Chapter 20: LR and SR
Concerns
Growth, Productivity,
Unemployment, and Inflation
Business Cycles

The economy naturally fluctuates in
the short run .
Business Cycles

During times of expansion – GDP is
growing
– Unemployment falls
– Sometimes inflation rises

During times of contraction – GDP is
falling
– Unemployment rises
– Sometimes inflation falls (could rise, though and
cause stagflation)
Unemployment

Employed = any person 16 or older
who
– Works for pay (for someone else or in
own business for 1 or more hours per
week)
– Works without pay for 15 or more hours
per week in a family business
– Has a job but has been temporarily
absent, with or without pay
Unemployment

Unemployed = a person 16 or older
who is not working, is available for
work, and has made efforts to find
work during the last 4 weeks
Unemployment
Not in the labor force = a person not
looking for work, because he/she does
not want a job or has given up looking
 Labor Force = # people employed +
# people unemployed
 Population = labor force + not in labor
force

Unemployment


Unemployment rate =
unemployed
employed + unemp.
Labor force participation rate =
labor force
population over age 16
Unemployment

Discouraged-Worker Effect
– Discouraged workers are people who
have stopped looking for work (so they
don’t count as unemployed)
– Result: ↓ in the measured unemployment
rate
– So at any given time, we might have
more people who actually want a job
than is measured by the unemployment
rate
Unemployment

Discouraged workers make up about 1
percent of the labor force
– During recessions, it can be higher

Should we add this to the
unemployment rate to get a more
accurate number?
Types of Unemployment:
Some unemployment is
inevitable!

Frictional unemployment – usually
short-term issues, like people
changing jobs, graduating from
college and looking for a job, people
moving, etc.
– This type of unemployment will ALWAYS
occur and is normal!
Types of Unemployment

Structural Unemployment –
unemployment that results from the
changing structure of the economy
– Ex: people’s skills do not match the skills
necessary for jobs
– Can be caused by:





new technology
new resources
changes in consumer demand
globalization
lack of education
Types of Unemployment


Natural rate of unemployment –
the unemployment that occurs as a
normal part of a functioning economy.
Sometimes it’s the sum of frictional +
structural unemployment (I would add
seasonal unemployment, too.)
Types of Unemployment


Cyclical unemployment – the
increase in unemployment that occurs
during recessions and depressions
(corresponds with the business cycle)
During a recession – firms produce
less b/c demand for g&s is lower, so
they need fewer workers (lay offs)
Costs of unemployment

Social consequences of unemployment
– Effects are unevenly distributed among
population
– Prolonged unemployment during severe
recessions (depressions) can also cause
anxiety, depression, physical and
psychological health issues, drug and
alcohol abuse, and suicide
Benefits of recessions???



Recessions usually slow the rate of inflation
Some argue that recessions increase
efficiency by driving the least efficient firms
out of business and forcing surviving firms
to improve
Recessions cause a decrease in demand for
imports (improves balance of trade…more
later)
Quick review from
today…

What type of unemployment?
– Giant Eagle lays off 3 workers b/c of 3 new selfcheckout lanes.
– Mrs. Eskra decides to change her career from
teacher to Economist and it’s taking a little while
for her to find a new job in that field.
– A friend gets laid off from her job at the mall.
The company says that they are just not making
enough money during the recession to keep her
hired.
Quick Review…



Which type of unemployment is the
most concerning to the government?
Why are the other two types of
unemployment not as concerning?
Why would the government want to
know which types of unemployment
are present?
Homework

Take notes on pages 447-452 (End of
chapter) and make sure your notes
are complete from in class to cover the
beginning of the chapter as well!
Inflation

Inflation – an increase in the overall
price level
– Happens when many prices increase
simultaneously

Deflation – decrease in the overall
price level
How do we measure
inflation?


Economists use price indexes –
measurements that show how the
average price of a standard group of
goods changes over time
The most common is the Consumer
Price Index (CPI)
The CPI


CPI uses a bundle of goods meant to
represent the “market basket”
purchased monthly by the typical
urban consumer
It differs from the GDP deflator, which
pertains to all goods and services in
the economy (not just consumer)
CPI Market Basket
Food and beverages,
15.6
Housing
Apparel
Other g&s, 4.3
Housing, 40.9
Education and
Communication, 5.8
Transportation
Medical Care
Recreation
Recreation, 5.9
Education and
Communication
Other g&s
Medical Care, 6
Transportation, 17.3
Apparel, 4.2
Food and beverages
CPI Market Basket
Category
Examples
Food and drinks
Cereals, coffee, chicken, milk,
restaurant meals
Housing
Rent, homeowners’ costs, fuel oil
Apparel and upkeep
Men’s shirts, women’s dresses, jewelry
Transportation
Airfares, new and used cars, gasoline,
auto insurance
Medical care
Prescription medicines, eye care,
physicians’ services
Entertainment
Newspapers, toys, musical instruments
Education and communication
Tuition, postage, telephone services,
computers
Other goods and services
Haircuts, cosmetics, bank fees
The CPI

The CPI may overstate changes in the cost
of living because it does not account for the
fact that people substitute away from more
expensive items over time and buy cheaper
goods.
– Ex: Groceries have recently become a lot more
expensive, so more people are choosing to
purchase more food items at WalMart or more
generic brands.
PPIs

Producer Price Indexes (PPIs) include
prices that producers receive for
products in the production process
– Finished goods, intermediate materials,
and crude materials
– Advantage: detect price increases earlier
– Leading indicators of future consumer
prices
What causes inflation?




Quantity theory – too much money is in the
economy
Demand-pull theory – inflation occurs when
demand for goods and services exceeds
existing supplies
Cost-push theory – inflation occurs when
producers raise prices in order to meet
increased costs
Together these cause a wage-price spiral
Costs of inflation


Inflation causes the goods and
services we buy to be more expensive
But usually people’s income also rises
during inflation (Does it adjust as
quickly?)
– COLAs = cost of living adjustments
Who is hurt by inflation?

Fixed income earners – the elderly
– Retired workers live on private pensions
– Monthly checks will never increase
– Some ARE indexed to inflation (like Social
Security)
Debtors and Creditors


When inflation is anticipated,
creditors charge an interest rate that
covers the decrease in value due to
inflation
Real interest rate = the difference
between interest rate on a loan and
the inflation rate
– Ex: interest rate is 10% and inflation is
8%. The real interest rate is 2% then.
Debtors and Creditors



When inflation is unanticipated,
creditors are hurt b/c they are paid
back in money that is not worth as
much as when they lent it.
Inflation that is higher than expected
benefits debtors
Inflation that is lower than expected
benefits creditors