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Chapter 20: LR and SR Concerns

Chapter 20: LR and SR Concerns. Growth, Productivity, Unemployment, and Inflation. Business Cycles. The economy naturally fluctuates in the short run. Business Cycles. During times of expansion – GDP is growing Unemployment falls Sometimes inflation rises

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Chapter 20: LR and SR Concerns

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  1. Chapter 20: LR and SR Concerns Growth, Productivity, Unemployment, and Inflation

  2. Business Cycles • The economy naturally fluctuates in the short run .

  3. Business Cycles • During times of expansion – GDP is growing • Unemployment falls • Sometimes inflation rises • During times of contraction – GDP is falling • Unemployment rises • Sometimes inflation falls (could rise, though and cause stagflation)

  4. Unemployment • Employed = any person 16 or older who • Works for pay (for someone else or in own business for 1 or more hours per week) • Works without pay for 15 or more hours per week in a family business • Has a job but has been temporarily absent, with or without pay

  5. Unemployment • Unemployed = a person 16 or older who is not working, is available for work, and has made efforts to find work during the last 4 weeks

  6. Unemployment • Not in the labor force = a person not looking for work, because he/she does not want a job or has given up looking • Labor Force = # people employed + # people unemployed • Population = labor force + not in labor force

  7. Unemployment • Unemployment rate = unemployed employed + unemp. • Labor force participation rate = labor force population over age 16

  8. Unemployment • Discouraged-Worker Effect • Discouraged workers are people who have stopped looking for work (so they don’t count as unemployed) • Result: ↓ in the measured unemployment rate • So at any given time, we might have more people who actually want a job than is measured by the unemployment rate

  9. Unemployment • Discouraged workers make up about 1 percent of the labor force • During recessions, it can be higher • Should we add this to the unemployment rate to get a more accurate number?

  10. Types of Unemployment: Some unemployment is inevitable! • Frictional unemployment – usually short-term issues, like people changing jobs, graduating from college and looking for a job, people moving, etc. • This type of unemployment will ALWAYS occur and is normal!

  11. Types of Unemployment • Structural Unemployment – unemployment that results from the changing structure of the economy • Ex: people’s skills do not match the skills necessary for jobs • Can be caused by: • new technology • new resources • changes in consumer demand • globalization • lack of education

  12. Types of Unemployment • Natural rate of unemployment – the unemployment that occurs as a normal part of a functioning economy. • Sometimes it’s the sum of frictional + structural unemployment (I would add seasonal unemployment, too.)

  13. Types of Unemployment • Cyclical unemployment – the increase in unemployment that occurs during recessions and depressions (corresponds with the business cycle) • During a recession – firms produce less b/c demand for g&s is lower, so they need fewer workers (lay offs)

  14. Costs of unemployment • Social consequences of unemployment • Effects are unevenly distributed among population • Prolonged unemployment during severe recessions (depressions) can also cause anxiety, depression, physical and psychological health issues, drug and alcohol abuse, and suicide

  15. Benefits of recessions??? • Recessions usually slow the rate of inflation • Some argue that recessions increase efficiency by driving the least efficient firms out of business and forcing surviving firms to improve • Recessions cause a decrease in demand for imports (improves balance of trade…more later)

  16. Quick review from today… • What type of unemployment? • Giant Eagle lays off 3 workers b/c of 3 new self-checkout lanes. • Mrs. Eskra decides to change her career from teacher to Economist and it’s taking a little while for her to find a new job in that field. • A friend gets laid off from her job at the mall. The company says that they are just not making enough money during the recession to keep her hired.

  17. Quick Review… • Which type of unemployment is the most concerning to the government? • Why are the other two types of unemployment not as concerning? • Why would the government want to know which types of unemployment are present?

  18. Homework • Take notes on pages 447-452 (End of chapter) and make sure your notes are complete from in class to cover the beginning of the chapter as well!

  19. Inflation • Inflation – an increase in the overall price level • Happens when many prices increase simultaneously • Deflation – decrease in the overall price level

  20. How do we measure inflation? • Economists use price indexes – measurements that show how the average price of a standard group of goods changes over time • The most common is the Consumer Price Index (CPI)

  21. The CPI • CPI uses a bundle of goods meant to represent the “market basket” purchased monthly by the typical urban consumer • It differs from the GDP deflator, which pertains to all goods and services in the economy (not just consumer)

  22. CPI Market Basket

  23. CPI Market Basket

  24. The CPI • The CPI may overstate changes in the cost of living because it does not account for the fact that people substitute away from more expensive items over time and buy cheaper goods. • Ex: Groceries have recently become a lot more expensive, so more people are choosing to purchase more food items at WalMart or more generic brands.

  25. PPIs • Producer Price Indexes (PPIs) include prices that producers receive for products in the production process • Finished goods, intermediate materials, and crude materials • Advantage: detect price increases earlier • Leading indicators of future consumer prices

  26. What causes inflation? • Quantity theory – too much money is in the economy • Demand-pull theory – inflation occurs when demand for goods and services exceeds existing supplies • Cost-push theory – inflation occurs when producers raise prices in order to meet increased costs • Together these cause a wage-price spiral

  27. Costs of inflation • Inflation causes the goods and services we buy to be more expensive • But usually people’s income also rises during inflation (Does it adjust as quickly?) • COLAs = cost of living adjustments

  28. Who is hurt by inflation? • Fixed income earners – the elderly • Retired workers live on private pensions • Monthly checks will never increase • Some ARE indexed to inflation (like Social Security)

  29. Debtors and Creditors • When inflation is anticipated, creditors charge an interest rate that covers the decrease in value due to inflation • Real interest rate = the difference between interest rate on a loan and the inflation rate • Ex: interest rate is 10% and inflation is 8%. The real interest rate is 2% then.

  30. Debtors and Creditors • When inflation is unanticipated, creditors are hurt b/c they are paid back in money that is not worth as much as when they lent it. • Inflation that is higher than expected benefits debtors • Inflation that is lower than expected benefits creditors

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