Facing Economic Challenges Economics Chapter 13 Notes

Economic Challenges

Three economic challenges discussed in this chapter:

Unemployment

Poverty and Income Distribution

Inflation

Economic Challenges - Unemployment

Unemployment has a variety of causes. Some level of unemployment is expected, even when an economy is healthy.

Underemployed—work part-time, want full-time or work below skill level

Measuring Unemployment

The Unemployment Rate Measure of unemploymentIncludes those over 16 who are not working, are able to work and actively seeking workDoes not include military, those in prison, those who are not seeking a job.

Measuring Unemployment

Full Employment Always some degree of unemployment:

people relocate; look for better job; can’t find appropriate job

Unemployment rate of 4 to 6 percent considered full employment in U.S.

other rates in countries with different labor markets, economic policies

Types of Unemployment

Type 1: Frictional UnemploymentPeople “in between” jobs.Includes:

Childrearing parents returning to worknew college graduates looking for first jobexperienced workers who want to switch jobs

Reflects workers’ freedom to find best job for them at highest wage

Types of Unemployment

Type 2: Seasonal UnemploymentDemand for some jobs changes dramatically from season to season

construction work falls off in wintertourism peaks at certain times of year; varies by regionmigrant farm work drops off in winter; migrant families suffer

Types of Unemployment

Type 3: Structural UnemploymentAs businesses become more efficient, require fewer workers

new technologies replace workers or require them to retrainnew industries requiring specialized education do not employ unskilledchange in consumer demand can shift type of workers neededoffshore outsourcing sometimes leaves people out of work

Types of Unemployment

Type 4: Cyclical Unemployment

As the nation goes through business cycles, it faces the problems of unemployment and inflation.Employers lay off workers during low points in business cycle

Section 2:Poverty and Income

Distribution What Is Poverty?

The Poverty Threshold People considered in poverty if income falls below poverty thresholdAlso called the poverty lineCalculated based on costs of nutritious food, other necessities

The 2009 Poverty Guidelines for the 48 Contiguous States and the District of

Columbia

Number in Family Poverty Line

1 $10,830

2 $14,570

3 $18,310

4 $22,050

What Is Poverty?

The Poverty Rate Poverty rate—percent of people in households below poverty threshold

based on population as a wholePoverty does not hit all sectors of society equally. Most at risk:

Children, minorities; inner-city, rural, and single–mother families

Factors Affecting Poverty

Education—the higher the level of education, the higher the income

Discrimination against minorities, women sometimes face wage discrimination, occupational segregation

Demographic trends—single-parent families have more economic problems

Change from manufacturing to service jobs has resulted in lower wages for low-skilled workers

Income Distribution

Income distribution—how income is divided among people in a nation

Income inequality—unequal distribution of income; some always exists

Income Distribution

$0 $150,000$100,000$50,000 $250,000$200,000

112,363,000 Households below $250,000

Each equals 500,000 households

http://ngm.nationalgeographic.com/2011/03/age-of-man/map-interactive

Assistance for people in poverty

Food stamp program gives card, government deposits funds in account

card can be used only to buy food at grocery stores

Medicaid offers health care; funded by federal and state governments

Earned-income tax credit—refunds taxes deducted from paychecks

money usually spent in own communities, helping boost their economies

General Antipoverty Programs

Social Security program pays benefits to retirees, survivors, disabled

Medicare is government health insurance for seniors

Unemployment insurance helps laid-off workers while looking for job

How Difficult is it to Live at the Poverty

Level? You are head of a family of four with an income at the poverty level of $20,000.

Housing: $5,400 Utilities: $2,400 Transportation: $5,000 Food: $4,200 Health Care: $2,200 Child Care: $2,400

BALANCE:

How much Money do you have now?

Life on $1 a Day

Is it possible to live on $1 a day?

Life on $1 a Day What were you able to afford?

What was difficult about the task?

What did you really need that you couldn’t afford?

How would you care for and feed your family with these budget limitations? What would you do?

Section 3: Inflation

Definition of inflation:

A sustained rise in the general price level, or a sustained fall in the purchasing power of money.

What Is the Impact of Inflation?

Effect 1: Decreasing Value of the Dollar

Rising consumer price index represents declining value of the dollarPeople on a fixed income are especially vulnerable

each dollar they have buys less every year

Inflation helps people who borrow at a fixed rate of interest

What Is the Impact of Inflation?

Effect 2: Increasing Interest Rates

Lenders raise interest rates to ensure profit on loans Businesses avoid borrowing to expand or make capital improvementsConsumers less likely to finance high-priced itemsMonthly credit card payments go up as rates rise

What Is the Impact of Inflation?

Effect 3: Decreasing Real Returns on Savings

Interest on savings tends to increase during inflationary timesAny interest you earn on investments is worth less than it was before

The Effects of Inflation in the 1970s

BackgroundIn the 1970s, the United States experienced the longest period of inflation in its history. By 1979, inflation had risen to 10 percent per year or higher. Prices of consumer goods rose dramatically. Those on fixed incomes were particularly affected.

What’s the IssueHow did inflation affect people and businesses in the 1970s?

Thinking EconomicallyName one example from each document that shows how inflation has a negative impact on the economy.Inflation is a general rise in price levels. Are the examples of price increases in documents B and C symptoms of inflation or isolated price increases?Compare the tone of documents A and C. Do economists care as much about inflation as consumers? Explain.