest rate on a loan and the inflation rate a loan and the inflation rate – Ex: Ex: interest rate is 10% and inflation interest rate is 10% and inflation
is 8%. The real interest rate is 2% is 8%. The real interest rate is 2% then.then.
Debtors and CreditorsDebtors and Creditors
When inflation is When inflation is unanticipatedunanticipated, , creditors are hurt b/c they are creditors are hurt b/c they are paid back in money that is not paid back in money that is not worth as much as when they lent worth as much as when they lent it. it.
Inflation that is higher than Inflation that is higher than expected benefits debtorsexpected benefits debtors
Inflation that is lower than Inflation that is lower than expected benefits creditors expected benefits creditors