Download Long-Run and Short-Run Concerns: Growth, Productivity

CHAPTER
7
Long-Run and Short-Run
Concerns: Growth,
Productivity, Unemployment,
and Inflation
Prepared by: Fernando Quijano
and Yvonn Quijano
© 2004 Prentice Hall Business Publishing
Principles of Economics, 7/e
Karl Case, Ray Fair
Long-Run and Short-Run Concerns: Growth,
Productivity, Unemployment, and Inflation
C H A P T E R 7:
Long-Run Output
and Productivity Growth
• An ideal economy is one in which there is:
• rapid growth of output per worker, low
unemployment, and low inflation.
• Unfortunately economies are not always in
this ideal state
• A key part of macroeconomics is studying
what determines output, unemployment,
and inflation.
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Long-Run and Short-Run Concerns: Growth,
Productivity, Unemployment, and Inflation
C H A P T E R 7:
Long-Run Output
and Productivity Growth
• Growth Theory studies the factors that affect the
average growth rate of output in an economy.
There are a number of ways to increase output. An
economy can:
• Add more workers
• Add more machines
• Increase the length of the workweek
• Increase the quality of the workers (productivity)
• Increase the quality of the machines (technology)
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Total output (real GDP)
Labor Productivity = ___________________
Total worker hours
Labor Productivity is the output per worker hour.
C H A P T E R 7:
Long-Run and Short-Run Concerns: Growth,
Productivity, Unemployment, and Inflation
Long-Run Output
and Productivity Growth
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Karl Case, Ray Fair
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Long-Run and Short-Run Concerns: Growth,
Productivity, Unemployment, and Inflation
C H A P T E R 7:
Recessions, Depressions,
and Unemployment
• The business cycle describes the periodic
ups and downs in the economy, or deviations
of output and employment away from the
long-run trend.
• A recession is roughly a period in which real
GDP declines for at least two consecutive
quarters. It is marked by falling output and
rising unemployment. (more plants and
equipment are running at less than full
capacity).
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Long-Run and Short-Run Concerns: Growth,
Productivity, Unemployment, and Inflation
C H A P T E R 7:
Recessions, Depressions,
and Unemployment
• A depression is a prolonged and deep
recession.
The precise definitions of
prolonged and deep are debatable (‫)قابلة للنقاش‬.
• Capacity utilization rates, which show the
percentage of factory capacity being used in
production, are one indicator of a recession.
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Long-Run and Short-Run Concerns: Growth,
Productivity, Unemployment, and Inflation
C H A P T E R 7:
Real GDP and Unemployment Rates,
1929-1933 and 1980-1982
THE EARLY PART OF THE GREAT DEPRESSION, 1929–1933
PERCENTAGE CHANGE
IN REAL GDP
UNEMPLOYMENT
RATE
3.2
NUMBER OF UNEMPLOYED
(MILLIONS)
1.5
1930
-8.6
8.9
4.3
1931
-6.4
16.3
8.0
1932
-13.0
24.1
12.1
1933
-1.4
25.2
12.8
YEAR
1929
Note: Percentage fall in real GDP between 1929 and 1933 was 26.6 percent.
THE RECESSION OF 1980–1982
YEAR
1979
1980
1981
1982
PERCENTAGE
CHANGE
IN REAL GDP
-0.2
2.5
-2.0
UNEMPLOYMENT
RATE
5.8
7.1
7.6
9.7
NUMBER OF
UNEMPLOYED
(MILLIONS)
6.1
CAPACITY
UTILIZATION
(PERCENTAGE)
85.2
7.6
8.3
10.7
80.9
79.9
72.1
Note: Percentage increase in real GDP between 1979 and 1982 was 0.1 percent.
Sources: Historical Statistics of the United States and U.S. Department of Commerce, Bureau of Economic Analysis.
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Long-Run and Short-Run Concerns: Growth,
Productivity, Unemployment, and Inflation
C H A P T E R 7:
Defining and
Measuring Unemployment
An employed person is any person 16 years old or
older:
1. who works for pay, either for someone else or
in his or her own business for 1 or more hours
per week,
2. who works without pay for 15 or more hours
per week in a family enterprise, or
3. who has a job but has been temporarily
absent, with or without pay.
