PRINCIPLES OF MACROECONOMICS PART II Concepts and Problems

PRINCIPLES OF MACROECONOMICS PART II Concepts and Problems in Macroeconomics TENTH EDITION CASE FAIR OSTER © 2012 Pearson Education, Inc. Publishing as Prentice Hall Prepared by: Fernando Quijano & Shellyof. Tefft 28

PART II Concepts and Problems in Macroeconomics © 2012 Pearson Education, Inc. Publishing as Prentice Hall 2 of 42

Unemployment, Inflation, and Long-Run Growth 7 CHAPTER OUTLINE Unemployment Measuring Unemployment Components of the Unemployment Rate The Costs of Unemployment PART II Concepts and Problems in Macroeconomics Inflation © 2012 Pearson Education, Inc. Publishing as Prentice Hall The Consumer Price Index The Costs of Inflation Long-Run Growth Output and Productivity Growth Looking Ahead 3 of 42

Unemployment Measuring Unemployment PART II Concepts and Problems in Macroeconomics employed Any person 16 years old or older (1) who works for pay, either for someone else or in his or her own business for 1 or more hours per week, (2) who works without pay for 15 or more hours per week in a family enterprise, or (3) who has a job but has been temporarily absent with or without pay. unemployed A person 16 years old or older who is not working, is available for work, and has made specific efforts to find work during the previous 4 weeks. © 2012 Pearson Education, Inc. Publishing as Prentice Hall 4 of 42

Unemployment Measuring Unemployment not in the labor force A person who is not looking for work because he or she does not want a job or has given up looking. PART II Concepts and Problems in Macroeconomics labor force The number of people employed plus the number of unemployed. labor force = employed + unemployed population = labor force + not in labor force © 2012 Pearson Education, Inc. Publishing as Prentice Hall 5 of 42

Unemployment Measuring Unemployment PART II Concepts and Problems in Macroeconomics unemployment rate The ratio of the number of people unemployed to the total number of people in the labor force participation rate The ratio of the labor force to the total population 16 years old or older. © 2012 Pearson Education, Inc. Publishing as Prentice Hall 6 of 42

PART II Concepts and Problems in Macroeconomics A person not looking for work, because he or she either does not want a job or has given up looking, is classified as: a. Unemployed. b. Not in the labor force. c. In the labor force but not currently employed. d. In the labor force participation rate, but not in the labor force. © 2012 Pearson Education, Inc. Publishing as Prentice Hall 7 of 42

PART II Concepts and Problems in Macroeconomics A person not looking for work, because he or she either does not want a job or has given up looking, is classified as: a. Unemployed. b. Not in the labor force. c. In the labor force but not currently employed. d. In the labor force participation rate, but not in the labor force. © 2012 Pearson Education, Inc. Publishing as Prentice Hall 8 of 42

Unemployment Measuring Unemployment TABLE 7. 1 Employed, Unemployed, and the Labor Force, 1950– 2009 (1) PART II Concepts and Problems in Macroeconomics Population 16 Years Old or Over (Millions) (2) Labor Force (Millions) (3) (4) (5) (6) Employed (Millions) Unemployed (Millions) Labor Force Participation Rate (Percentage Points) Unemployment Rate (Percentage Points) 1950 105. 0 62. 2 58. 9 3. 3 59. 2 5. 3 1960 117. 2 69. 6 65. 8 3. 9 59. 4 5. 5 1970 137. 1 82. 8 78. 7 4. 1 60. 4 4. 9 1980 167. 7 106. 9 99. 3 7. 6 63. 8 7. 1 1990 189. 2 125. 8 118. 8 7. 0 66. 5 5. 6 2000 212. 6 142. 6 136. 9 5. 7 67. 1 4. 0 2009 235. 8 154. 1 139. 9 14. 3 65. 4 9. 3 Note: Figures are civilian only (military excluded). © 2012 Pearson Education, Inc. Publishing as Prentice Hall 9 of 42

Unemployment Components of the Unemployment Rates for Different Demographic Groups TABLE 7. 2 Unemployment Rates by Demographic Group, 1982 and 2010 PART II Concepts and Problems in Macroeconomics Years Total White Men Women Both sexes African American Men Women Both sexes © 2012 Pearson Education, Inc. Publishing as Prentice Hall November 1982 June 2010 20+ 16– 19 10. 8 9. 6 9. 0 8. 1 21. 3 9. 5 8. 6 8. 9 7. 1 23. 2 20+ 16– 19 20. 2 19. 3 16. 5 49. 5 15. 4 17. 4 11. 8 39. 9 10 of 42

