7 Prepared by: Fernando Quijano and Yvonn Quijano © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair Long-Run and Short-Run Concerns: Growth, Productivity, Unemployment, and Inflation

C H A P T E R 7: Long-Run and Short-Run Concerns: Growth, Productivity, Unemployment, and Inflation © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 2 of 40 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.

C H A P T E R 7: Long-Run and Short-Run Concerns: Growth, Productivity, Unemployment, and Inflation © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 3 of 40 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)

C H A P T E R 7: Long-Run and Short-Run Concerns: Growth, Productivity, Unemployment, and Inflation © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 4 of 40 Long-Run Output and Productivity Growth Labor Productivity = ___________________ Labor Productivity is the output per worker hour. Total output (real GDP) Total worker hours

C H A P T E R 7: Long-Run and Short-Run Concerns: Growth, Productivity, Unemployment, and Inflation © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 5 of 40 Recessions, Depressions, and Unemployment 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). The business cycle describes the periodic ups and downs in the economy, or deviations of output and employment away from the long-run trend.

C H A P T E R 7: Long-Run and Short-Run Concerns: Growth, Productivity, Unemployment, and Inflation © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 6 of 40 Recessions, Depressions, and Unemployment Capacity utilization rates, which show the percentage of factory capacity being used in production, are one indicator of a recession. A depression is a prolonged and deep recession. The precise definitions of prolonged and deep are debatable (قابلة للنقاش).

C H A P T E R 7: Long-Run and Short-Run Concerns: Growth, Productivity, Unemployment, and Inflation © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 7 of 40 Real GDP and Unemployment Rates, and THE EARLY PART OF THE GREAT DEPRESSION, 1929–1933 YEAR PERCENTAGE CHANGE IN REAL GDP UNEMPLOYMENT RATE NUMBER OF UNEMPLOYED (MILLIONS)     Note: Percentage fall in real GDP between 1929 and 1933 was 26.6 percent. THE RECESSION OF 1980–1982 YEAR PERCENTAGE CHANGE IN REAL GDP UNEMPLOYMENT RATE NUMBER OF UNEMPLOYED (MILLIONS) CAPACITY UTILIZATION (PERCENTAGE)   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.

C H A P T E R 7: Long-Run and Short-Run Concerns: Growth, Productivity, Unemployment, and Inflation © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 8 of 40 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.

C H A P T E R 7: Long-Run and Short-Run Concerns: Growth, Productivity, Unemployment, and Inflation © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 9 of 40 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.

C H A P T E R 7: Long-Run and Short-Run Concerns: Growth, Productivity, Unemployment, and Inflation © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 10 of 40 Defining and Measuring Unemployment

C H A P T E R 7: Long-Run and Short-Run Concerns: Growth, Productivity, Unemployment, and Inflation © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 11 of 40 Defining and Measuring Unemployment Computing the unemployment rate for the month of July 2003: Labor force: million Employed: million Unemployed: 7.92 million

C H A P T E R 7: Long-Run and Short-Run Concerns: Growth, Productivity, Unemployment, and Inflation © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 12 of 31 Chapter 3 Unemployment, Inflation, and Long-Run Growth 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 © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 13 of 31 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

C H A P T E R 7: Long-Run and Short-Run Concerns: Growth, Productivity, Unemployment, and Inflation © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 14 of 31 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

C H A P T E R 7: Long-Run and Short-Run Concerns: Growth, Productivity, Unemployment, and Inflation © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 15 of 31 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

C H A P T E R 7: Long-Run and Short-Run Concerns: Growth, Productivity, Unemployment, and Inflation © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 16 of 31 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

C H A P T E R 7: Long-Run and Short-Run Concerns: Growth, Productivity, Unemployment, and Inflation © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 17 of 31 Chapter 3 Unemployment, Inflation, and Long-Run Growth 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 © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 18 of 31 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

C H A P T E R 7: Long-Run and Short-Run Concerns: Growth, Productivity, Unemployment, and Inflation © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 19 of 31 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

C H A P T E R 7: Long-Run and Short-Run Concerns: Growth, Productivity, Unemployment, and Inflation © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 20 of 31 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

C H A P T E R 7: Long-Run and Short-Run Concerns: Growth, Productivity, Unemployment, and Inflation © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 21 of 40 Employed, Unemployed, and the Labor Force, 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 Note: Figures are civilian only (military excluded). Source: Economic Report of the President, 2003, Table B-35.

C H A P T E R 7: Long-Run and Short-Run Concerns: Growth, Productivity, Unemployment, and Inflation © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 22 of 40 Unemployment Rates for Different Demographic Groups Unemployment Rates by Demographic Group, 1982 and 2003 YEARS NOVEMBER 1982 JULY 2003 Total White Men – Women – African-American Men – Women – Source: U.S. Department of Labor, Bureau of Labor Statistics. Data are not seasonally adjusted.