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Long-Run and Short-Run Concerns: Growth,
Productivity, Unemployment, and Inflation
•
C H A P T E R 7:
•
Defining and
Measuring Unemployment
An unemployed person is a person 16 years old or
older who: is not working, is available for work,
and has made specific efforts to find work
during the previous 4 weeks but not found work
A person who is not looking for work, either
because he or she does not want a job or has
given up looking, is not in the labor force.
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Long-Run and Short-Run Concerns: Growth,
Productivity, Unemployment, and Inflation
C H A P T E R 7:
Defining and
Measuring Unemployment
labor force = employed + unemployed
population = labor force + not in labor force
unemployed
unemployment rate =
employed + unemployed
labor force
labor force participation rate =
population
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Long-Run and Short-Run Concerns: Growth,
Productivity, Unemployment, and Inflation
C H A P T E R 7:
Defining and
Measuring Unemployment
• Computing the unemployment rate for the month
of July 2003:
• Labor force: 141.39 million
• Employed: 133.47 million
• Unemployed: 7.92 million
unemployment rate July 2003
© 2004 Prentice Hall Business Publishing
7.92
=
 5.6%
133.47 + 7.92
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Table 7.1
Employed
14,000 people
Unemployed
3,000 people
Not in the Labor Force
4,000 people
C H A P T E R 7:
Long-Run and Short-Run Concerns: Growth,
Productivity, Unemployment, and Inflation
Chapter 3 Unemployment, Inflation, and Long-Run Growth
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C H A P T E R 7:
Long-Run and Short-Run Concerns: Growth,
Productivity, Unemployment, and Inflation
Chapter 3 Unemployment, Inflation, and Long-Run Growth
4) Refer to Table 7.1. The labor force equals
A) 14,000 people.
B) 17,000 people.
C) 18,000 people.
D) 21,000 people.
Answer: B
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C H A P T E R 7:
Long-Run and Short-Run Concerns: Growth,
Productivity, Unemployment, and Inflation
Chapter 3 Unemployment, Inflation, and Long-Run Growth
• 5) Refer to Table 7.1. The unemployment rate is
• A) 17.6%.
• B) 16.7%.
• C) 14.3%.
• D) 25.0%.
• Answer: A
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C H A P T E R 7:
Long-Run and Short-Run Concerns: Growth,
Productivity, Unemployment, and Inflation
Chapter 3 Unemployment, Inflation, and Long-Run Growth
• 6) Refer to Table 7.1. The labor-force participation rate
is
• A) 75.0%.
• B) 66.7%.
• C) 77.8%.
• D) 80.9%.
• Answer: D
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C H A P T E R 7:
Long-Run and Short-Run Concerns: Growth,
Productivity, Unemployment, and Inflation
Chapter 3 Unemployment, Inflation, and Long-Run Growth
• 7) Refer to Table 7.1. The employment rate is
• A) 85.7%.
• B) 83.3%.
• C) 82.4%.
• D) 75.0%.
• Answer: C
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• Refer to the information provided in Table 7.2 below
to answer the questions that follow.
• Table 7.2
C H A P T E R 7:
Long-Run and Short-Run Concerns: Growth,
Productivity, Unemployment, and Inflation
Chapter 3 Unemployment, Inflation, and Long-Run Growth
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C H A P T E R 7:
Long-Run and Short-Run Concerns: Growth,
Productivity, Unemployment, and Inflation
Chapter 3 Unemployment, Inflation, and Long-Run Growth
• 8) Refer to Table 7.2. The labor force
• A) equals 150 million.
• B) equals 130 million.
• C) equals 170 million
• D) cannot be determined from this information.
• Answer: A
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C H A P T E R 7:
Long-Run and Short-Run Concerns: Growth,
Productivity, Unemployment, and Inflation
Chapter 3 Unemployment, Inflation, and Long-Run Growth
• 9) Refer to Table 7.2. The total number of people
unemployed is
• A) 20 million.
• B) 13 million.
• C) 17 million.
• D) 15 million.
• Answer: D
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C H A P T E R 7:
Long-Run and Short-Run Concerns: Growth,
Productivity, Unemployment, and Inflation
Chapter 3 Unemployment, Inflation, and Long-Run Growth
• 10) Refer to Table 7.2. The total number of people
employed is
• A) 153 million.
