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Chapter 13: Economic Challenges
Opener
Essential Question
• How much can we reduce unemployment,
inflation, and poverty?
Chapter 13, Opener
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Slide 2
Guiding Questions
• Section 1: Unemployment
– What are the causes of unemployment?
• Unemployment is caused by people being
between jobs, workers’ skills not matching those
needed for the available jobs, seasonal trends, and
economic downturns.
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Slide 3
Guiding Questions
• Section 2: Inflation
– What are the causes and effects of inflation?
• Inflation is caused by the growth of the money
supply, changes in aggregate demand, and
changes in aggregate supply. Inflation can lead to
a decrease in people’s purchasing power, it can
erode income, and it cause interest rates to
decrease.
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Guiding Questions
• Section 3: Poverty
– What factors affect the poverty rate?
• Unemployment, shifts in family structure, location,
racial and gender discrimination, the growth of lowskill service jobs, and the lack of education can all
affect the poverty rate.
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Chapter 13: Economic Challenges
Section 1
Objectives
1. Differentiate between frictional,
seasonal, structural, and cyclical
unemployment.
2. Describe how full employment is
measured.
3. Explain why full employment does not
mean that every worker is employed.
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Key Terms
• frictional unemployment: type of
unemployment that occurs when people
take time to find a job
• structural unemployment: type of
unemployment that occurs when workers’
skills do not match those needed for the
jobs available
• globalization: the shift from local to global
markets as countries seek foreign trade
and investment
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Key Terms, cont.
• seasonal unemployment: type of
unemployment that occurs as the result of
harvest schedules, vacations, or when
industries make seasonal shifts in their
production schedules
• cyclical unemployment: unemployment
that rises during economic downturns and
falls when the economy improves
• unemployment rate: the percentage of
the nation’s labor force that is unemployed
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Key Terms, cont.
• full employment: the level of employment
reached when there is no cyclical
unemployment
• underemployed: working at a job for
which one is overqualified or working parttime when full-time work is desired
• discouraged worker: someone who
wants a job but has given up looking
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Introduction
• What are the causes of unemployment?
– Unemployment is caused by:
• People being between jobs for one reason or
another
• A company or industry shuts down for a season
• Workers skills not matching those needed for the
jobs that are available
• Economic downturns
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Types of Unemployment
• Unemployment always exists, even in a booming
economy.
• Economists look at four categories of
unemployment: frictional, seasonal, structural,
and cyclical.
– Frictional unemployment occurs when people take
time to find a job.
– A person who is frictionally unemployed may be:
•
•
•
•
Chapter 13, Opener
Changing jobs to find more satisfying works
Laid off and looking for a new job
Just out of school and interviewing for a job
Returning to the workforce after a voluntary absence
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Structural Unemployment
• When the structure of the economy changes, the skills that
workers need to succeed also change.
– Workers who lack necessary skills lose their jobs.
– Structural unemployment
occurs when workers’
skills do not match those
needed for the jobs that
are now available.
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Structural Unemployment, cont.
• There are five major
causes of structural
unemployment:
– The development of
new technology
– The discovery of new
resources
– Changes in consumer
demand
– Globalization
– Lack of education
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Structural Unemployment, cont.
• In the 1990s and 2000s, policymakers
developed training programs to help
workers gain new computer skills in light of
the fact that computer technology,
globalization, and other structural changes
threatened the future of many workers.
– Retraining takes time, however, and the new
skills do not ensure that the trainees will
obtain high-wage jobs.
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Slide 15
Seasonal Unemployment
• Seasonal unemployment occurs when
industries slow or shut down for a season
or make seasonal shifts in their production
schedules.
– Seasonal unemployment can also occur as a
result of harvest schedules or vacations.
– Economists expect to see seasonal
unemployment throughout the year.
– Government policymakers do not take steps
to prevent this kind of unemployment because
it is a normal part of a healthy economy.
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Seasonal Unemployment, cont.
• The lives of seasonally
unemployed workers can
be very difficult.
– Migrant farm workers, for
example, face seasonal
unemployment once the
harvest season is over.
Harvest schedules are
often unpredictable,
making the transition
from one crop to another
hard to gauge.