C H A P T E R 7: Long-Run and Short-Run Concerns: Growth, Productivity, Unemployment, and Inflation © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 23 of 40 Regional Differences in Unemployment Regional Differences in Unemployment, 1975, 1982, 1991, and U.S. avg Cal Fla Ill Mass Mich N.J N.Y N.C Ohio Tex Sources: Statistical Abstract of the United States, various editions.

C H A P T E R 7: Long-Run and Short-Run Concerns: Growth, Productivity, Unemployment, and Inflation © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 24 of 40 The Discouraged-Worker Effect 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 © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 25 of 40 The Duration of Unemployment Average Duration of Unemployment, 1979–2002 YEARWEEKSYEARWEEKS Sources: U.S. Department of Labor, Bureau of Labor Statistics.

C H A P T E R 7: Long-Run and Short-Run Concerns: Growth, Productivity, Unemployment, and Inflation © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 26 of 40 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.

C H A P T E R 7: Long-Run and Short-Run Concerns: Growth, Productivity, Unemployment, and Inflation © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 27 of 40 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 (مشكلات التكيف) that may last for years.

C H A P T E R 7: Long-Run and Short-Run Concerns: Growth, Productivity, Unemployment, and Inflation © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 28 of 40 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).

C H A P T E R 7: Long-Run and Short-Run Concerns: Growth, Productivity, Unemployment, and Inflation © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 29 of 40 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%.

C H A P T E R 7: Long-Run and Short-Run Concerns: Growth, Productivity, Unemployment, and Inflation © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 30 of 40 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.

C H A P T E R 7: Long-Run and Short-Run Concerns: Growth, Productivity, Unemployment, and Inflation © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 31 of 40 Two Serious Inflationary Periods Since 1970 Inflation Rates, 1974–1976 and 1980–1983 RECESSION BEGINS INFLATION RATE Source: See Table 19.8.

C H A P T E R 7: Long-Run and Short-Run Concerns: Growth, Productivity, Unemployment, and Inflation © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 32 of 40 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.

C H A P T E R 7: Long-Run and Short-Run Concerns: Growth, Productivity, Unemployment, and Inflation © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 33 of 40 Inflation and the Business Cycle Inflation During Three Expansions INFLATION RATE Source: See Table 19.8.

C H A P T E R 7: Long-Run and Short-Run Concerns: Growth, Productivity, Unemployment, and Inflation © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 34 of 40 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.

C H A P T E R 7: Long-Run and Short-Run Concerns: Growth, Productivity, Unemployment, and Inflation © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 35 of 40 Price Indexes 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 © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 36 of 40 Price Indexes The CPI market basket shows how a typical consumer divides his or her money among various goods and services.

C H A P T E R 7: Long-Run and Short-Run Concerns: Growth, Productivity, Unemployment, and Inflation © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 37 of 40 The Consumer Price Index (CPI) The CPI, 1950–2002 YEAR PERCENTAGE CHANGE IN CPICPIYEAR PERCENTAGE CHANGE IN CPICPIYEAR PERCENTAGE CHANGE IN CPICPI  Sources: Bureau of Labor Statistics, U.S. Department of Labor.

C H A P T E R 7: Long-Run and Short-Run Concerns: Growth, Productivity, Unemployment, and Inflation © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 38 of 40 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.

C H A P T E R 7: Long-Run and Short-Run Concerns: Growth, Productivity, Unemployment, and Inflation © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 39 of 40 The Costs of Inflation 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 © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 40 of 40 The Costs of Inflation 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 © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 41 of 40 The Costs of Inflation Unanticipated inflation—an inflation that takes people by surprise—can hurt creditors (lenders) and benefit debtors (borrowers) The real interest rate is the difference between the interest rate on a loan and the inflation rate. Real Interest Rate = Nominal Interest Rate – Inflation rate

C H A P T E R 7: Long-Run and Short-Run Concerns: Growth, Productivity, Unemployment, and Inflation © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 42 of 40 The Costs of Inflation 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 © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 43 of 40 The Costs of Inflation 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 © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 44 of 40 Review Terms and Concepts consumer price index (CPI) consumer price index (CPI) cyclical unemployment cyclical unemployment deflation depression discouraged-worker effect discouraged-worker effect employed frictional unemployment frictional unemployment inflation labor force labor force labor-force participation rate labor-force participation rate natural rate of unemployment natural rate of unemployment not in the labor force not in the labor force producer price indexes (PPIs) producer price indexes (PPIs) real interest rate real interest rate recession structural unemployment structural unemployment sustained inflation sustained inflation unemployed unemployment rate unemployment rate