Chapter

20
Long-Run and Short-Run Concerns: Growth, Productivity, Unemployment, and Inflation
Prepared by:

Fernando & Yvonn Quijano

© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair

CHAPTER 20: Long-Run and Short-Run Concerns: Growth, Productivity, Unemployment, and Inflation

Long-Run and Short-Run Concerns: Growth, Productivity, Unemployment, and Inflation

20
Chapter Outline
Long-Run Output and Productivity Growth Recessions, Depressions, and Unemployment Defining and Measuring Unemployment Components of the Unemployment Rate The Costs of Unemployment The Benefits of Recessions

Inflation Defining Inflation Price Indexes The Costs of Inflation Inflation: Public Enemy Number One?
Looking Ahead
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 2 of 34

LONG-RUN AND SHORT-RUN CONCERNS: GROWTH, PRODUCTIVITY, UNEMPLOYMENT, AND INFLATION
CHAPTER 20: Long-Run and Short-Run Concerns: Growth, Productivity, Unemployment, and Inflation

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.

© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair

3 of 34

Productivity.1 Output per Worker Hour (Productivity). Unemployment. and Inflation FIGURE 7. 1952 I–2005 II © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 4 of 34 .LONG-RUN OUTPUT AND PRODUCTIVITY GROWTH CHAPTER 20: Long-Run and Short-Run Concerns: Growth.

Unemployment. 1952 I–2005 II © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 5 of 34 .2 Capital per Worker. Productivity. and Inflation FIGURE 7.LONG-RUN OUTPUT AND PRODUCTIVITY GROWTH CHAPTER 20: Long-Run and Short-Run Concerns: Growth.

© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 6 of 34 . depression A prolonged and deep recession. Productivity. a period in which real GDP declines for at least two consecutive quarters. The precise definitions of prolonged and deep are debatable. AND UNEMPLOYMENT CHAPTER 20: Long-Run and Short-Run Concerns: Growth. Unemployment. Marked by falling output and rising unemployment. DEPRESSIONS. and Inflation recession Roughly.RECESSIONS.

6 9.2 2.5 -1.1 25.6 percent.2 80.2 NUMBER OF UNEMPLOYED (MILLIONS) 1. THE RECESSION OF 1980–1982 PERCENTAGE CHANGE IN REAL GDP -0. 1929–1933 YEAR 1929 1930 1931 1932 1933 PERCENTAGE CHANGE IN REAL GDP -8.7 NUMBER OF UNEMPLOYED (MILLIONS) 6.9 72.S. 1929–1933 and 1980–1982 THE EARLY PART OF THE GREAT DEPRESSION.3 24.6 8.3 8.8 7.9 UNEMPLOYMENT RATE 5. Productivity.6 -6. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 7 of 34 .2 8. AND UNEMPLOYMENT CHAPTER 20: Long-Run and Short-Run Concerns: Growth.4 -13. Sources: Historical Statistics of the United States and U.9 79.7 CAPACITY UTILIZATION (PERCENTAGE) 85.9 16.0 -1.1 percent.5 4.RECESSIONS. Unemployment.1 7.4 UNEMPLOYMENT RATE 3.1 7. and Inflation TABLE 7.8 Note: Percentage fall in real GDP between 1929 and 1933 was 26.1 YEAR 1979 1980 1981 1982 Note: Percentage increase in real GDP between 1979 and 1982 was 0.3 10. Bureau of Economic Analysis. DEPRESSIONS.0 12. Department of Commerce.1 12.1 Real GDP and Unemployment Rates.

RECESSIONS. Unemployment. DEPRESSIONS. or (3) who has a job but has been temporarily absent. Productivity. AND UNEMPLOYMENT CHAPTER 20: Long-Run and Short-Run Concerns: Growth. with or without pay. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 8 of 34 . and Inflation DEFINING AND MEASURING UNEMPLOYMENT employed Any person 16 years old or older (1) who works for pay. (2) who works without pay for 15 or more hours per week in a family enterprise. either for someone else or in his or her own business for 1 or more hours per week.

AND UNEMPLOYMENT CHAPTER 20: Long-Run and Short-Run Concerns: Growth. not in the labor force A person who is not looking for work. is available for work. DEPRESSIONS. because he or she either does not want a job or has given up looking. and has made specific efforts to find work during the previous 4 weeks. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 9 of 34 . and Inflation unemployed A person 16 years old or older who is not working. Unemployment.RECESSIONS. Productivity.

