Chapter 11 Economic Challenges Section 1 Unemployment

I. Measuring Unemployment Health of the U.S. economy is gauged by examining the labor force and unemployment Census Bureau conducts a monthly study called the Current Population Survey

A.Identifying the Employed and Unemployed Individuals ages 16 and older are classified as employed if during the survey week they: Worked for pay 1 or more hours Worked without pay in a family business 15 or more hours Have jobs but did not work as a result of illness, weather, vacations, or labor disputes

Classified as unemployed if during the survey week they: Do not meet any of the above criteria and have been actively seeking work for four weeks Others are classified as “not in the labor force” B. Unemployment Rate The percentage of people in the civilian labor force who are unemployed

C. Problems with the Unemployment Rate 1)Does not indicate how hard someone is looking for a job 2) Does not include: Marginally attached workers: people who once held productive jobs but have given up on looking for work Discouraged workers: people who want a job but have stopped looking for job-related reasons 3) Does not indicate the number of underemployed: those with jobs beneath their skill level and those not working full time but want to

D. Determining Full Employment Some unemployment is unavoidable and a natural part of a healthy economy A 95% employment rate represents full employment

II. Types of Unemployment A. Frictional Unemployment Moving from one job to another B. Structural Unemployment Result of changes in technology C. Seasonal Unemployment Job rate fluctuates depending on season D. Cyclical Unemployment Result of recession or economic downturn Harms the economy the most Great depression reached 25%

Chapter 11 Economic Challenges Section 2 Inflation

I. Examining Price Fluctuations When discussing prices, economists talk about: A.Price Level ~reflects prices in an economy and influences : Aggregate supply: total amount of goods and services produced in an economy Aggregate demand: total amount of spending by individuals and businesses in an economy

B. Inflation An increase in the average price level of all products in an economy Aggregate demand increases faster than aggregate supply Reduces the real purchasing power of the dollar

C. Deflation A decrease in the average price level of all goods and services in an economy Aggregate demand decreases more rapidly than aggregate supply Sellers are forced to lower prices to attract buyers Boosts the real purchasing power of the dollar

II. Causes of Inflation Two general categories: A. Demand-Pull Inflation Aggregate demand exceeds aggregate supply As demand continues to increase, the prices of goods are pulled even higher Results from an increase in the money supply or an increase in the use of credit

B. Cost-Push Inflation When producers raise prices to cover higher resource costs Increased costs push producers to raise prices even if demand has not increased

A supply shock, an event that increases the cost of production, is one of many causes Ex. Crop failures, natural disasters, political upheavals Wage-price spiral ~higher wages = higher prices

C.Price Expectations When consumers expect prices to increase, they tend to buy to take advantage of lower prices Increases aggregate demand and inflation rises When consumers expect lower prices they postpone buying Decreases aggregate demand and lowers inflation

Chapter 11 Economic Challenges Section 2 Inflation: Part 2

I. Measuring Inflation Economists look at changes in the average price level of goods and services in a nation Average prices, not specific If most items are more expensive, the purchasing power of the dollar decreases Economists construct a price index to measure price levels

A.Consumer Price Index (CPI) The measure of the average change over time in the price of a fixed group of products BLS (Bureau of Labor Statistics) Selects a base year ( ) Then selects a sample of commonly purchased items called a market basket Food, clothing, shelter, utilities, transportation, health care, etc.

B. Producer Price Index (PPI) A measure of the average change over time in the prices of goods and services bought by producers Based on 3200 products Current base year 1982

II. Inflation Rate Inflation Rate = [( CPI year B - CPI year A ) / CPI year A ] x 100 The monthly or annual percentage change in prices Inflation rate from 1 to 3 % is moderate Hyperinflation is when inflation increases at a rate of several hundred percent per year Ex. WWI—war reparations Complete economic collapse

III. Effects of Inflation A.Decreased Purchasing Power Dollar won’t buy as much COLA’S (cost of living adjustments) Automatically raise wages or payments to account for inflation

B.Decreased Value of Real Wages when pay increases fail to keep pace with rising prices $20, $40,000 Purchasing power about the same C.Increases Interest Rates As prices increase so do interest rates High rates slow down spending

D.Decreases Saving and Investing $2,000 for 5 Inflation rate average is 7% E.Increases Production Cost Why might this hurt some businesses?