• B) 117 million.
• C) 135 million.
• D) 180 million.
• Answer: C
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Long-Run and Short-Run Concerns: Growth,
Productivity, Unemployment, and Inflation
C H A P T E R 7:
Employed, Unemployed,
and the Labor Force, 1953-2002
Employed, Unemployed, and the Labor Force, 1953–2002
(1)
(2)
(3)
(4)
(5)
(6)
POPULATION
16 YEARS
OLD OR OVER
(MILLIONS)
LABOR
FORCE
(MILLIONS)
EMPLOYED
(MILLIONS)
UNEMPLOYED
(MILLIONS)
LABOR-FORCE
PARTICIPATION
RATE
UNEMPLOYMENT
RATE
1953
107.1
63.0
61.2
1.8
58.9
2.9
1960
117.2
69.6
65.8
3.9
59.4
5.5
1970
137.1
82.8
78.7
4.1
60.4
4.9
1980
167.7
106.9
99.3
7.6
63.8
7.1
1982
172.3
110.2
99.5
10.7
64.0
9.7
1990
189.2
125.8
118.8
7.0
66.5
5.6
2002
211.9
141.8
135.1
6.7
66.9
4.7
Note: Figures are civilian only (military excluded).
Source: Economic Report of the President, 2003, Table B-35.
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Long-Run and Short-Run Concerns: Growth,
Productivity, Unemployment, and Inflation
C H A P T E R 7:
Unemployment Rates for
Different Demographic Groups
Unemployment Rates by Demographic Group, 1982 and 2003
YEARS
Total
White
Men
Women
JULY
2003
4.2
20+
16–19
20+
16–19
9.6
9.0
22.7
8.1
19.7
3.6
2.6
11.7
3.5
10.2
20+
16–19
20+
16–19
20.2
19.3
52.4
16.5
46.3
8.6
7.1
28.5
7.0
27.2
African-American
Men
Women
NOVEMBER
1982
10.8
Source: U.S. Department of Labor, Bureau of Labor Statistics. Data are not seasonally adjusted.
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Long-Run and Short-Run Concerns: Growth,
Productivity, Unemployment, and Inflation
C H A P T E R 7:
Regional Differences
in Unemployment
Regional Differences in Unemployment, 1975, 1982, 1991, and 2003
1975
1982
1991
2003
U.S. avg.
8.5
9.7
6.7
5.8
Cal.
9.9
9.9
7.5
6.6
Fla.
10.7
8.2
7.3
5.2
7.1
11.3
7.1
6.5
Mass.
11.2
7.9
9.0
5.6
Mich.
12.5
15.5
9.2
6.6
N.J.
10.2
9.0
6.6
5.7
N.Y.
9.5
8.6
7.2
6.1
N.C.
8.6
9.0
5.8
5.8
Ohio
9.1
12.5
6.4
6.0
Tex.
5.6
6.9
6.6
6.6
Ill.
Sources: Statistical Abstract of the United States, various editions.
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• Discouraged workers are people who want to
work but cannot find jobs.
They grow
discouraged and stop looking for work, thus
dropping out of the ranks of the unemployed and
the labor force.
C H A P T E R 7:
Long-Run and Short-Run Concerns: Growth,
Productivity, Unemployment, and Inflation
The Discouraged-Worker Effect
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Long-Run and Short-Run Concerns: Growth,
Productivity, Unemployment, and Inflation
C H A P T E R 7:
The Duration of Unemployment
Average Duration of Unemployment, 1979–2002
YEAR
WEEKS
YEAR
WEEKS
1979
10.8
1991
13.7
1980
11.9
1992
17.7
1981
13.7
1993
18.0
1982
15.6
1994
18.8
1983
20.0
1995
16.6
1984
18.2
1996
16.7
1985
15.6
1997
15.8
1986
15.0
1998
14.5
1987
14.5
1999
13.4
1988
13.5
2000
12.6
1989
11.9
2001
13.2
1990
12.0
2002
Sources: U.S. Department of Labor, Bureau of Labor Statistics.
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Long-Run and Short-Run Concerns: Growth,
Productivity, Unemployment, and Inflation
C H A P T E R 7:
Types of Unemployment
• Frictional unemployment is caused by
normal worker movement from one job to
another.