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Slide 17
Cyclical Unemployment
• Unemployment that rises during economic
downturns and falls when the economy
improves is called cyclical unemployment.
– During a recession, many workers lose their jobs.
Many of these laid-off employees will be rehired when
the recession ends and the business cycle resumes
an upward trend.
– Today, unemployment insurance provides weekly
payments to workers who have lost their jobs. The
payments usually provide about half of a worker’s lost
wages each week for a limited amount of time.
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Factors Outside the Economy
• Sometimes, events outside the economy
can cause unemployment.
– Many jobs in travel and tourism were lost
following the 9/11 attacks.
– In 2005, the destruction by Hurricane Katrina
caused thousands of people to lose their jobs.
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Measuring Unemployment
• Checkpoint: How is the
unemployment rate
calculated?
– The government keeps
track of how many
people are unemployed
and why.
– The Bureau of Labor
Statistics (BLS)
computes the
unemployment rate from
a monthly household
survey of 60,000 families
who represent a crosssection of the United
States.
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Measuring Unemployment, cont.
• The unemployment rate is adjusted for
seasonal unemployment.
– Taking this step allows economists to more
accurately compare unemployment rate from
month to month. This comparison helps them
better detect changing economic conditions.
– The unemployment rates is only an average
for the nation. It does not reflect regional
differences.
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Slide 22
Full Employment
• Economists generally agree that in an economy that is
working properly, an unemployment rate of around 4 to 6
percent is normal.
– Full employment is achieved when no cyclical
unemployment exists.
– Why does a high unemployment rate correspond with a
recession?
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Slide 23
Full Employment, cont.
• Full employment means that nearly everyone
who wants a job has a job.
– However, some people remain underemployed, which
means they are working at a job for which they are
overqualified, or working part-time when they desire
full-time work.
– Other people simply give up hope of finding work.
These discouraged workers have stopped searching
for employment.
• Although they are without work, discouraged workers
do not appear in the unemployment rate determined by
the BLD because they are not actively looking for work.
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Slide 24
Review
• Now that you have learned about the
causes of unemployment, go back and
answer the Chapter Essential Question.
– How much can we reduce unemployment,
inflation, and poverty?
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Slide 25
Chapter 13: Economic Challenges
Section 2
Objectives
1. Explain the effects of rising prices.
2. Understand the use of price indexes to
compare changes in prices over time.
3. Identify the causes and effects of
inflation.
4. Describe recent trends in the inflation
rate.
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Key Terms
• inflation: a general increase in prices across an
economy
• purchasing power: the ability to purchase
goods and services
• price index: a measurement that shows how the
average price of a standard group of goods
changes over time
• Consumer Price Index: a price index
determined by measuring the price of a standard
group of goods meant to represent the “market
basket” of a typical urban consumer
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Key Terms, cont.
• market basket: a representative collection
of goods and services
• inflation rate: the percentage rate of
change in price level over time
• core inflation rate: the rate of inflation
excluding the effects of food and energy
prices
• hyperinflation: inflation that is out of
control
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Key Terms, cont.
• quantity theory: the theory that too much
money in the economy causes inflation
• wage-price spiral: the process by which
rising wages cause higher prices, and
higher prices cause higher wages
• fixed income: income that does not
increase even when prices go up
• deflation: a sustained drop in the price
level
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Introduction
• What are the causes and effects of
inflation?
– Inflation is caused by:
• The growth of the money supply
• Changes in aggregate demand
• Changes in aggregate supply
– The effects of inflation include:
• Decrease in purchasing power
• Erodes income
• Decrease in interest rates
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The Effects of Rising Prices
• Inflation is a general
increase in prices across
an economy.
• Over the years, prices
generally go up. Inflation
shrinks the value, or
purchasing power of
things.
– The effects of inflation
over the years can be
seen in this comparison
of prices for basic food
items.
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Price Indexes
• To measure inflation, economists compare
price levels.
– To help them calculate price level, economists
use a price index, which is a measurement
that shows how the average price of a
standard group of goods changes over time.
– Price indexes help consumers and
businesspeople make economic decisions.
