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

This chapter explores the concepts of long-run output and productivity growth, recessions and depressions, unemployment, and inflation. It also discusses the costs and benefits associated with these economic concerns.

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

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  1. 7 Long-Run and Short-RunConcerns: Growth, Productivity, Unemployment, and Inflation Chapter Outline Long-Run Output and Productivity GrowthRecessions, Depressions, and UnemploymentDefining and Measuring UnemploymentComponents of the Unemployment RateThe Costs of UnemploymentThe Benefits of RecessionsInflationDefining InflationPrice IndexesThe Costs of InflationInflation: Public Enemy Number One?Looking Ahead

  2. LONG-RUN AND SHORT-RUN CONCERNS: GROWTH, PRODUCTIVITY, UNEMPLOYMENT, AND INFLATION output growth The growth rate of the output of the entire economy. per-capita output growth The growth rate of output per person in the economy. productivity growth The growth rate of output per worker.

  3. Which of the following is part of an ideal economy? a. Rapid growth of output per worker. b. Low unemployment. c. Low inflation. d. All of the above.

  4. Which of the following is part of an ideal economy? a. Rapid growth of output per worker. b. Low unemployment. c. Low inflation. d. All of the above.

  5. LONG-RUN OUTPUT AND PRODUCTIVITY GROWTH FIGURE 7.1 Output per Worker Hour (Productivity), 1952 I–2005 II

  6. The two features immediately clear when you examine the trend in productivity in the United States over the past fifty years are: a. An upward trend and fairly sizable fluctuations around that trend. b. An upward trend and relatively small fluctuations around that trend. c. A downward trend and fairly sizable fluctuations around that trend. d. A downward trend and relatively small fluctuations around that trend.

  7. The two features immediately clear when you examine the trend in productivity in the United States over the past fifty years are: a. An upward trend and fairly sizable fluctuations around that trend. b. An upward trend and relatively small fluctuations around that trend. c. A downward trend and fairly sizable fluctuations around that trend. d. A downward trend and relatively small fluctuations around that trend.

  8. LONG-RUN OUTPUT AND PRODUCTIVITY GROWTH FIGURE 7.2 Capital per Worker, 1952 I–2005 II

  9. RECESSIONS, DEPRESSIONS, AND UNEMPLOYMENT recession Roughly, a period in which real GDP declines for at least two consecutive quarters. Marked by falling output and rising unemployment. depression A prolonged and deep recession. The precise definitions of prolonged and deep are debatable.

  10. RECESSIONS, DEPRESSIONS, AND UNEMPLOYMENT

  11. The most severe recession since the 1930s took place between: a. 1974 and 1975. b. 1980 and 1982. c. 1990 and 1991. d. The first and third quarters of 2001.

  12. The most severe recession since the 1930s took place between: a. 1974 and 1975. b. 1980 and 1982. c. 1990 and 1991. d. The first and third quarters of 2001.

  13. RECESSIONS, DEPRESSIONS, AND UNEMPLOYMENT DEFINING AND MEASURING UNEMPLOYMENT employed 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 or without pay.

  14. RECESSIONS, DEPRESSIONS, AND UNEMPLOYMENT unemployed 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. not in the labor force A person who is not looking for work, because he or she either does not want a job or has given up looking.

  15. RECESSIONS, DEPRESSIONS, AND UNEMPLOYMENT labor force The number of people employed plus the number of unemployed. labor force = employed + unemployed population = labor force + not in labor force

  16. RECESSIONS, DEPRESSIONS, AND UNEMPLOYMENT unemployment rate The ratio of the number of people unemployed to the total number of people in the labor force. labor force participation rate The ratio of the labor force to the total population 16 years old or older.

  17. A person not looking for work, because he or she either does not want a job or has given up looking, is classified as: a. Unemployed. b. Not in the labor force. c. In the labor force but not currently employed. d. In the labor force participation rate, but not in the labor force.

  18. A person not looking for work, because he or she either does not want a job or has given up looking, is classified as: a. Unemployed. b. Not in the labor force. c. In the labor force but not currently employed. d. In the labor force participation rate, but not in the labor force.

  19. RECESSIONS, DEPRESSIONS, AND UNEMPLOYMENT

  20. RECESSIONS, DEPRESSIONS, AND UNEMPLOYMENT COMPONENTS OF THE UNEMPLOYMENT RATE Unemployment Rates for Different Demographic Groups There are large differences in unemployment rates across demographic groups.

  21. RECESSIONS, DEPRESSIONS, AND UNEMPLOYMENT Unemployment Rates in States and Regions The national unemployment rate does not tell the whole story. A low national rate of unemployment does not mean that the entire nation is growing and producing at the same rate.

  22. Unemployment rates in states and regions across the United States reveal that: a. States and regions in the United States generally display the same levels of unemployment. b. The labor force in the United States is almost completely mobile, with workers taking advantage of job opportunities clear across the country. c. A low national rate of unemployment does not mean that the entire nation is growing and producing at the same rate. d. All of the above.

  23. Unemployment rates in states and regions across the United States reveal that: a. States and regions in the United States generally display the same levels of unemployment. b. The labor force in the United States is almost completely mobile, with workers taking advantage of job opportunities clear across the country. c. A low national rate of unemployment does not mean that the entire nation is growing and producing at the same rate. d. All of the above.