• Frictional unemployment is good for the
economy because these workers will usually
find a job that suits them better (and in which
they are likely to be more productive).
• The term frictional unemployment is used to
denote short-run job/skill matching problems,
problems that last a few weeks.
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Long-Run and Short-Run Concerns: Growth,
Productivity, Unemployment, and Inflation
C H A P T E R 7:
Types of Unemployment
• Structural unemployment is the portion of
unemployment that is due to changes in the
structure of the economy that result in a
significant loss of jobs in certain industries.
• Structural unemployment creates longer-run
adjustment problems (‫ )مشكالت التكيف‬that may
last for years.
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Long-Run and Short-Run Concerns: Growth,
Productivity, Unemployment, and Inflation
C H A P T E R 7:
Types of Unemployment
• Cyclical unemployment is the increase in
unemployment that occurs during recessions
and depressions.
• The cost to the economy of cyclical
unemployment is the lost of output (GDP).
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Long-Run and Short-Run Concerns: Growth,
Productivity, Unemployment, and Inflation
C H A P T E R 7:
Types of Unemployment
• The natural rate of unemployment is the
unemployment that occurs as a normal part
of the functioning of the economy.
Sometimes taken as the sum of frictional
unemployment and structural unemployment
• The natural rate of unemployment is the
unemployment that is normal. Estimates
range from 4% to 6%.
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Long-Run and Short-Run Concerns: Growth,
Productivity, Unemployment, and Inflation
C H A P T E R 7:
The Benefits of Recessions
• Recessions may help to reduce inflation.
• Also, a recession leads to a decrease in the
demand for imports, which improves a
nation’s balance of payments.
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Long-Run and Short-Run Concerns: Growth,
Productivity, Unemployment, and Inflation
C H A P T E R 7:
Two Serious Inflationary
Periods Since 1970
Inflation Rates, 1974–1976 and 1980–1983
RECESSION
BEGINS
INFLATION
RATE
1974
11.0
1975
9.1
1976
5.8
1980
13.5
1981
10.3
1982
6.2
1983
3.2
Source: See Table 19.8.
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Long-Run and Short-Run Concerns: Growth,
Productivity, Unemployment, and Inflation
C H A P T E R 7:
Inflation
• Not all price increases are inflation. Over any
time period, prices of some goods will rise and
other prices will fall.
• Inflation is an increase in the overall (average)
price level. Inflation happens when prices of
many goods and services increase together.
• Deflation is a decrease in the overall (average)
price level.
• Sustained inflation is inflation that continues
over a significant period of time.
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Inflation During Three Expansions
INFLATION RATE
C H A P T E R 7:
Long-Run and Short-Run Concerns: Growth,
Productivity, Unemployment, and Inflation
Inflation and the Business Cycle
1972
1973
1974
3.2
6.2
11.0
1976
1977
1978
1979
1980
5.8
6.5
7.6
11.3
13.5
1984
1985
1986
1987
1988
1989
4.3
3.6
1.9
3.6
4.1
4.8
Source: See Table 19.8.
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Long-Run and Short-Run Concerns: Growth,
Productivity, Unemployment, and Inflation
C H A P T E R 7:
Price Indexes
• Price indexes are used to measure overall price
levels. The price index that pertains to all goods
and services in the economy is the GDP price
index.
• The consumer price index (CPI) is a price index
computed each month by the Bureau of Labor
Statistics using a bundle that is meant to
represent the “market basket” purchased monthly
by the typical urban consumer.
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• The consumer price index (CPI) is the
most popular fixed-weight price index.
• One version of the CPI is the “Chained
Consumer Price Index,” which uses
changing weights.
C H A P T E R 7:
Long-Run and Short-Run Concerns: Growth,
Productivity, Unemployment, and Inflation
Price Indexes
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Long-Run and Short-Run Concerns: Growth,
Productivity, Unemployment, and Inflation
C H A P T E R 7:
Price Indexes
Recreation
5.9%
Medical Care
6.0%
Education and
Communication
5.8%
Other Goods
and Services
4.3%
Food and
Beverages
15.6%
Transportation
17.3%
Apparel
4.2%
Housing
40.9%
• The CPI market basket shows how a typical
consumer divides his or her money among
various goods and services.
