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					Ch. 13 Economic Challenges



   Section 1-Unemployment
Types of unemployment

   Frictional
       Workers between jobs and new entrants
   Structural
       Caused by fundamental change in
        economy, certain skills no longer needed
            Farmers, auto industry, military bases
       Technology – automation of jobs
    Types of unemployment

   Cyclical
       Directly related to the business cycle-
        unemployment that rises during economic
        downturns and falls when economy improves
       Consumers put off purchases during a
        recession  corresponding industries lay-
        off workers
   Seasonal
       Gift wrappers, lifeguards
      Measuring Employment


Each month, the Bureau of Labor Statistics surveys households to
determine how many people are employed and how many are
unemployed. This survey helps determine the unemployment rate.
                        Unemployment Formula

       Number of people unemployed               X               100
       Number of people in civilian *labor force

  *LABOR FORCE = all nonmilitary people who are employed (16 yrs. or
  older and worked at least one hour for pay within past week; worked 15 or more
  hours without pay in a family business, or held jobs but did not work due to
  illnesses, vacations, labor disputes, or bad weather) or unemployed (must have
  work lined up for the future, or must be actively searching for a new job)
      Examples of people who are
         outside labor force:
   Full-time student

   Parent who stays home to
    raise children

   Retirees



   Not considered unemployed
    so they are not counted in
    employment statistics
     Measuring Unemployment
   Unemployment rate
       # unemployed/civilian labor force
   Understates employment conditions
       Labor force ‘dropouts’ are not counted
       Part-time workers are counted
   Full employment
       Level of employment reached when no cyclical
        unemployment exists
       Efficient use of all factors of production
       4-6%
Underemployed
 Full employment
 means that nearly
 everyone who wants a
 job has a job. Some
 people work at a job
 for which they are
 over-qualified, or
 work part-time when
 they desire full-time
 work.
Discouraged Workers
 These people have
 given up hope of
 finding a job.
 They are not
 included in the
 unemployment rate
 because they are
 not actively
 looking for work.
      Inflation – Section 2
Inflation
Inflation is an increase in the general
 (average) price level of goods and
 services in the economy. Not an
increase in the price of any specific
product.

Degrees of inflation
    Deflation-opposite of inflation
    Creeping inflation – 1-3%/year
    Hyperinflation – By far the worst
     kind of inflation -100-500%/year
      often leads to total economic
     collapse
    Core Inflation Rate

Sometimes the inflation rate spikes up
sharply. These increases may be due in
part to increases in prices in world
food and oil markets.

In order to study long-term trends in
the inflation rate, analysts need to set
aside temporary spikes in food and fuel
prices.

The core inflation rate is the rate of
inflation excluding the effects of food
and energy prices.
     The Consumer Price Index


   We learned in Chapter 12 that Nominal GDP is
    adjusted for inflation and arrives at Real GDP.

   The most widely reported measure of inflation
    is the CPI or Consumer Price Index which
    measures changes in the average price of
    consumer goods and services. It is sometimes
    called the cost-of-living index. It includes only
    consumer goods and services in order to
    determine how rising prices affect the income
    of consumers.
  The Bureau of Labor Statistics of the U.S.
   Department of Labor prepares the CPI

Data collectors called economic assistants
contact retail stores, homeowners, and
tenants in selected cities throughout the
U.S. and record the prices of about 80,000
a month.(They must really enjoy shopping!)

Based on these monthly inquiries, the BLS
records average prices for a “market
basket” of different items purchased by the
typical family.
              The “Market Basket” typically
                contains eight categories:


   Food and beverage
   Housing
   Apparel and upkeep
   Transportation
   Medical Care
   Entertainment
   Education and Communication
   Other Goods and Services

    Approximately every 10 yrs. the items in the
    market basket are updated to reflect changing
    consumer buying habits
          What is the basic idea behind the CPI?


   The basic idea behind the CPI is to show how this price index
    measures inflation.