  24. RECESSIONS, DEPRESSIONS, AND UNEMPLOYMENT Discouraged-Worker Effects discouraged-worker effect The decline in the measured unemployment rate that results when people who want to work but cannot find jobs grow discouraged and stop looking, thus dropping out of the ranks of the unemployed and the labor force.

  25. RECESSIONS, DEPRESSIONS, AND UNEMPLOYMENT The Duration of Unemployment

  26. When an unemployed worker becomes discouraged about finding work and stops looking, the unemployment rate will: a. Rise. b. Fall. c. Remain unchanged. d. Increase only if the worker falls out of the labor force.

  27. When an unemployed worker becomes discouraged about finding work and stops looking, the unemployment rate will: a. Rise. b. Fall. c. Remain unchanged. d. Increase only if the worker falls out of the labor force.

  28. RECESSIONS, DEPRESSIONS, AND UNEMPLOYMENT THE COSTS OF UNEMPLOYMENT Some Unemployment Is Inevitable When we consider the various costs of unemployment, it is useful to categorize unemployment into three types: ■ Frictional unemployment ■ Structural unemployment ■ Cyclical unemployment

  29. RECESSIONS, DEPRESSIONS, AND UNEMPLOYMENT Frictional and Structural Unemployment frictional unemployment 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 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.

  30. RECESSIONS, DEPRESSIONS, AND UNEMPLOYMENT natural rate of unemployment 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.

  31. RECESSIONS, DEPRESSIONS, AND UNEMPLOYMENT Cyclical Unemployment and Lost Output cyclical unemployment The increase in unemployment that occurs during recessions and depressions.

  32. RECESSIONS, DEPRESSIONS, AND UNEMPLOYMENT Social Consequences In addition to economic hardship, prolonged unemployment may also bring with it social and personal ills: anxiety, depression, deterioration of physical and psychological health, drug abuse (including alcoholism), and suicide.

  33. RECESSIONS, DEPRESSIONS, AND UNEMPLOYMENT THE BENEFITS OF RECESSIONS Recessions may help to reduce inflation.

  34. INFLATION

  35. INFLATION DEFINING INFLATION inflation An increase in the overall price level. deflation A decrease in the overall price level. sustained inflation An increase in the overall price level that continues over a significant period.

  36. INFLATION PRICE INDEXES consumer price index (CPI) 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.

  37. INFLATION FIGURE 7.3 The CPI Market Basket

  38. The CPI market basket shows that most of a typical consumer’s money goes toward: a. Recreation, medical care, and education. b. Food and beverage, apparel, and other goods and services. c. Housing, transportation, and food and beverages. d. None of the above. The typical consumer spends about the same amount of money on each of the categories listed in the choices above.

  39. The CPI market basket shows that most of a typical consumer’s money goes toward: a. Recreation, medical care, and education. b. Food and beverage, apparel, and other goods and services. c. Housing, transportation, and food and beverages. d. None of the above. The typical consumer spends about the same amount of money on each of the categories listed in the choices above.

  40. INFLATION Changes in the CPI somewhat overstate changes in the cost of living.

  41. INFLATION producer price indexes (PPIs) Measures 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, although there are subcategories within each of these categories.

  42. INFLATION THE COSTS OF INFLATION People’s income from wages and salaries, profits, interest, and rent increases during inflations. The wage rate is the price of labor, rent is the price of land, and so on. During inflations, most prices—including input prices—tend to rise together, and input prices determine both the incomes of workers and the incomes of owners of capital and land.

  43. INFLATION Inflation Changes the Distribution of Income If your income is fixed and prices rise, your ability to purchase goods and services falls proportionately. Effects on Debtors and Creditors real interest rate The difference between the interest rate on a loan and the inflation rate. Inflation that is higher than expected benefits debtors; inflation that is lower than expected benefits creditors.

  44. The interest rate stated in a loan contract is: a. The real rate of interest. b. The nominal rate of interest minus the rate of inflation. c. The real rate of interest plus the rate of inflation. d. The same as the rate of inflation.

  45. The interest rate stated in a loan contract is: a. The real rate of interest. b. The nominal rate of interest minus the rate of inflation. c. The real rate of interest plus the rate of inflation. d. The same as the rate of inflation.

  46. INFLATION Administrative Costs and Inefficiencies • 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. • People are not fully informed about price changes and may make mistakes that lead to a misallocation of resources.

  47. INFLATION Increased Risk and Slower Economic Growth When unanticipated inflation occurs regularly, the degree of risk associated with investments in the economy increases.

  48. INFLATION INFLATION: PUBLIC ENEMY NUMBER ONE? • Some people consider inflation to be our public enemy number one. Elected leaders have vigorously pursued policies designed to stop 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.

  49. REVIEW TERMS AND CONCEPTS producer price indexes (PPIs) productivity growth real interest rate recession structural unemployment sustained inflation unemployed unemployment rate 1. Labor force = employed + unemployed 2. Population = labor force + not in labor force 3. 4. • 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 • output growth • per-capita output growth

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