1. CHAPTER 22 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 1 of 39 PowerPoint Lectures for Principles of Economics, 9e By Karl E. Case, Ray C. Fair & Sharon M. Oster ; ;

2. CHAPTER 22 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 2 of 39

3. © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 22 PART IV CONCEPTS AND PROBLEMS IN MACROECONOMICS Unemployment, Inflation, and Long-Run Growth Fernando & Yvonn Quijano Prepared by:

4. CHAPTER 22 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 4 of 39 11 UnemploymentMeasuring UnemploymentComponents of the Unemployment RateThe Costs of UnemploymentInflationThe Consumer Price IndexThe Costs of InflationLong-Run GrowthOutput and Productivity GrowthLooking Ahead CHAPTER OUTLINE Unemployment, Inflation, and Long-Run Growth 22 PART IV CONCEPTS AND PROBLEMS IN MACROECONOMICS

5. CHAPTER 22 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 5 of 39 Unemployment employed 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. Measuring Unemployment unemployed 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.

6. CHAPTER 22 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 6 of 39 Unemployment not in the labor force A person who is not looking for work because he or she does not want a job or has given up looking. Measuring Unemployment labor force The number of people employed plus the number of unemployed. labor force = employed + unemployed population = labor force + not in labor force

7. CHAPTER 22 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 7 of 39 Unemployment unemployment rate The ratio of the number of people unemployed to the total number of people in the labor force. Measuring Unemployment labor force participation rate The ratio of the labor force to the total population 16 years old or older.

8. CHAPTER 22 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 8 of 39 A person not looking for work, because he or she either does not want a job or has given up looking, is classified as: a.Unemployed. b.Not in the labor force. c.In the labor force but not currently employed. d.In the labor force participation rate, but not in the labor force.

9. CHAPTER 22 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 9 of 39 A person not looking for work, because he or she either does not want a job or has given up looking, is classified as: a.Unemployed. b.Not in the labor force. c.In the labor force but not currently employed. d.In the labor force participation rate, but not in the labor force.

10. CHAPTER 22 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 10 of 39 Unemployment Measuring Unemployment TABLE 22.1 Employed, Unemployed, and the Labor Force, 1953–2007 (1)(2)(3)(4)(5)(6) Population 16 Years Old Or Over (Millions) Labor Force (Millions) Employed (Millions) Unemployed (Millions) Labor Force Participation Rate (Percentage Points) Unemployment Rate (Percentage Points) 1953107.163.061.21.858.92.9 1960117.269.665.83.959.45.5 1970137.182.878.74.160.44.9 1980167.7106.999.37.663.87.1 1982172.3110.299.510.764.09.7 1990189.2125.8118.87.066.55.6 2000212.6142.6136.95.767.14.0 2007231.9153.1146.07.166.04.6 Note: Figures are civilian only (military excluded). Source: Economic Report of the President, 2008, Table B-35.

11. CHAPTER 22 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 11 of 39 Unemployment Components of the Unemployment Rate Unemployment Rates for Different Demographic Groups TABLE 22.2 Unemployment Rates by Demographic Group, 1982 and 2008 YearsNov. 1982March 2008 Total10.8 5.2 White9.6 4.5 Men20+9.04.1 Women20+8.14.1 Both sexes16–1921.313.2 African-American20.2 9.0 Men Women 20+ 19.3 16.5 8.4 7.5 Both sexes16–1949.531.3 Source: U.S. Department of Labor, Bureau of Labor Statistics. Data are not seasonally adjusted.

12. CHAPTER 22 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 12 of 39 Unemployment Components of the Unemployment Rate Unemployment Rates in States and Regions TABLE 22.3 Regional Differences in Unemployment, 1975, 1982, 1991, and 2003 1975198219912003 U.S. avg.8.59.76.76.0 Cal.9.9 7.56.7 Fla.10.78.27.35.1 Ill.7.111.37.16.7 Mass.11.27.99.05.8 Mich.12.515.59.27.3 N.J.10.29.06.65.9 N.Y.9.58.67.26.3 N.C.8.69.05.86.5 Ohio9.112.56.46.1 Tex.5.66.96.66.8 Sources: Statistical Abstract of the United States, various editions.

13. CHAPTER 22 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 13 of 39 Unemployment rates in states and regions across the United States reveal that: a.States and regions in the United States generally display the same levels of unemployment. b.The labor force in the United States is almost completely mobile, with workers taking advantage of job opportunities clear across the country. c.A low national rate of unemployment does not mean that the entire nation is growing and producing at the same rate. d.All of the above.