   To determine the CPI, the BLS establishes a base period
    (currently 1982-1984) to which it can compare current prices.

   The cost of that market basket is assigned an index number of
    100.

   Every month, a BLS representatives updates the cost of the
    same market basket of goods by rechecking all the prices. Each
    updated cost is compared with the base period cost to
    determine the index for that month. As costs rise, the index
    rises.
        CPI formula: Just a little math

         CPI = updated cost (today)
                base period cost                X 100

Suppose market basket cost $200 during base pd. and $330 today



         CPI =        $330
                      $200 x 100 = 165

    CPI rose from 100 in the base period to 165 today . In other
    words the average of prices in the economy went up.
     Now we’re ready to calculate the
     inflation rate

Inflation Formula:


CPI for new year (year A)   - CPI for old year (Year B)
CPI for old year (year B)                                 X   100
         Causes of inflation
    Price levels rise steeply when demand > supply (wartime) or when
     productivity is restricted (drought that leads to poor harvests)

   Quantity Theory
    Too much money in the economy causes inflation

   Demand-pull theory
     Demand for goods and services > existing supplies

   Cost-push theory
     Producers raise prices in order to meet increased
     costs. Can lead to a spiral of ever-higher prices
     called a wage-price spiral.
Effects of inflation

    Purchasing power - Purchasing
      power of the dollar falls and hurts
      people on fixed incomes (income
     that does not go up when prices go up)

    Spending habits – Inflation causes
     people to change their spending
     habits

    Interest rates – when a bank’s
     interest rates matches the
     inflation rate, savers break even.
     Lenders hurt by new higher rates
     and are paid back in less valuable
     (inflated) dollars. Borrowers
     benefit.
               Section 3:   Poverty


   Poverty threshold
    The income level
    below which income
    is insufficient to
    support a family or
    household
    Poverty
   Poverty (2009) – less than $22,128
    for a family of four

   Poverty rate – Percentage of people
    who live in households with income
    below the official poverty threshold.
    Rates differ according to different
    indicators: Race/ethnic origin, type of
    family, age and residence.
 What causes poverty?


Lack of education – high school graduates earned about 1/3
more than dropouts. College graduates earned about 3x as much.
Are YOU going to graduate from high school?

Location – People who live in inner city and rural areas earn less
than people outside the inner city.

Racial and Gender Discrimination – On the average, white
workers earn more than minority workers and men earn more
than women. This type of discrimination has been diminishing.
More causes of poverty



Economic shifts – Last
hired and first fired

These are the workers who are
hired when the economy is
expanding but are the first to
lose their jobs when the
economy slows down. Those
without college level skills
suffer since jobs have shifted
from manufacturing to service
and high-technology jobs.
         More causes of poverty

       Shifts in family structure

   Increase in Divorce rate
   Increase in children born to
    unmarried parents

             

    Result: Increased single-parent
     families who live in poverty
     Income Distribution – how the nation’s total
      income is distributed among its population


   Income inequality - The U.S. market distributes income
    unevenly. To create a more equal distribution of income, the
    government uses various programs to transfer money from
    people with high incomes to those with low incomes:
   Unemployment compensation
   Food stamps
   Federal minimum wage

    Two key factors that contribution to differences in income
    among Americans:

                -       differences in skills and education
                 -      inheritances

    Lorenz Curve – illustrates the distribution of income
               in the economy
Antipoverty Policies

   Income assistance
       Temporary Assistance for Needy Families
   General assistance
       Food stamps
       Medicaid
   Social service programs
       Job training, foster care, etc.
   Tax credits
       Earned Income Tax Credit
Antipoverty programs cont.
   Enterprise zones
       Areas where companies are encouraged to
        locate free from certain taxes and regulations
   Workfare programs
       Exchange labor for benefits
       Tax credits to companies who hire workers
        previously on welfare
   Negative income tax
       Replace welfare
       Cash payments to people below the poverty line

				
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posted:9/30/2012
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