RECESSIONS. Productivity. Unemployment. AND UNEMPLOYMENT CHAPTER 20: Long-Run and Short-Run Concerns: Growth. and Inflation labor force The number of people employed plus the number of unemployed. labor force = employed + unemployed population = labor force + not in labor force © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 10 of 34 . DEPRESSIONS.

AND UNEMPLOYMENT CHAPTER 20: Long-Run and Short-Run Concerns: Growth. and Inflation unemployment rate The ratio of the number of people unemployed to the total number of people in the labor force. unemployme nt rate  unemployed employed  unemployed labor force participation rate The ratio of the labor force to the total population 16 years old or older. Productivity. DEPRESSIONS. unemployed employed  unemployed © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 11 of 34 . Unemployment.RECESSIONS.

6 82.1 58.8 3.1 167.2 65.9 7.1 117. Unemployed.6 10.6 4.1 9.6 147.9 4.3 99.5 4.0 5. 1953–2004 (1) POPULATION 16 YEARS OLD OR OVER (MILLIONS) (2) LABOR FORCE (MILLIONS) (3) (4) (5) LABOR FORCE PARTICIPATION RATE (6) EMPLOYED (MILLIONS) UNEMPLOYED (MILLIONS) UNEMPLOYMENT RATE 1953 1960 1970 1980 1982 1990 2000 2004 107.0 2.4 60.3 189.8 136.7 172. 2005.4 63. DEPRESSIONS. Source: Economic Report of the President.RECESSIONS.5 Note: Figures are civilian only (military excluded).8 142.5 118. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 12 of 34 .4 63.9 139.7 99. and the Labor Force.1 7.0 69.8 64. Unemployment.2 Employed.4 61.5 67.0 5.7 7.3 1. Productivity.2 137.8 78.7 5.2 125.0 66.9 5.9 110.6 223. and Inflation TABLE 7. AND UNEMPLOYMENT CHAPTER 20: Long-Run and Short-Run Concerns: Growth.9 59.8 106.1 66.7 8.2 212. Table B-35.

S.1 JULY 2005 5.3 8.3 Unemployment Rates by Demographic Group. 1982 and 2005 YEARS Total White Men Women Both sexes African-American Men Women Both sexes NOVEMBER 1982 10.6 9.4 4.5 51. Department of Labor.2 8. There are large differences in unemployment rates across demographic groups.4 3.0 8.RECESSIONS.2 4.8 9. DEPRESSIONS.3 13. Unemployment. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 13 of 34 . and Inflation COMPONENTS OF THE UNEMPLOYMENT RATE Unemployment Rates for Different Demographic Groups TABLE 7. Bureau of Labor Statistics.9 36. Data are not seasonally adjusted.3 16.2 19.8 20. Productivity. AND UNEMPLOYMENT CHAPTER 20: Long-Run and Short-Run Concerns: Growth.4 20+ 20+ 16–19 20+ 20+ 16–19 Source: U.1 21.4 10.

2 7.4 Regional Differences in Unemployment.5 8.3 7.6 6.8 Mich.7 Fla.6 6.7 Mass. various editions.6 5.C. avg. 9.1 12.5 6. and Inflation Unemployment Rates in States and Regions TABLE 7.Y.5 6.3 5.4 6.0 6.RECESSIONS.S.2 7.0 5.1 11. AND UNEMPLOYMENT CHAPTER 20: Long-Run and Short-Run Concerns: Growth. 11.7 6.8 Sources: Statistical Abstract of the United States. 1991.9 6.5 15.2 7. Unemployment. 5.5 9.3 N. 7. The national unemployment rate does not tell the whole story.7 8.6 7. 12.2 9.8 6.5 9.0 Cal.7 6. 9. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 14 of 34 . and 2003 1975 1982 1991 2003 U.2 6.6 9.1 6. A low national rate of unemployment does not mean that the entire nation is growing and producing at the same rate. 1982. 1975.1 Ill.J. 8. 10. 8.9 9.9 7.9 N. 10.5 Ohio 9.0 5.3 N. DEPRESSIONS. Productivity.9 9.1 Tex.

Unemployment.RECESSIONS. DEPRESSIONS. Productivity. and Inflation 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. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 15 of 34 . AND UNEMPLOYMENT CHAPTER 20: Long-Run and Short-Run Concerns: Growth.

and Inflation The Duration of Unemployment TABLE 7.9 13. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair .7 15.2 19.7 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 17. Department of Labor. Productivity.6 16 of 34 Sources: U.6 19.4 12.6 13.0 18.6 15.6 20.5 13.5 Average Duration of Unemployment.5 11.0 14.0 13. DEPRESSIONS.1 16.2 15.8 11.6 16.RECESSIONS.8 16.0 18.9 12.8 14. Unemployment. Bureau of Labor Statistics.7 18. 1979–2004 WEEKS WEEKS 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 10. AND UNEMPLOYMENT CHAPTER 20: Long-Run and Short-Run Concerns: Growth.S.7 15.5 13.

