Transcript Chapter 11 Economic Challenges

Chapter 11
Economic Challenges
Section 1
Unemployment
I. Measuring Unemployment
Health of the U.S. economy is gauged
by examining the labor force and
unemployment
Census Bureau conducts a monthly
study called the Current Population
Survey
A. Identifying the Employed and
Unemployed
Individuals ages 16 and older are
classified as employed if during
the survey week they:
Worked for pay 1 or more hours
Worked without pay in a family
business 15 or more hours
Have jobs but did not work as a
result of illness, weather,
vacations, or labor disputes
Classified as unemployed if during
the survey week they:
Do not meet any of the above
criteria and have been actively
seeking work for four weeks
Others are classified as “not in the
labor force”
B. Unemployment Rate
The percentage of people in the
civilian labor force who are
unemployed
C. Problems with the Unemployment
Rate
1) Does not indicate how hard
someone is looking for a job
2) Does not include:
Marginally attached workers: people
who once held productive jobs but
have given up on looking for work
Discouraged workers: people who
want a job but have stopped looking
for job-related reasons
3) Does not indicate the number of
underemployed: those with jobs
beneath their skill level and those
not working full time but want to
D. Determining Full Employment
Some unemployment is unavoidable
and a natural part of a healthy
economy
A 95% employment rate represents
full employment
II. Types of Unemployment
A. Frictional Unemployment
Moving from one job to another
B. Structural Unemployment
Result of changes in technology
C. Seasonal Unemployment
Job rate fluctuates depending on season
D. Cyclical Unemployment
Result of recession or economic
downturn
Harms the economy the most
Great depression reached 25%
Chapter 11
Economic Challenges
Section 2
Inflation
I. Examining Price Fluctuations
When discussing prices, economists
talk about:
A. Price Level ~reflects prices in an
economy and influences :
Aggregate supply: total amount of
goods and services produced in an
economy
Aggregate demand: total amount of
spending by individuals and
businesses in an economy
B. Inflation
An increase in the average price
level of all products in an economy
Aggregate demand increases
faster than aggregate supply
Reduces the real purchasing
power of the dollar
C. Deflation
A decrease in the average price
level of all goods and services in
an economy
Aggregate demand decreases
more rapidly than aggregate
supply
Sellers are forced to lower
prices to attract buyers
Boosts the real purchasing
power of the dollar
II. Causes of Inflation
Two general categories:
A. Demand-Pull Inflation
Aggregate demand exceeds
aggregate supply
As demand continues to increase,
the prices of goods are pulled even
higher
Results from an increase in the
money supply or an increase in the
use of credit
B. Cost-Push Inflation
When producers raise prices to
cover higher resource costs
Increased costs push producers to
raise prices even if demand has
not increased
A supply shock, an event that
increases the cost of production,
is one of many causes
Ex. Crop failures, natural
disasters, political upheavals
Wage-price spiral ~higher wages =
higher prices
C. Price Expectations
When consumers expect prices to
increase, they tend to buy to take
advantage of lower prices
Increases aggregate demand
and inflation rises
When consumers expect lower
prices they postpone buying
Decreases aggregate demand
and lowers inflation
Chapter 11
Economic Challenges
Section 2
Inflation: Part 2
I. Measuring Inflation
Economists look at changes in the
average price level of goods and
services in a nation
Average prices, not specific
If most items are more expensive,
the purchasing power of the dollar
decreases
Economists construct a price index to
measure price levels
A. Consumer Price Index (CPI)
The measure of the average change
over time in the price of a fixed
group of products
BLS (Bureau of Labor Statistics)
Selects a base year (1982-1984)
Then selects a sample of commonly
purchased items called a market
basket
Food, clothing, shelter, utilities,
transportation, health care, etc.
B. Producer Price Index (PPI)
A measure of the average change
over time in the prices of goods and
services bought by producers
Based on 3200 products
Current base year 1982
II. Inflation Rate
Inflation Rate = [( CPI year B - CPI year
A ) / CPI year A ] x 100
The monthly or annual percentage
change in prices
Inflation rate from 1 to 3 % is
moderate
Hyperinflation is when inflation
increases at a rate of several hundred
percent per year
Ex. WWI—war reparations
Complete economic collapse
III. Effects of Inflation
A. Decreased Purchasing Power
Dollar won’t buy as much
COLA’S (cost of living
adjustments)
Automatically raise wages or
payments to account for
inflation
B. Decreased Value of Real Wages
when pay increases fail to keep
pace with rising prices
1979--$20,000
1995--$40,000
Purchasing power about the
same
C. Increases Interest Rates
As prices increase so do interest
rates
High rates slow down spending
D. Decreases Saving and Investing
$2,000 for 5 years @5%=$2550
Inflation rate average is 7%
E. Increases Production Cost
Why might this hurt some
businesses?