The government also uses indexes in making
policy decisions.
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Consumer Price Index
• The best-known price
index, the Consumer
Price Index (CPI),
focuses on consumers.
– The CPI is determined
by measuring the price
of a standard group
meant to represent the
“market basket” of a
typical urban consumer.
– The market basket
(right) is divided into
eight categories of
goods and services.
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Consumer Price Index, cont.
• About every 10 years, the items in the market
basket are updated to account for shifting
consumer buying habits.
• Economists also find it useful to calculate the
inflation rate—the percentage rate of change in
price level over time.
– To determine the CPI, the BLS establishes a based
period to which it can compare prices.
– Currently the base period is 1982-1984.
– The BLS determines the CPI for a given year using
the following formula:
CPI = updated cost x 100
base period cost
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Slide 35
Types of Inflation
• Inflation rates in the
United States have
changed greatly over
time.
– When the inflation rate
exceeds 5 percent, it
makes economic
planning difficult.
– The worst kind of
inflation is hyperinflation
in which inflation rates
can go as high as 100 or
even 500 percent per
month.
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In what years was inflation so
high that it made economic
planning difficult?
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Causes of Inflation
• Checkpoint: What are the three causes of
inflation?
– Growth of money supply—too much money in the
economy causes inflation
– Changes in aggregate demand—inflation can occur
when demand for goods and services exceeds
existing supplies
– Changes in aggregate supply—inflation can occur
when producers raise prices in order to meet
increased costs.
• Wage increases are the largest single production cost
for most companies.
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Wage-Price Spiral
• Increasing wages can lead to a spiral of everhigher price because one increase in costs
leads to an increase in prices, which leads to
another increase in costs, and on and on.
– This process is known as the wage-price spiral.
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Effects of Inflation
• High inflation is a
major economic
problem, effecting
purchasing power,
income, and interest
rates.
– Inflation can erode
purchasing power. It
the inflation rate is 10
percent, $1.00 will buy
the equivalent of only
$.90 world of goods
today.
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Effects on Income
• Inflation sometimes, by not always, erodes
income.
– If workers’ wages do not increase as much as
inflation does, they are in a worse economic
position than before.
– People living on a fixed income, like retired
people, are especially hard hit by inflation
because their money does not increase, even
when prices go up.
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Effects on Interest Rates
• People receive a
given amount of
interest on money in
their savings
accounts, but their
true return depends
on the rate of
inflation.
– If the inflation rate is
higher than the bank’s
interest rates, savers
lose money.
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Slide 41
Recent Trends
• Americans under age 30 have experienced fairly
low inflation rates for most of their lifetimes.
– In the 2000s, the economy actually seemed to be
experiencing a period of deflation, or a sustained drop
in the price levels.
– However, by mid-2008, inflation was becoming a
worry. The CPI rose 1.1 percent in June. Higher
production costs, fueled by a 6.6 percent increase in
energy prices, helped push the annual inflation rate to
more than 4 percent.
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Slide 42
Review
• Now that you have learned about the
causes and effects of inflation, go back
and answer the Chapter Essential
Question.
– How much can we reduce unemployment,
inflation, and poverty?
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Slide 43
Chapter 13: Economic Challenges
Section 3
Objectives
1. Define who is poor, according to
government standards.
2. Describe the causes of poverty.
3. Analyze the distribution of income in the
United States.
4. Summarize government policies
intended to combat poverty.
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Slide 45
Key Terms
• poverty threshold: the income level below
which income is insufficient to support a family
or household
• poverty rate: the percentage of people who live
in households with income below the official
poverty threshold
• income distribution: the way in which a
nation’s total income is distributed among its
population
• food stamp program: government program that
helps low-income recipients buy food
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Key Terms, cont.
• Lorenz curve: the curve that illustrates
income distribution
• enterprise zone: area where businesses
can locate free of certain state, local, and
federal taxes and restrictions
• block grants: federal funds given to the
states in lump sums
• workfare: a program requiring work in
exchange for temporary government
assistance
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Introduction
• What factors affect the poverty rate?