RECESSIONS. AND UNEMPLOYMENT CHAPTER 20: Long-Run and Short-Run Concerns: Growth. Productivity. Unemployment. it is useful to categorize unemployment into three types: ■ Frictional unemployment ■ Structural unemployment ■ Cyclical unemployment © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 17 of 34 . DEPRESSIONS. and Inflation THE COSTS OF UNEMPLOYMENT Some Unemployment Is Inevitable When we consider the various costs of unemployment.

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. used to denote short-run job/skill matching problems. DEPRESSIONS.RECESSIONS. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 18 of 34 . Unemployment. and Inflation Frictional and Structural Unemployment frictional unemployment The portion of unemployment that is due to the normal working of the labor market. AND UNEMPLOYMENT CHAPTER 20: Long-Run and Short-Run Concerns: Growth. Productivity.

RECESSIONS. DEPRESSIONS. Sometimes taken as the sum of frictional unemployment and structural unemployment. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 19 of 34 . Productivity. Unemployment. AND UNEMPLOYMENT CHAPTER 20: Long-Run and Short-Run Concerns: Growth. and Inflation natural rate of unemployment The unemployment that occurs as a normal part of the functioning of the economy.

AND UNEMPLOYMENT CHAPTER 20: Long-Run and Short-Run Concerns: Growth. Unemployment. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 20 of 34 .RECESSIONS. and Inflation Cyclical Unemployment and Lost Output cyclical unemployment The increase in unemployment that occurs during recessions and depressions. Productivity. DEPRESSIONS.

and suicide. drug abuse (including alcoholism). Unemployment.RECESSIONS. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 21 of 34 . AND UNEMPLOYMENT CHAPTER 20: Long-Run and Short-Run Concerns: Growth. and Inflation Social Consequences In addition to economic hardship. DEPRESSIONS. prolonged unemployment may also bring with it social and personal ills: anxiety. Productivity. depression. deterioration of physical and psychological health.

1974–1976 and 1980–1983 RECESSION BEGINS 1974 INFLATION RATE 11.8.6 Inflation Rates.3 1982 1983 Source: See Table 17.0 1975 1976 9. Productivity.RECESSIONS. 6. Unemployment.2 3.5 10.8 1980 1981 13. DEPRESSIONS.2 Recessions may help to reduce inflation.1 5. AND UNEMPLOYMENT CHAPTER 20: Long-Run and Short-Run Concerns: Growth. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 22 of 34 . and Inflation THE BENEFITS OF RECESSIONS TABLE 7.

3.2 11.5 4.6 4.INFLATION CHAPTER 20: Long-Run and Short-Run Concerns: Growth.3 13.0 5. Unemployment.2 6.8.3 3.6 11. and Inflation TABLE 7.6 1.8 6.7 Inflation During Three Expansions INFLATION RATE 1972 1973 1974 1976 1977 1978 1979 1980 1984 1985 1986 1987 1988 1989 Source: See Table 7.5 7.8 © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 23 of 34 . Productivity.9 3.1 4.

sustained inflation An increase in the overall price level that continues over a significant period.INFLATION CHAPTER 20: Long-Run and Short-Run Concerns: Growth. deflation A decrease in the overall price level. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 24 of 34 . and Inflation DEFINING INFLATION inflation An increase in the overall price level. Productivity. Unemployment.

INFLATION CHAPTER 20: Long-Run and Short-Run Concerns: Growth. and Inflation PRICE INDEXES 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. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 25 of 34 . Productivity. Unemployment.

Productivity. and Inflation FIGURE 7. Unemployment.3 The CPI Market Basket © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 26 of 34 .INFLATION CHAPTER 20: Long-Run and Short-Run Concerns: Growth.

