1. Chapter 20: Economic Challenges Opener

2. Copyright © Pearson Education, Inc.Slide 2Chapter 20, Opener Essential Question How much can we reduce unemployment, inflation, and poverty?

3. Copyright © Pearson Education, Inc.Slide 3Chapter 20, Opener 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.

4. Copyright © Pearson Education, Inc.Slide 4Chapter 20, Opener 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.

5. Copyright © Pearson Education, Inc.Slide 5Chapter 20, Opener Guiding Questions Section 3: Poverty –What factors affect the poverty rate? Unemployment, shifts in family structure, location, racial and gender discrimination, the growth of low- skill service jobs, and the lack of education can all affect the poverty rate.

6. Chapter 20: Economic Challenges Section 1

7. Copyright © Pearson Education, Inc.Slide 7Chapter 20, Opener 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.

8. Copyright © Pearson Education, Inc.Slide 8Chapter 20, Opener 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

9. Copyright © Pearson Education, Inc.Slide 9Chapter 20, Opener 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

10. Copyright © Pearson Education, Inc.Slide 10Chapter 20, Opener 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 part- time when full-time work is desired discouraged worker: someone who wants a job but has given up looking

11. Copyright © Pearson Education, Inc.Slide 11Chapter 20, Opener 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

12. Copyright © Pearson Education, Inc.Slide 12Chapter 20, Opener 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: 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

13. Copyright © Pearson Education, Inc.Slide 13Chapter 20, Opener 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.

14. Copyright © Pearson Education, Inc.Slide 14Chapter 20, Opener 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

15. Copyright © Pearson Education, Inc.Slide 15Chapter 20, Opener 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.

16. Copyright © Pearson Education, Inc.Slide 16Chapter 20, Opener 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.

17. Copyright © Pearson Education, Inc.Slide 17Chapter 20, Opener 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.

18. Copyright © Pearson Education, Inc.Slide 18Chapter 20, Opener 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.

19. Copyright © Pearson Education, Inc.Slide 19Chapter 20, Opener 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.

20. Copyright © Pearson Education, Inc.Slide 20Chapter 20, Opener 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 cross- section of the United States.

21. Copyright © Pearson Education, Inc.Slide 21Chapter 20, Opener

22. Copyright © Pearson Education, Inc.Slide 22Chapter 20, Opener 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.

23. Copyright © Pearson Education, Inc.Slide 23Chapter 20, Opener 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?

24. Copyright © Pearson Education, Inc.Slide 24Chapter 20, Opener 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.

25. Copyright © Pearson Education, Inc.Slide 25Chapter 20, Opener 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?

26. Chapter 20: Economic Challenges Section 2

27. Copyright © Pearson Education, Inc.Slide 27Chapter 20, Opener 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.

28. Copyright © Pearson Education, Inc.Slide 28Chapter 20, Opener 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

29. Copyright © Pearson Education, Inc.Slide 29Chapter 20, Opener 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

30. Copyright © Pearson Education, Inc.Slide 30Chapter 20, Opener 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

31. Copyright © Pearson Education, Inc.Slide 31Chapter 20, Opener 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

32. Copyright © Pearson Education, Inc.Slide 32Chapter 20, Opener 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.

33. Copyright © Pearson Education, Inc.Slide 33Chapter 20, Opener 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.

34. Copyright © Pearson Education, Inc.Slide 34Chapter 20, Opener 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.

35. Copyright © Pearson Education, Inc.Slide 35Chapter 20, Opener 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

36. Copyright © Pearson Education, Inc.Slide 36Chapter 20, Opener 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. In what years was inflation so high that it made economic planning difficult?

37. Copyright © Pearson Education, Inc.Slide 37Chapter 20, Opener 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.

38. Copyright © Pearson Education, Inc.Slide 38Chapter 20, Opener Wage-Price Spiral Increasing wages can lead to a spiral of ever- higher 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.

39. Copyright © Pearson Education, Inc.Slide 39Chapter 20, Opener 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.

40. Copyright © Pearson Education, Inc.Slide 40Chapter 20, Opener 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.

41. Copyright © Pearson Education, Inc.Slide 41Chapter 20, Opener 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.

42. Copyright © Pearson Education, Inc.Slide 42Chapter 20, Opener 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.

43. Copyright © Pearson Education, Inc.Slide 43Chapter 20, Opener 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?

44. Chapter 20: Economic Challenges Section 3

45. Copyright © Pearson Education, Inc.Slide 45Chapter 20, Opener 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.

46. Copyright © Pearson Education, Inc.Slide 46Chapter 20, Opener 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

47. Copyright © Pearson Education, Inc.Slide 47Chapter 20, Opener 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

48. Copyright © Pearson Education, Inc.Slide 48Chapter 20, Opener Introduction What factors affect the poverty rate? –Race and ethnic origin –Type of family –Age –Residence –Education –Growth of low-skill service jobs

49. Copyright © Pearson Education, Inc.Slide 49Chapter 20, Opener 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.

50. Copyright © Pearson Education, Inc.Slide 50Chapter 20, Opener 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?

51. Copyright © Pearson Education, Inc.Slide 51Chapter 20, Opener 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

52. Copyright © Pearson Education, Inc.Slide 52Chapter 20, Opener 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?

53. Copyright © Pearson Education, Inc.Slide 53Chapter 20, Opener 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.

54. Copyright © Pearson Education, Inc.Slide 54Chapter 20, Opener 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.

55. Copyright © Pearson Education, Inc.Slide 55Chapter 20, Opener 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?

56. Copyright © Pearson Education, Inc.Slide 56Chapter 20, Opener 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.

57. Copyright © Pearson Education, Inc.Slide 57Chapter 20, Opener 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.

58. Copyright © Pearson Education, Inc.Slide 58Chapter 20, Opener 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.

59. Copyright © Pearson Education, Inc.Slide 59Chapter 20, Opener 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.

60. Copyright © Pearson Education, Inc.Slide 60Chapter 20, Opener 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.

61. Copyright © Pearson Education, Inc.Slide 61Chapter 20, Opener 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?