Chapter 13: Economic Challenges

1. Chapter 13: Economic Challenges

2. Unemployment • 4 Types of Unemployment • Frictional Unemployment • People are taking time to find another job • Dissatisfied with current job • Time off for education, or personal reasons

3. Unemployment • 4 Types of Unemployment • Seasonal Unemployment • Industry regularly shuts down during a particular season • Ex. – Farm laborers travel across the country to work seasonal crops • Ex. - Tax preparation jobs

4. Unemployment • 4 Types of Unemployment • Structural Unemployment • Structure of the economy changes, changing types of jobs available • New technologies (farm jobs disappear, new factory jobs) • Consumer demand changes • Globalization – companies relocate jobs to other countries

5. Unemployment • 4 Types of Unemployment • Cyclical Unemployment • Contraction and recession cause loss of jobs • Consumers have less money, demand shifts left for most products • Companies lay off workers to accommodate this decrease

6. Unemployment • The Unemployment Rate • U.S. Bureau of the Census polls 50,000 families to calculate % of Americans who are looking for work, but cannot find a job • # of ppl. unemployed / # of civilians polled

7. Unemployment • The Unemployment Rate • An unemployment rate of 0% is impossible • Full Employment is when there is no cyclical unemployment • Economies are considered healthy with an unemployment rate of 4-6%

8. Unemployment • Problems with using Unemployment Rate as a Measure • Does not factor in underemployment – people working in jobs that are beneath their qualifications • Ex. – someone with a college degree working part time for $8.00 an hour • Does not factor in discouraged workers – people who can’t find a job, and are so frustrated that they quit looking

9. Inflation • Inflation is a general increase in prices • Movie Ticket in 1950 - $0.25 • Movie Ticket in 2005 - $7.50

10. Inflation • Inflation reduces Purchasing Power – the ability of your money to purchase goods and services • Say you have $3.00, and tacos cost $1.00 each • Your money is worth 3 tacos

11. Inflation • Inflation reduces Purchasing Power – the ability of your money to purchase goods and services • If you hold your $3.00 for a few years, and prices inflate to $1.50 for tacos… • Your money is worth 2 tacos!

12. Inflation • Measuring Inflation • Level of Prices is calculated by using Price Indexes • Consumer Price Index – Bureau of Labor Statistics chooses a “market basket” of commonly bought goods, and tracks changes in price

13. Inflation • CPI = Current Price X 100 Base Period Price

14. Inflation • Types of Inflation • Creeping Inflation • 1-3% per year, causes no problems • Chronic Inflation • Steady increase each month, takes away incentive to save and invest • Hyperinflation • Out of control, prices could double every month • Leads to total economic collapse

15. Inflation • Causes of Inflation • Quantity Theory • Having too much money in the economy causes inflation • Money supply should be tightly regulated by the government

16. Inflation • Causes of Inflation • Demand-Pull Theory • Demand for goods exceeds existing supplies • Businesses, thus, raise their prices

17. Inflation • Causes of Inflation • Cost-Push Theory • As costs go up for producers, they increase their prices • Ex. – Employees get a raise, so to cover the additional cost, JC Penny raises its prices by 5% • This trend is called a wage-price spiral

18. Poverty • Poverty can mean different things to different people • Defined by the Census Bureau as “total income less than the amount needed to satisfy the family’s minimum needs” • Census Bureau sets the poverty threshold – income level below which family is considered impoverished

19. Poverty • Sample Poverty Thresholds (U.S.) • Single parent, one child = $13,020 • Two parents, two children = $19,257

20. Poverty • Poverty Rate - % of a group that falls below the poverty threshold • U.S. poverty rate is 12.7% (2004) • Poverty Rates help show factors that may contribute to poverty

21. Poverty • Poverty Rates of Various Population Groups (U.S.) • White = 8.6% • Black = 24.7% • Hispanic = 21.9% • 2 Parent Households = 5.5% • Single Parent (Female) Household = 31.6%

22. Poverty • Causes of Poverty • Lack of Education • Median income for high school dropout = $18,144 • Median income for high school grad or GED = $25,360 • Median income for 4 year college grad = $42,404

23. Poverty • Causes of Poverty • Location • Higher income jobs are located in suburban areas • Large numbers of minorities concentrated in inner cities, with no means to commute

24. Poverty • Causes of Poverty • Racial/Gender Discrimination • Women earn $0.75 for every dollar men make • Blacks and Hispanics make $0.60 for every dollar whites make • Result of education, location disparities, but also discrimination

25. Poverty • Causes of Poverty • Economic Shifts • Laborers frequently lose their jobs as new technology replaces them • Without education and training, they can become left out of the new workforce

26. Poverty • Causes of Poverty • Shifts in Family Structure • Divorce rate continues to rise, and single parent families are much more likely to be impoverished

27. Income Distribution • Income Distribution – how the nation’s total income is distributed among the population • Shows gap between rich and poor

28. Income Distribution • Calculating Income Distribution • Divide the nation into 5 parts based on income (ex. Highest 5th, next highest 5th, etc.) • Total the incomes of each of the 5 parts • Compute % of income each group has

29. Income Distribution • Graphing Income Distribution • The Lorenz Curve shows how “unequal” the distribution is

31. Income Distribution • U.S. Income Distribution • Lowest 5th – 3.6% • Second 5th – 8.9% • Third 5th – 15% • Fourth 5th – 23.2% • Highest 5th – 49.4%

32. Why the Income Gap? • Differences in Skill and Effort – Workers with higher skill levels work more hours at more demanding jobs • Inheritances – many Americans inherit large sums of money and invest it, producing more income

33. How to Fix Poverty • No “for sure” solution, but many suggestions • Enterprise Zones – government lifts all taxes in run-down areas, thus encouraging new businesses

34. How to Fix Poverty • No “for sure” solution, but many suggestions • Employment Assistance – government creates job-training programs for workers who lack skills and institutes a minimum wage

35. How to Fix Poverty • No “for sure” solution, but many suggestions • Welfare Reform • Welfare – government gives poor people money to cover basic needs, such as food, health care, etc.

36. How to Fix Poverty • No “for sure” solution, but many suggestions • Welfare Reform • Reform is labeled “workfare” – a program to give temporary assistance until the recipient can find a job