8 3.6 65.4 PERCENTAGE CHANGE IN CPI 4.5 3.0 3. and Inflation TABLE 7.2 3.1 26.0 130. Changes in the CPI somewhat overstate changes in the cost of living.8 0.4 49.3 124.6 2.3 2.9 30.2 140.9 60.9 26.2 11.0 1.6 172.2 3.2 5.3 1.8 27.9 3.5 148.6 113.6 103.5 41.2 3.1 5. U.0 31.3 6.6 CPI 34.4 3.5 5.1 29.9 96.1 179.2 177.6 PERCENTAGE CHANGE IN CPI 1.6 2.5 26.7 1.7 4.0 1.3 53.5 163. Unemployment.6 11.9 29.8 1.8 56.6 118.4 33.7 -0.4 2.3 7.7 136.6 2.6 31.6 82.7 38.6 4.2 4.6 29.0 2.6 2.8 40.0 26.2 152.7 26.0 188.3 1. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 27 of 34 .9 160.3 2.5 99.8 36.INFLATION CHAPTER 20: Long-Run and Short-Run Concerns: Growth.8 0.3 1.0 2.2 6. Department of Labor.3 3.4 1.4 90.2 30.5 7.9 3.2 72.4 156.8 5.9 0.7 CPI 109.9 184.9 1.2 28. Productivity.S.5 32.1 4.8 The CPI.0 166.9 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Sources: Bureau of Labor Statistics.3 144. 1950–2004 PERCENTAGE CHANGE IN CPI 1.4 4.1 CPI 24.7 1.9 107.8 44.5 10.0 9.3 13.1 28.8 6.

INFLATION CHAPTER 20: Long-Run and Short-Run Concerns: Growth. The three main categories are finished goods. Productivity. Unemployment. and crude materials. although there are subcategories within each of these categories. and Inflation producer price indexes (PPIs) Measures of prices that producers receive for products at all stages in the production process. intermediate materials. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 28 of 34 .

and Inflation THE COSTS OF INFLATION People’s income from wages and salaries. Unemployment. and so on. interest. The wage rate is the price of labor. During inflations. rent is the price of land. profits. Productivity.INFLATION CHAPTER 20: Long-Run and Short-Run Concerns: Growth. and rent increases during inflations. most prices—including input prices—tend to rise together. and input prices determine both the incomes of workers and the incomes of owners of capital and land. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 29 of 34 .

inflation that is lower than expected benefits creditors. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 30 of 34 . Productivity. and Inflation Inflation Changes the Distribution of Income If your income is fixed and prices rise. your ability to purchase goods and services falls proportionately. Unemployment.INFLATION CHAPTER 20: Long-Run and Short-Run Concerns: Growth. Inflation that is higher than expected benefits debtors. Effects on Debtors and Creditors real interest rate The difference between the interest rate on a loan and the inflation rate.

• People are not fully informed about price changes and may make mistakes that lead to a misallocation of resources. Unemployment. time could be used more efficiently. People therefore hold less cash and need to stop at the bank more often.INFLATION CHAPTER 20: Long-Run and Short-Run Concerns: Growth. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 31 of 34 . Without inflation. Productivity. • The opportunity cost of holding cash is high during inflations. and Inflation Administrative Costs and Inefficiencies • Inflation creates administrative costs and inefficiencies.

INFLATION CHAPTER 20: Long-Run and Short-Run Concerns: Growth. the degree of risk associated with investments in the economy increases. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 32 of 34 . and Inflation Increased Risk and Slower Economic Growth When unanticipated inflation occurs regularly. Productivity. Unemployment.

Unemployment.INFLATION CHAPTER 20: Long-Run and Short-Run Concerns: Growth. • The recessions of 1974 to 1975 and 1980 to 1982 were the price we had to pay to stop inflation. Elected leaders have vigorously pursued policies designed to stop inflation. Stopping inflation is costly. Productivity. and Inflation INFLATION: PUBLIC ENEMY NUMBER ONE? • Some people consider inflation to be our public enemy number one. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 33 of 34 .

Population = labor force + not in labor force 3. Labor force = employed + unemployed 2. Labor force participat ion rate  population © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 34 of 34 . Unemployment. Productivity. and Inflation consumer price index (CPI) cyclical unemployment deflation depression discouraged-worker effect employed frictional unemployment inflation labor force labor force participation rate natural rate of unemployment not in the labor force output growth per-capita output growth producer price indexes (PPIs) productivity growth real interest rate recession structural unemployment sustained inflation unemployed unemployment rate 1. Unemployme nt rate  unemployed employed  unemployed labor force 4.REVIEW TERMS AND CONCEPTS CHAPTER 20: Long-Run and Short-Run Concerns: Growth.

Sign up to vote on this title
UsefulNot useful

Master Your Semester with Scribd & The New York Times

Special offer: Get 4 months of Scribd and The New York Times for just $1.87 per week!

Master Your Semester with a Special Offer from Scribd & The New York Times