Long-Run and Short-Run Concerns: Growth, Productivity, Unemployment, and Inflation

1. Long-Run and Short-Run Concerns: Growth, Productivity, Unemployment, and Inflation

2. Long-Run Outputand Productivity Growth • An ideal economy is one in which there is: • rapid growth of output per worker, low unemployment, and low inflation. • Unfortunately economies are not always in this ideal state • A key part of macroeconomics is studying whatdetermines output, unemployment, and inflation.

3. Long-Run Outputand Productivity Growth • Growth Theory studies the factors that affect the average growth rate of output in an economy. There are a number of ways to increase output. An economy can: • Add more workers • Add more machines • Increase the length of the workweek • Increase the quality of the workers (productivity) • Increase the quality of the machines (technology)

4. Long-Run Outputand Productivity Growth Total output (real GDP) Labor Productivity = ___________________ Labor Productivity is the output per worker hour. Total worker hours

5. Recessions, Depressions,and Unemployment • The business cycledescribes the periodic ups and downs in the economy, or deviations of output and employment away from the long-run trend. • 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. (more plants and equipment are running at less than full capacity).

6. Recessions, Depressions,and Unemployment • A depression is a prolonged and deep recession. The precise definitions of prolonged and deep are debatable (قابلة للنقاش). • Capacity utilization rates, which show the percentage of factory capacity being used in production, are one indicator of a recession.

7. Real GDP and Unemployment Rates,1929-1933 and 1980-1982

8. Defining andMeasuring Unemployment An employed person is any person 16 years old or older: • who works for pay, either for someone else or in his or her own business for 1 or more hours per week, • who works without pay for 15 or more hours per week in a family enterprise, or • who has a job but has been temporarily absent, with or without pay.

9. Defining andMeasuring Unemployment • An unemployed person is a person 16 years old or older who: is not working, is available for work, and has made specific efforts to find work during the previous 4 weeks but not found work • 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.

10. Defining andMeasuring Unemployment

11. Defining andMeasuring Unemployment • Computing the unemployment rate for the month of July 2003: • Labor force: 141.39 million • Employed: 133.47 million • Unemployed: 7.92 million

12. Chapter 3 Unemployment, Inflation, and Long-Run Growth Table 7.1 Employed 14,000 people Unemployed 3,000 people Not in the Labor Force 4,000 people

13. Chapter 3 Unemployment, Inflation, and Long-Run Growth 4) Refer to Table 7.1. The labor force equals A) 14,000 people. B) 17,000 people. C) 18,000 people. D) 21,000 people. Answer: B

14. Chapter 3 Unemployment, Inflation, and Long-Run Growth • 5) Refer to Table 7.1. The unemployment rate is • A) 17.6%. • B) 16.7%. • C) 14.3%. • D) 25.0%. • Answer: A

15. Chapter 3 Unemployment, Inflation, and Long-Run Growth • 6) Refer to Table 7.1. The labor-force participation rate is • A) 75.0%. • B) 66.7%. • C) 77.8%. • D) 80.9%. • Answer: D

16. Chapter 3 Unemployment, Inflation, and Long-Run Growth • 7) Refer to Table 7.1. The employment rate is • A) 85.7%. • B) 83.3%. • C) 82.4%. • D) 75.0%. • Answer: C

17. Chapter 3 Unemployment, Inflation, and Long-Run Growth • Refer to the information provided in Table 7.2 below to answer the questions that follow. • Table 7.2 

18. Chapter 3 Unemployment, Inflation, and Long-Run Growth • 8) Refer to Table 7.2. The labor force • A) equals 150 million. • B) equals 130 million. • C) equals 170 million • D) cannot be determined from this information. • Answer: A

19. Chapter 3 Unemployment, Inflation, and Long-Run Growth • 9) Refer to Table 7.2. The total number of people unemployed is • A) 20 million. • B) 13 million. • C) 17 million. • D) 15 million. • Answer: D

20. Chapter 3 Unemployment, Inflation, and Long-Run Growth • 10) Refer to Table 7.2. The total number of people employed is • A) 153 million. • B) 117 million. • C) 135 million. • D) 180 million. • Answer: C

21. Employed, Unemployed,and the Labor Force, 1953-2002

22. Unemployment Rates forDifferent Demographic Groups

23. Regional Differencesin Unemployment

24. The Discouraged-Worker Effect • Discouraged workers are people who want to work but cannot find jobs. They grow discouraged and stop looking for work, thus dropping out of the ranks of the unemployed and the labor force.

25. The Duration of Unemployment

26. Types of Unemployment • Frictional unemployment is caused by normal worker movement from one job to another. • Frictional unemployment is good for the economy because these workers will usually find a job that suits them better (and in which they are likely to be more productive). • The term frictional unemployment is used to denote short-run job/skill matching problems, problems that last a few weeks.

27. Types of Unemployment • 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 creates longer-run adjustment problems (مشكلات التكيف) that may last for years.

28. Types of Unemployment • Cyclical unemployment is the increase in unemployment that occurs during recessions and depressions. • The cost to the economy of cyclical unemployment is the lost of output (GDP).

29. Types of 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 • The natural rate of unemployment is the unemployment that is normal. Estimates range from 4% to 6%.

30. The Benefits of Recessions • Recessions may help to reduce inflation. • Also, a recession leads to a decrease in the demand for imports, which improves a nation’s balance of payments.

31. Two Serious InflationaryPeriods Since 1970

32. Inflation • Not all price increases are inflation. Over any time period, prices of some goods will rise and other prices will fall. • Inflation is an increase in the overall (average) price level. Inflation happens when prices of many goods and services increase together. • Deflation is a decrease in the overall (average) price level. • Sustained inflation is inflation that continues over a significant period of time.

33. Inflation and the Business Cycle

34. 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. • 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.

35. Price Indexes • The consumer price index (CPI) is the most popular fixed-weight price index. • One version of the CPI is the “Chained Consumer Price Index,” which uses changing weights.

36. Price Indexes • The CPI market basket shows how a typical consumer divides his or her money among various goods and services.

37. The Consumer Price Index (CPI)

38. Price Indexes • Other popular price indexes are producer price indexes (PPIs), which measure price changes for products at all stages in the production process. • The three main categories are: • finished goods, • intermediate materials, and • crude materials.

39. The Costs of Inflation • Inflation changes the distribution of income. People living on fixed incomes are particularly hurt by inflation.

40. The Costs of Inflation • The benefits received by many retired workers, including social security, are fully indexed to inflation. When prices rise, benefits rise.

41. The Costs of Inflation • Unanticipated inflation—an inflation that takes people by surprise—can hurt creditors (lenders) and benefit debtors (borrowers) • The real interest rate is the difference between the interest rate on a loan and the inflation rate. Real Interest Rate = Nominal Interest Rate – Inflation rate

42. The Costs of Inflation • Inflation creates inefficiencies. Without inflation, time could be used more efficiently. • People are not fully informed about price changes and may make mistakes that lead to a misallocation of resources.

43. The Costs of Inflation • Some people consider inflation to be our public enemy number one. Elected leaders try to design economic policies to stop inflation.

44. Review Terms and Concepts consumer price index (CPI) cyclical unemployment deflation depression discouraged-worker effect employed frictional unemployment inflation labor force labor-force participation rate natural rate of unemployment not in the labor force producer price indexes (PPIs) real interest rate recession structural unemployment sustained inflation unemployed unemployment rate