Facing Economic Challenges Economics Chapter 12 Notes.

Facing Economic Challenges Economics Chapter 12 Notes

Economic Challenges - Unemployment

▫Unemployment has a variety of causes. Some level of unemployment is expected, even when an economy is healthy.

▫As the nation goes through business cycles, it faces the problems of unemployment and inflation. Persistent unemployment can lead to poverty.

During periods of inflation, wages buy less.

Measuring Unemployment•The Unemployment Rate

▫Civilian labor force—people over 16 who are working, looking for work

▫Bureau of Labor Statistics determines unemployment rate divides number of unemployed workers by

total in civilian labor force does not count discouraged who have

stopped looking or underemployed▫ Underemployed—work part-time, want

full-time or work below skill level

Measuring Unemployment•Full Employment

▫ Full employment—no unemployment caused by decreased economic activity

▫Always some degree of unemployment: people relocate; look for better job; can’t find

appropriate job ▫Unemployment rate of 4 to 6 percent

considered full employment in U.S. other rates in countries with different labor

markets, economic policies

Types of Unemployment•Type 1: Frictional Unemployment

▫Frictional unemployment not a threat to economic stability.

▫Includes: Childrearing parents returning to work new college graduates looking for first job experienced workers who want to switch jobs

▫Reflects workers’ freedom to find best job for them at highest wage

Types of Unemployment

•Type 2: Seasonal Unemployment▫Demand for some jobs changes

dramatically from season to season construction work falls off in winter tourism peaks at certain times of year; varies by region

migrant farm work drops off in winter; migrant families suffer

Types of Unemployment•Type 3: Structural Unemployment

▫As businesses become more efficient, require fewer workers new technologies replace workers or require

them to retrain new industries requiring specialized

education do not employ unskilled change in consumer demand can shift type of

workers needed offshore outsourcing sometimes leaves

people out of work

Types of Unemployment

•Type 4: Cyclical Unemployment

▫Employers lay off workers during low points in business cycle

▫During recession, hard to find new jobs since demand for labor drops

▫Unemployment period varies by type; average relatively short over one third of unemployed find work in five weeks or less

Section 2:Poverty and Income Distribution What Is Poverty?•The Poverty Threshold

▫People considered in poverty if income falls below poverty threshold

▫Also called the poverty line▫Calculated based on costs of nutritious

food, other necessities differs by size of household adjusted annually

What Is Poverty?

•The Poverty Rate ▫Poverty rate—percent of people in

households below poverty threshold based on population as a whole

▫Poverty does not hit all sectors of society equally. Most at risk: Children, minorities; inner-city, rural, and single–mother families

The Problem of Poverty•Factors Affecting Poverty

▫Education—the higher the level of education, the higher the income

▫Discrimination against minorities, women sometimes face wage discrimination,

occupational segregation▫Demographic trends—single-parent

families have more economic problems ▫Change from manufacturing to service jobs

has resulted in lower wages for low-skilled workers

Income Distribution

•Income distribution—how income is divided among people in a nation

• Income inequality—unequal distribution of income; some always exists

Antipoverty Programs•Programs for Low-Income Households

▫Food stamp program gives card, government deposits funds in account card can be used only to buy food at grocery

stores▫Medicaid offers health care; funded by

federal and state governments▫Earned-income tax credit—refunds taxes

deducted from paychecks money usually spent in own communities,

helping boost their economies

General Antipoverty Programs▫Social Security program pays benefits to

retirees, survivors, disabled▫Medicare is government health insurance

for seniors▫Unemployment insurance helps laid-off

workers while looking for job Social Security, Medicare funded by payroll

taxes; reduced poverty Unemployment insurance paid mostly by

taxes on employer

Antipoverty Programs•Other Programs

▫Some programs supplement the largest programs, including: Community Services Block Grants, job

training, Empowerment Zones▫In 1996, federal welfare programs changed

to welfare-to-work workfare requires welfare recipients to do

some work Temporary Assistance for Needy Families has

five-year limit

Inflation – a rise in the general level of prices of goods and services in an economy over a period of time

Inflation•Types of Inflation –

Demand-pull Inflation- general rise in prices as a result of demand excesses supply in economic system.

Cost-push Inflation- inflation as a result of a rise in prices of costs of production.

RELATED CONCEPTS OF INFLATION▫Moderate, Creeping & Galloping Inflation

All refer to the speed of inflation ▫Hyperinflation- over 50 percent per month ▫Deflation - decrease in general price level;

happens rarely

HOW DO WE MEASURE INFLATION?•CPI / PPI• Consumer price index- measured price

changes for selected consumer goods.• Producer price index-- measured price

changes received by domestic producers.•GDP DEFLATOR ▫is a measure of the price of all the goods and

services included in gross domestic product (GDP)

What Is the Impact of Inflation?

•Effect 1: Decreasing Value of the Dollar▫Rising consumer price index represents

declining value of the dollar▫People on a fixed income are especially

vulnerable each dollar they have buys less every year

▫Inflation helps people who borrow at a fixed rate of interest

What Is the Impact of Inflation?

•Effect 2: Increasing Interest Rates▫Lenders raise interest rates to ensure profit

on loans ▫Businesses avoid borrowing to expand or

make capital improvements▫Consumers less likely to finance high-

priced items▫Monthly credit card payments go up as

rates rise

What Is the Impact of Inflation?

•Effect 3: Decreasing Real Returns on Savings▫Interest on savings tends to increase

during inflationary times▫Inflation worries people about drop in

standard of living, retirement