14. CHAPTER 22 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 14 of 39 Unemployment rates in states and regions across the United States reveal that: a.States and regions in the United States generally display the same levels of unemployment. b.The labor force in the United States is almost completely mobile, with workers taking advantage of job opportunities clear across the country. c.A low national rate of unemployment does not mean that the entire nation is growing and producing at the same rate. d.All of the above.

15. CHAPTER 22 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 15 of 39 Unemployment Components of the Unemployment Rate Unemployment Rates in States and Regions A Quiet Revolution:Women Join the LaborForce If you are interested in learning more about the economic history of American women, read the book Understanding the Gender Gap: An Economic History of American Women by Harvard University economist Claudia Goldin.

16. CHAPTER 22 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 16 of 39 Unemployment Components of the Unemployment Rate Discouraged-Worker Effects discouraged-worker effect The decline in the measured unemployment rate that results when people who want to work but cannot find jobs grow discouraged and stop looking, thus dropping out of the ranks of the unemployed and the labor force.

17. CHAPTER 22 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 17 of 39 Unemployment Components of the Unemployment Rate The Duration of Unemployment TABLE 22.4 Average Duration of Unemployment, 1979–2007 Weeks 197910.8199318.0 198011.9199418.8 198113.7199516.6 198215.6199616.7 198320.0199715.8 198418.2199814.5 198515.6199913.4 198615.0200012.6 198714.5200113.1 198813.5200216.6 198911.9200319.2 199012.0200419.6 199113.7200518.4 199217.7200616.8 200716.8 Sources: U.S. Department of Labor, Bureau of Labor Statistics.

18. CHAPTER 22 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 18 of 39 When an unemployed worker becomes discouraged about finding work and stops looking, the unemployment rate will: a.Rise. b.Fall. c.Remain unchanged. d.Increase only if the worker falls out of the labor force.

19. CHAPTER 22 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 19 of 39 When an unemployed worker becomes discouraged about finding work and stops looking, the unemployment rate will: a.Rise. b.Fall. c.Remain unchanged. d.Increase only if the worker falls out of the labor force.

20. CHAPTER 22 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 20 of 39 Unemployment The Costs of Unemployment Some Unemployment Is Inevitable When we consider the various costs of unemployment, it is useful to categorize unemployment into three types:  Frictional unemployment  Structural unemployment  Cyclical unemployment

21. CHAPTER 22 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 21 of 39 Unemployment The Costs of Unemployment Frictional, Structural, and Cyclical Unemployment frictional unemployment The portion of unemployment that is due to the normal working of the labor market; used to denote short-run job/skill matching problems. structural unemployment 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.

22. CHAPTER 22 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 22 of 39 Unemployment The Costs of Unemployment Frictional, Structural, and Cyclical Unemployment natural rate of unemployment 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. cyclical unemployment The increase in unemployment that occurs during recessions and depressions.

23. CHAPTER 22 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 23 of 39 Unemployment The Costs of Unemployment Social Consequences In addition to economic hardship, prolonged unemployment may also bring with it social and personal ills: anxiety, depression, deterioration of physical and psychological health, drug abuse (including alcoholism), and suicide.

24. CHAPTER 22 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 24 of 39 Inflation The Consumer Price Index consumer price index (CPI) 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.

25. CHAPTER 22 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 25 of 39 Inflation The Consumer Price Index The CPI market basket shows how a typical consumer divides his or her money among various goods and services. Most of a consumer’s money goes toward housing, transportation, and food and beverages. Source: The Bureau of Labor Statistics  FIGURE 22.1 The CPI Market Basket

26. CHAPTER 22 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 26 of 39 The CPI market basket shows that most of a typical consumer’s money goes toward: a.Recreation, medical care, and education. b.Food and beverage, apparel, and other goods and services. c.Housing, transportation, and food and beverages. d.None of the above. The typical consumer spends about the same amount of money on each of the categories listed in the choices above.

27. CHAPTER 22 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 27 of 39 The CPI market basket shows that most of a typical consumer’s money goes toward: a.Recreation, medical care, and education. b.Food and beverage, apparel, and other goods and services. c.Housing, transportation, and food and beverages. d.None of the above. The typical consumer spends about the same amount of money on each of the categories listed in the choices above.

