Transcript Economic Instability

Economic Instability
Unemployment v. Inflation
Questions to Ponder:
Are you (or a friend) looking for a job this
summer?
 How easy is it to find a job? What kind of
jobs are available? How are the wages?
 What causes unemployment in the US?
 How does the causes of unemployment
compare to your own lack of jobs?

What do you think the
unemployment rate is for the US?

DOWN in April: 5.2%
looking for work.
 7,000 new jobs in
April.
 Unemployment rate in
2004 ran at 5.5%
 8,149,000 looking
for work in 2004.
The reasons for unemployment




Frictional
Unemployment
Structural
Unemployment
Seasonal
Unemployment
Cyclical
Unemployment
Frictional Unemployment



People in between
jobs.
Short period of time
while changing jobs.
3% - 4% frictional
employment is
considered normal.
Structural Unemployment

When changes in
market supply or
demand conditions
affect major industries
or regions.
Causes of Structural
Unemployment





Decline in demand for a
product
Increased foreign
competition
Automation of production
Increased raw material
costs
Lack of labor mobility
between occupations or
regions.
Seasonal Unemployment

Most seasonal
unemployment is
tends to occur in
certain industries.
 Hotel and
catering
 Tourism
 Fruit picking
 Christmas
Cyclical Unemployment

When aggregate
demand in the
economy is not
sufficient to provide
jobs for all those who
seek work.
 Recession
 Depression
Cyclical Unemployment

When the economy is
operating at
production capacity
there is full
employment aggregate
demand.
Natural Rate of Unemployment

The lowest level of
unemployment that
can be maintained
without setting off
increases in inflation.
 2005: 3.1%
 Same number of
new workers
coming into the job
market yearly.
One other kind of Unemployment

HIDDEN
UNEMPLOYMENT
 Reported number is
only people
 Actively seeking
work.
Unemployment Rate does not
include



Discouraged workers who
have stopped looking.
Those who work part-time
when they want full-time
work
Those working that are
overqualified for the job.
 underemployed
What is so wrong if everyone
who wants a job has a job???
THE ANSWER????
 INFLATION

The trade-off
with more
employment.
Inflation

Continual rise in the
general level of prices
in an economy.
 Concern is when
the prices go up
faster than wages!
How do we measure inflation?

CPI
 Consumer Price Index
 Comparing prices of
items at different
points in time.
 CPI is the most
commonly used index
to measure inflation.
What goods are in the MARKET
BASKET for the CPI?

What would you put in
the market basket?
 HINT: 200 items!
What is in the 2005 market
basket?



FOOD AND BEVERAGES (breakfast
cereal, milk, coffee, chicken, wine,
service meals and snacks)
HOUSING (rent of primary residence,
owners' equivalent rent, fuel oil,
bedroom furniture)
APPAREL (men's shirts and sweaters,
women's dresses, jewelry)
What is in the market basket?



TRANSPORTATION (new vehicles, airline
fares, gasoline, motor vehicle
insurance)
MEDICAL CARE (prescription drugs and
medical supplies, physicians' services,
eyeglasses and eye care, hospital
services)
RECREATION (televisions, pets and pet
products, sports equipment,
admissions);
What is in the market basket?


EDUCATION AND COMMUNICATION
(college tuition, postage, telephone
services, computer software and
accessories);
OTHER GOODS AND SERVICES (tobacco
and smoking products, haircuts and
other personal services, funeral
expenses).
What is the CPI pattern in 2005?

CPI measures the
dollar’s worth.
 Check out the
website
http://minneapolisfed.
org/Research/data/u
s/calc/index.cfm
CPI: Prices are 3.1% higher than
last year.

In 2004, you bought
goods and services for
$1 that in 2005 are
costing $1.03 for the
same goods and
services.
Types of Inflation

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
Demand-Pull Inflation
Cost-Push Inflation
Monetary Inflation
Stagflation
Hyperinflation
Demand-Pull Inflation

When the demand for
goods and services
exceeds the production
capacity.
 Prices rising
because of
shortages.
Cost-Push Inflation

Inflation can arise from
changes in the costs of
production of goods and
services.
 Increase in the price of
raw materials
 Increase in the price of
labor
 Increase in the cost of
capital.
Cost-Push v. Demand Pull

They push and pull
prices up.
 Labor contracts
containing COLA
clauses.

Cost-Of-Living
Adjustments.
Monetary Inflation

Inflation caused by
excessive growth in
the money supply.
 Value of money
decreases if it isn’t
that “rare.”
Rule for Monetary Inflation:
VELOCITY

Quantity Equation
M xV=Tx P
 Money supply
times the velocity at
which it changes
hands equals the
number of
transactions times
the average level of
prices.
MxV=TxP

Direct relationship
between the money
supply and the price
level.
What happens when the quantity
equation is “off”?


Hyperinflation
Money supply
increases much, much
faster than an
economy’s output of
goods and services.
 THINK RUSSIA in
1990s.
Phillips Curve: The relationship
between unemployment and
inflation.
INVERSE relationship.
Unemployment goes
UP, then inflation goes
DOWN.
Stagflation: When things
REALLY go wrong on the
Phillips Curve

Inflation and
unemployment were at
higher levels.
 Combination of
stagnation and
inflation.
 Both were
increasing.
1970s: What caused Stagflation?



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Spending on the
Vietnam War PLUS
spending on domestic
social programs.
Inflationary
expectations
Rise in energy costs
caused by OPEC
Monopolistic pricing
What is wrong with Inflation?


Inflation reduces
REAL INCOME of
those whose incomes
do not rise as fast as
the price level.
Hurts:
 People holding
assets in MONEY
 Lenders
Special Note: Phillips Curve
International

Pg. 293-294 “El
Dempleo”
 Europe 1970s had
higher inflation and
unemployment.
 Worse because:
 Labor union
practices
 Tax structures
 Government
economic policies
Consequences of Unemployment

Income Effects
 Loss of income and
benefits (Health
insurance)
 Loss of income to
others because of
reduced purchasing
power
 Reduced tax income
and increased outlays
of government.
Consequences of Unemployment

Real Output Effects
 Each 1% of
unemployment results
in a reduction of $100billion in output.
 Lower real investment
means less growth and
reduced future output.
Consequences of Unemployment

Social Effects
 Health Problems
 Increased suicides
 Break up of
families
 Increased child
abuse
 Increased crime
Consequences of INFLATION

Income Effects:
 Reduced
purchasing power
of the dollar
 Reduced real
income for fixed
income receivers
 Reduced real
wealth of savings
Income Effects of Inflation
(cont.)



Benefits those whose
incomes rise faster
than the inflation rate.
Benefits owners of
real assets (real estate,
precious metals
(kinda!))
Benefits debtors
How Inflation effects Real
Output


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Inflation initially
stimulates output
Near full employment,
there arise bottlenecks in
supplies
Costs begin rising faster
than prices
Interest rates accelerate,
discouraging new
investment.