Economics Challenges

1. ECONOMIC
CHALLENGES
Chapter 13

2. UNEMPLOYMENT
Chapter 13, Section 1

3. Full Employment
• Although it seems desirable, full employment is not a
characteristic of a strong economy
• Full employment will lead to some inefficiency
• A strong economy exhibits an unemployment rate of 4-6
percent…the natural rate of unemployment

4. Unemployment
Economists characterize unemployment in four categories
• Frictional
• Structural
• Cyclical (Demand Deficient)
• Seasonal

5. Frictional Unemployment
Unemployment that occurs when people take time to find
a job
There are jobs available but they have not found one yet
• Switching jobs
• Just finished school
• Left labor force and trying to return
• Part of the Natural Rate of Unemployment

6. Structural Unemployment
There is a job available but the worker’s skills do not
match the skills required for jobs
• 5 causes of structural unemployment
Development of new technology
Discovery of new resources
Changes in consumer demand
Globalization
Lack of education
Part of the Natural Rate of Unemployment

7. Cyclical Unemployment
Also known as demand deficient unemployment because
there are not jobs available.
Unemployment that changes with business cycles
• Considered bad unemployment

8. Seasonal Unemployment
Unemployment that occurs due to changes in seasons
• Growing seasons
• Construction
• Vacation or resort industries
• Accounted for and adjusted in the unemployment rate

10. Measuring Employment
Unemployment is an important indicator in the economy
BLS (Bureau of Labor Statistics) polls the population and
reports on unemployment
• Used to compute the unemployment rate
Represents the % of people in the labor force who are unemployed

11. Underemployment and Discouraged
Workers
In various cases, people may have a job but be
overqualified for that position. This is underemployment.
Discouraged Workers are those who have stopped
looking for a job
• They do not appear in the unemployment rate because they are not
part of the labor force

12. Unemployment that is too low??
Very low unemployment can lead:
• To unneeded positions
• High competition by companies to find workers
Higher wages
Higher prices (inflation)

13. Review
1. Unemployment that occurs when workers’ skills do not
match the jobs that are available is known as
• (a) frictional unemployment.
• (b) structural unemployment.
• (c) seasonal unemployment.
• (d) cyclical unemployment.
2. The unemployment rate
• (a) is the percentage of the labor force that is unemployed.
• (b) is the number of people who are unemployed.
• (c) includes only discouraged workers.
• (d) is the percentage of the labor force that is underemployed.

14. INFLATION
Chapter 13, Section 2

15. Inflation
Inflation is the term used to describe an increase in price
levels
• It does not always mean that things have become more expensive.
If wages increase with inflation, the change in prices is not felt.
Inflation also represents a decrease in purchasing power
…the power to purchase goods and services.
If prices increases and wages do not, one loses
purchasing power

16. Price Indexes
Price indexes are measurements that show the average
price of a collection of goods from one year to the next
Consumer Price Index (CPI)
• Best known price index
• Calculated monthly and focuses on consumer goods…establishes
the rate of inflation
• Uses the market basket
The market basket is a collection of representative goods

17. Market Basket
Updated every 10 years
Includes products from following categories
• Food and drink
• Housing
• Apparel
• Transportation
• Medical care
• Entertainment
• Education
• Other services

18. Inflation Rate
Inflation rate measures the percent change in prices over
time
Calculation:
• CPI for year A minus CPI for year B / CPI for year B x 100

19. Types of Inflation
Creeping inflation...low inflation rate (1-3% per
year) for a long period of time.
• Not harmful to the economy
Chronic Inflation...steady accelerating inflation
over a period of time
• Hard on an economy (things are unpredictable)
Hyper Inflation...out of control inflation (100-
500%)
• Extremely hard on the economy

20. Causes of Inflation
Many factors can lead to an increase in prices.
• Quantity Theory...too much money causes inflation
• Demand-Pull Theory...there is higher demand and prices rise
• Cost-Push Theory...cost of production goes up so prices rise (wage
increases caused by low unemployment, raw materials)

21. Wage-Price Spiral
Occurs when higher wages cause higher prices and
higher prices cause higher wages

22. Effects of Inflation
High inflation can cause many problems for an economy.
Hard to predict the future
Loss of purchasing power

23. Effects of Inflation
• Income...if prices increase but wages do not, one’s
disposable income decreases (troublesome for those on a
fixed income)
• Interest Rates...if inflation increase faster than interest
rates, savings and investments may lose money

24. Review
1. Inflation is
• (a) the process by which rising wages cause higher prices.
• (b) the price increase of a typical group of goods.
• (c) a general increase in prices.
• (d) the ability to purchase goods and services.
2. Chronic inflation occurs when the inflation rate
• (a) drops to zero.
• (b) remains low for a long time.
• (c) grows out of control.
• (d) rises steadily over an extended period.

25. POVERTY
Chapter 13, Section 3

26. Poverty
Poverty Threshold...income level that is too low to support
a family
Current threshold for family of 4…$24,600
Poverty rate...percentage of households below the
poverty line

27. Causes of Poverty
Lack of Education
Location
Racial and Gender Discrimination
Economic Shifts...layoffs etc...last hired, first fired
Family Structure...single parent families etc...

28. Income distribution
Median income for US...$51,939, yet millions live in
poverty
• This is due to uneven income distribution
• 20% of US households make 50% of the income (80% of the
wealth)

29. Antipoverty Policies
Enterprise zones...companies are encouraged to locate in
areas and received incentives to do so
Employment Assistance...
Programs to place workers
Minimum Wage

30. Antipoverty Policies
Welfare Reform
• Personal Responsibility and Work Opportunity Reconciliation Act
Aimed at reducing reliance on welfare assistance
Set a 5 year limit on benefits from federal funds
Sent responsibility to the states
• Block grants...money to the states for distribution rather than directly to the
people
• Workfare...exchange of work for assistance
• States can apply fro waivers regarding requirements

31. Review
1. An income level below which income is insufficient to
support a family or household is known as the
• (a) income gap.
• (b) poverty rate.
• (c) poverty threshold.
• (d) income inequality.
2. The Personal Responsibility and Work Opportunity Act of
1996
• (a) provides lump sums of money to poor families.
• (b) provides federal payments to poor families to supplement state
payments.
• (c) set a 5-year limit on receipt of benefits.
• (d) provides direct cash payments to poor families.