– Race and ethnic origin
– Type of family
– Age
– Residence
– Education
– Growth of low-skill service jobs
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The Poverty Threshold
• According to the government, a poor family is one whose
total income is less than the amount required to satisfy the
family’s minimum needs.
– The Census Bureau
determines the poverty
threshold required to
meet those minimum
needs. The poverty
threshold often varies
with the size of the family.
– If a family’s total income
is below the poverty
threshold, everyone in the
family is counted as poor.
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Slide 49
The Poverty Rate
• The poverty rate is
the percentage of
people who live in
households with
incomes below the
official poverty
threshold.
– In 2006, 12% of the
population equaled
36.5 million.
– What happened to the
poverty rate from 1994
to 2000?
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The Poverty Rate, cont.
• Poverty rates differ sharply by group,
according to several indicators:
– Race and ethnic origin—the poverty rate
among minorities is higher than among whites
– Type of family—single mother families have a
greater poverty rate
– Age—children are the largest age group living
in poverty
– Residence—inner cities have double the
poverty rate of those who live outside the
inner city
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Poverty Rates by Group
• Households headed
by women, African
Americans,
Hispanics, and Native
Americans are more
likely than other
groups to have
incomes below the
poverty threshold.
– Which population
group has the highest
poverty rate?
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Slide 52
Causes of Poverty
• The failure to earn adequate income is often the
result of unemployment. However, more than
half of poor households have someone who
works at least part-time, and one in five have a
full-time, year-round worker.
– For these “working poor,” the problem is usually low
wages or a limited work schedule.
• Shifts in the family structure, from a two-parent
family to a single-parent family, tend to lead to
an increase in the amount of families living in
poverty.
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Causes of Poverty, cont.
• People who live in the inner city earn less
than people living outside the inner city.
• White workers generally earn higher
salaries than minority workers, and men
generally earn more than women.
– Inequality results from differences in hours
worked, education, work experience, and
discrimination.
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Slide 54
Causes of Poverty, cont.
• The growth of globalization has led to a
decrease in high-paying manufacturing
jobs forcing many less-educated people to
work in low-skill service jobs where wages
are low.
• Lack of education also leads to poverty.
– Checkpoint: What are three causes of
poverty?
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Slide 55
Income Distribution
• To fully understand poverty in this country, you
also need to understand income distribution.
– The table (below left) shows family income ranked by
category. When plotted on a Lorenz curve (below
right), these data show the distribution of income in
the United States.
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Income Distribution, cont.
• As you can see from the chart and graph on the previous
slide, the wealthiest fifth of American households earned
more income than the bottom four fifths combined.
• Factors that lead to
this income gap include:
– Differences in skills
and education
– Inheritances
– Field of work
• In the last two decades,
the distribution of income
has become less equal.
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Slide 57
Antipoverty Policies
• The government spends billions of dollars on
programs designed to reduce poverty.
– Critics of such programs argue that the programs
themselves harm the very people they are intended to
help. Such criticisms have led to new policies.
• Earned Income Tax Credit (EITC) —a refundable tax
credit that low-income families with children receive
when they fill out their federal income tax return. EITC
offsets the impact of the Social Security payroll tax on
low-income families.
• In 2005, the EITC lifted more than four million people
above the poverty line.
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Slide 58
Antipoverty Policies, cont.
• Enterprise zones—benefit businesses by
lowering their costs and help local people by
making it easier for them to find work.
• In recent decades, federal and state
governments have designed job training
programs to help workers who lack the skills to
earn an adequate income.
– The government has established a minimum wage
as well.
• The government also has programs to help poor
people obtain affordable housing.
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Slide 59
Welfare Reform
• Checkpoint: What was the goal of TANF?
– The welfare-reform plan of 1996 established
Temporary Assistance for Needy Families
(TANF), which provides block grants to the
states to help move poor adults from welfare
dependence to employment.
• It was hoped that this reform would reduce poverty
by providing poor Americans with labor skills and
access to steady, adequate income.
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Slide 60
Review
• Now that you have learned about the
factors that affect the poverty rate, go back
and answer the Chapter Essential
Question.
– How much can we reduce unemployment,
inflation, and poverty?
Chapter 13, Opener
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Slide 61