28. CHAPTER 22 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 28 of 39 Inflation The Consumer Price Index TABLE 22.5 The CPI, 1950–2007 Percentage Change in CPICPI Percentage Change in CPICPI Percentage Change in CPICPI 19501.324.119695.536.719884.1118.3 19517.926.019705.738.819894.8124.0 19521.926.519714.440.519905.4130.7 19530.826.719723.241.819914.2136.2 19540.726.919736.244.419923.0140.3 1955  0.4 26.8197411.049.319933.0144.5 19561.527.219759.153.819942.6148.2 19573.328.119765.856.919952.8152.4 19582.828.919776.560.619963.0156.9 19590.729.119787.665.219972.3160.5 19601.729.6197911.372.619981.6163.0 19611.029.9198013.582.419992.2166.6 19621.030.2198110.390.920003.4172.2 19631.330.619826.296.520012.8177.1 19641.331.019833.299.620021.6179.9 19651.631.519844.3103.920032.3184.0 19662.932.419853.6107.620042.7188.9 19673.133.419861.9109.620053.4195.3 19684.234.819873.6113.620063.2201.6 20072.8207.3 Sources: Bureau of Labor Statistics, U.S. Department of Labor.

29. CHAPTER 22 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 29 of 39 Inflation The Consumer Price Index producer price indexes (PPIs) Measures of prices that producers receive for products at all stages in the production process. The indexes are calculated separately for various stages in the production process. The three main categories are finished goods, intermediate materials, and crude materials, although there are subcategories within each of these categories.

30. CHAPTER 22 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 30 of 39 Inflation The Costs of Inflation real interest rate The difference between the interest rate on a loan and the inflation rate. The indexes are calculated separately for various stages in the production process. The three main categories are finished goods, intermediate materials, and crude materials, although there are subcategories within each of these categories. Inflation May Change the Distribution of Income

31. CHAPTER 22 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 31 of 39 The interest rate stated in a loan contract is: a.The real rate of interest. b.The nominal rate of interest minus the rate of inflation. c.The real rate of interest plus the rate of inflation. d.The same as the rate of inflation.

32. CHAPTER 22 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 32 of 39 The interest rate stated in a loan contract is: a.The real rate of interest. b.The nominal rate of interest minus the rate of inflation. c.The real rate of interest plus the rate of inflation. d.The same as the rate of inflation.

33. CHAPTER 22 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 33 of 39 Inflation The Costs of Inflation There may also be costs associated even with anticipated inflation. One is the administrative cost associated with simply keeping up. Administrative Costs and Inefficiencies Economists have debated the seriousness of the costs of inflation for decades. No matter what the real economic cost of inflation, people do not like it. Public Enemy Number One?

34. CHAPTER 22 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 34 of 39 Long-Run Growth output growth The growth rate of the output of the entire economy. per-capita output growth The growth rate of output per person in the economy. productivity growth The growth rate of output per worker.

35. CHAPTER 22 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 35 of 39 Which of the following is part of an ideal economy? a.Rapid growth of output per worker. b.Low unemployment. c.Low inflation. d. All of the above.

36. CHAPTER 22 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 36 of 39 Which of the following is part of an ideal economy? a.Rapid growth of output per worker. b.Low unemployment. c.Low inflation. d. All of the above.

37. CHAPTER 22 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 37 of 39 Long-Run Growth Output and Productivity Growth Productivity grew much faster in the 1950s and 1960s than since.  FIGURE 22.2 Output per Worker Hour (Productivity), 1952 I–2007 IV

38. CHAPTER 22 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 38 of 39 The two features immediately clear when you examine the trend in productivity in the United States over the past fifty years are: a.An upward trend and fairly sizable fluctuations around that trend. b.An upward trend and relatively small fluctuations around that trend. c.A downward trend and fairly sizable fluctuations around that trend. d.A downward trend and relatively small fluctuations around that trend.

39. CHAPTER 22 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 39 of 39 The two features immediately clear when you examine the trend in productivity in the United States over the past fifty years are: a.An upward trend and fairly sizable fluctuations around that trend. b.An upward trend and relatively small fluctuations around that trend. c.A downward trend and fairly sizable fluctuations around that trend. d.A downward trend and relatively small fluctuations around that trend.

40. CHAPTER 22 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 40 of 39 Long-Run Growth Output and Productivity Growth Capital per worker grew until about 1980 and then leveled off somewhat.  FIGURE 22.3 Capital per Worker, 1952 I–2007 IV

41. CHAPTER 22 Unemployment, Inflation, and Long-Run Growth © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 41 of 39 consumer price index (CPI) cyclical unemployment discouraged-worker effect employed frictional unemployment labor force labor force participation rate natural rate of unemployment not in the labor force output growth per-capita output growth REVIEW TERMS AND CONCEPTS producer price indexes (PPIs) productivity growth real interest rate structural unemployment unemployed unemployment rate 1. Labor force = employed + unemployed 2. Population = labor force + not in labor force 3. 4.