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Long-Run and Short-Run Concerns: Growth,
Productivity, Unemployment, and Inflation
C H A P T E R 7:
The Consumer Price Index (CPI)
The CPI, 1950–2002
YEAR
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
PERCENTAGE
CHANGE
IN CPI
1.3
7.9
1.9
0.8
0.7
-0.4
1.5
3.3
2.8
0.7
1.7
1.0
1.0
1.3
1.3
1.6
2.9
3.1
CPI
24.1
26.0
26.5
26.7
26.9
26.8
27.2
28.1
28.9
29.1
29.6
29.9
30.2
30.6
31.0
31.5
32.4
33.4
YEAR
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
PERCENTAGE
CHANGE
IN CPI
4.2
5.5
5.7
4.4
3.2
6.2
11.0
9.1
5.8
6.5
7.6
11.3
13.5
10.3
6.2
3.2
4.3
3.6
CPI
34.8
36.7
38.8
40.5
41.8
44.4
49.3
53.8
56.9
60.6
65.2
72.6
82.4
90.9
96.5
99.6
103.9
107.6
YEAR
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
PERCENTAGE
CHANGE
IN CPI
1.9
3.6
4.1
4.8
5.4
4.2
3.0
3.0
2.6
2.8
3.0
2.3
1.6
2.2
3.4
2.8
CPI
109.6
113.6
118.3
124.0
130.7
136.2
140.3
144.5
148.2
152.4
156.9
160.5
163.0
166.6
172.2
177.1
Sources: Bureau of Labor Statistics, U.S. Department of Labor.
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Long-Run and Short-Run Concerns: Growth,
Productivity, Unemployment, and Inflation
C H A P T E R 7:
Price Indexes
• Other popular price indexes are
producer price indexes (PPIs),
which measure price changes for
products at all stages in the
production process.
• The three main categories are:
• finished goods,
• intermediate materials, and
• crude materials.
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• Inflation changes the distribution of income.
People living on fixed incomes are particularly
hurt by inflation.
C H A P T E R 7:
Long-Run and Short-Run Concerns: Growth,
Productivity, Unemployment, and Inflation
The Costs of Inflation
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Karl Case, Ray Fair
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• The benefits received by many retired
workers, including social security, are fully
indexed to inflation. When prices rise,
benefits rise.
C H A P T E R 7:
Long-Run and Short-Run Concerns: Growth,
Productivity, Unemployment, and Inflation
The Costs of Inflation
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Long-Run and Short-Run Concerns: Growth,
Productivity, Unemployment, and Inflation
• Unanticipated inflation—an inflation that takes
people by surprise—can hurt creditors (lenders)
and benefit debtors (borrowers)
C H A P T E R 7:
The Costs of Inflation
Real Interest Rate = Nominal Interest Rate – Inflation rate
• The real interest rate is the difference between
the interest rate on a loan and the inflation rate.
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• Inflation creates inefficiencies. Without inflation,
time could be used more efficiently.
• People are not fully informed about price
changes and may make mistakes that lead to a
misallocation of resources.
C H A P T E R 7:
Long-Run and Short-Run Concerns: Growth,
Productivity, Unemployment, and Inflation
The Costs of Inflation
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• Some people consider inflation to be our public
enemy number one. Elected leaders try to
design economic policies to stop inflation.
C H A P T E R 7:
Long-Run and Short-Run Concerns: Growth,
Productivity, Unemployment, and Inflation
The Costs of Inflation
© 2004 Prentice Hall Business Publishing
Principles of Economics, 7/e
Karl Case, Ray Fair
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Long-Run and Short-Run Concerns: Growth,
Productivity, Unemployment, and Inflation
C H A P T E R 7:
Review Terms and Concepts
consumer price index (CPI)
natural rate of unemployment
cyclical unemployment
not in the labor force
deflation
producer price indexes (PPIs)
depression
real interest rate
discouraged-worker effect
recession
employed
structural unemployment
frictional unemployment
sustained inflation
inflation
unemployed
labor force
unemployment rate
labor-force participation rate
© 2004 Prentice Hall Business Publishing
Principles of Economics, 7/e
Karl Case, Ray Fair
44 of 40