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Ch. 11 – Economic Challenges ● ● Unemployment The US Census Bureau conducts monthly surveys and identifies unemployed people ● Individuals (age 16 +) are considered employed if: ● 1) Worked for pay one or more hours ● ● 2) Worked without pay in a family business 15 or more hours 3) have jobs but did not work as a result of illness, weather, vacations or labor disputes Ch. 11, Sec.1 – Unemployment (cont) ● Impacts of unemployment: ● 1) Loss of production ● 2) Loss of sales ● ● ● ● 3) Gov't needs to decide, if and how, to support unemployed Unemployment rate The percentage of people in the civilian labor force who are unemployed. The most closely watched and highly publicized labor force statistic What is our typical rate? Unemployment (cont) ● Unemployment rate does NOT include: ● 1) Marginally attached workers - ● ● ● People who once held productive jobs but have given up looking for work (2000=1.1M) 2) Discouraged workers Subset of above, people who want a job but have given up looking for job-related reasons ● 3) Underemployed workers - ● People who are in jobs beneath their skill level Unemployment (cont) ● Full employment = ● 4-5% unemployment ● Types of unemployment: ● 1) Frictional - ● ● ● People who have decided to leave one job to look for another 2) Structural - Caused by changes in technology or the way the economy is structured Unemployment (cont) ● ● ● ● ● ● 3) Seasonal Unemployment due to holidays, school year, or changing production schedules 4) Cyclical Unemployment resulting from recessions or economic downturns Lowest and highest unemployment rates in US history? 1925-28 ---> 3.1% Ch. 11, Sec. 2 - Inflation ● ● ● ● Aggregate demand Total amount of spending by individuals and businesses in an economy Aggregate supply Total amount of goods and services produced in an economy ● If aggregate demand > aggregate supply then... ● Price levels go up ● Purchasing power goes down Inflation (cont) ● ● ● ● Inflation An increase in the average price level of all products in an economy Deflation Aggregate demand decreases more rapidly than aggregate supply ● When was deflation the worst in US history? ● Depression: 1929-32 ---> -5.4% Inflation (cont) ● Causes of inflation - ● 1) Demand-pull inflation: ● ● ● ● ● Aggregate demand increases faster than the economy's production capacity As demand increases, prices are pulled higher Can result from an increase in money supply or increased use of credit 2) Cost-push inflation: Increasing production costs push producers to raise prices Inflation (cont) ● ● ● ● Measuring inflation Economists use the CPI (Consumer Price Index) – average change in price over time of a fixed group of products (market basket) Food, clothing, shelter, utilities, transportation, entertainment, health care The percentage change in the CPI from one time period to the next provides the inflation rate ● (CPI Year 2 – CPI Year 1)/ CPI Year 1 x 100 = ● Inflation rate Inflation (cont) ● Typical inflation rate? ● 3 to 4% ● Hyperinflation - ● ● ● ● The worst degree of inflation which can be several hundred % Large increase in money supply – like post WWI Germany Producer Price Index (PPI) Average change in price over time of goods/services purchased by producers Inflation (cont) ● Most severe periods of inflation in US? ● 1917-20 ---> 16.4% ● 1945-48 ---> 8.2% ● 1977-80 ---> 9.7% ● Effects of inflation: ● 1) Decreased purchasing power ● 2) Decreased value of real wages ● 3) Increased interest rates ● 4) Decreased savings and investment ● 5) Increased production costs Ch. 11, Sec. 3 - Poverty ● Income Gap: ● The amount of income inequality ● ● ● ● Wider in the 1990's than at any other time since WW II Poverty threshold (level) The lowest income, as determined by the gov't, that a family needs to maintain a basic standard of living (2000 - $17,603 for family of four) In 1999 – 32.3M people --> Poverty rate 11.8% Poverty (cont) ● Income gap example: ● 1995 - ● ● The richest 20% of families earned 49% of total income The poorest 20% of families earned 5% of total income ● Lorenz curve - ● Displays income distribution graphically Poverty (cont) ● Growing income gap in the US ● Causes: ● 1) Changes in households ● Single-parent/single person increase ● 2) Changes in the labor market ● Corporate downsizing, reduction in unions ● 3) Changes in technology ● Drop in demand for low-skilled workers ● 4) Growth of global economy