Unemployment Components of the Unemployment Rates in States and Regions PART II Concepts and Problems in Macroeconomics TABLE 7. 3 Regional Differences in Unemployment, 1975, 1982, 1991, 2003 and 2010 U. S. avg. Cal. Fla. Ill. Mass. Mich. N. J. N. Y. N. C. Ohio Tex. © 2012 Pearson Education, Inc. Publishing as Prentice Hall 1975 1982 1991 2003 2010 8. 5 9. 9 10. 7 7. 1 11. 2 12. 5 10. 2 9. 5 8. 6 9. 1 5. 6 9. 7 9. 9 8. 2 11. 3 7. 9 15. 5 9. 0 8. 6 9. 0 12. 5 6. 9 6. 7 7. 5 7. 3 7. 1 9. 0 9. 2 6. 6 7. 2 5. 8 6. 4 6. 6 6. 0 6. 7 5. 1 6. 7 5. 8 7. 3 5. 9 6. 3 6. 5 6. 1 6. 8 9. 7 12. 4 11. 7 10. 8 9. 2 13. 6 9. 7 8. 3 10. 7 8. 3 11 of 42

PART II Concepts and Problems in Macroeconomics Unemployment rates in states and regions across the United States reveal that: a. States and regions in the United States generally display the same levels of unemployment. b. The labor force in the United States is almost completely mobile, with workers taking advantage of job opportunities clear across the country. c. A low national rate of unemployment does not mean that the entire nation is growing and producing at the same rate. d. All of the above. © 2012 Pearson Education, Inc. Publishing as Prentice Hall 12 of 42

PART II Concepts and Problems in Macroeconomics Unemployment rates in states and regions across the United States reveal that: a. States and regions in the United States generally display the same levels of unemployment. b. The labor force in the United States is almost completely mobile, with workers taking advantage of job opportunities clear across the country. c. A low national rate of unemployment does not mean that the entire nation is growing and producing at the same rate. d. All of the above. © 2012 Pearson Education, Inc. Publishing as Prentice Hall 13 of 42

Unemployment Components of the Unemployment Rate Discouraged-Worker Effects PART II Concepts and Problems in Macroeconomics 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. © 2012 Pearson Education, Inc. Publishing as Prentice Hall 14 of 42

PART II Concepts and Problems in Macroeconomics When an unemployed worker becomes discouraged about finding work and stops looking, the unemployment rate will: a. Rise. b. Fall. c. Remain unchanged. d. Increase only if the worker falls out of the labor force. © 2012 Pearson Education, Inc. Publishing as Prentice Hall 15 of 42

PART II Concepts and Problems in Macroeconomics When an unemployed worker becomes discouraged about finding work and stops looking, the unemployment rate will: a. Rise. b. Fall. c. Remain unchanged. d. Increase only if the worker falls out of the labor force. © 2012 Pearson Education, Inc. Publishing as Prentice Hall 16 of 42

ECONOMICS IN PRACTICE A Quiet Revolution: Women Join the Labor Force PART II Concepts and Problems in Macroeconomics As women began joining the labor force in greater numbers in the 1970 s and 1980 s, their wages relative to men’s wages actually fell. Most economists attribute this decline to the fact that less experienced women were entering the labor force, pointing out the importance of correcting for factors such as experience and education when we analyze labor markets. If you are interested in learning more about the economic history of American women, read the book Understanding the Gender Gap: An Economic History of American Women by Harvard University economist Claudia Goldin. © 2012 Pearson Education, Inc. Publishing as Prentice Hall 17 of 42

Unemployment Components of the Unemployment Rate The Duration of Unemployment TABLE 7. 4 Average Duration of Unemployment, 1970– 2009 PART II Concepts and Problems in Macroeconomics Weeks 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 8. 6 11. 3 12. 0 10. 0 9. 8 14. 2 15. 8 14. 3 11. 9 10. 8 11. 9 13. 7 15. 6 20. 0 © 2012 Pearson Education, Inc. Publishing as Prentice Hall Weeks 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 18. 2 15. 6 15. 0 14. 5 13. 5 11. 9 12. 0 13. 7 17. 7 18. 0 18. 8 16. 6 16. 7 Weeks 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 15. 8 14. 5 13. 4 12. 6 13. 1 16. 6 19. 2 19. 6 18. 4 16. 8 17. 9 24. 4 18 of 42

Unemployment The Costs of Unemployment Some Unemployment Is Inevitable When we consider the various costs of unemployment, it is useful to categorize unemployment into three types: PART II Concepts and Problems in Macroeconomics Frictional unemployment Structural unemployment Cyclical unemployment © 2012 Pearson Education, Inc. Publishing as Prentice Hall 19 of 42

Unemployment The Costs of Unemployment Frictional, Structural, and Cyclical Unemployment PART II Concepts and Problems in Macroeconomics frictional unemployment The portion of unemployment that is due to the normal turnover in the labor market; used to denote short-run job/skill matching problems. 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. natural rate of unemployment The unemployment rate that occurs as a normal part of the functioning of the economy. Sometimes taken as the sum of frictional unemployment rate and structural unemployment rate. cyclical unemployment Unemployment that is above frictional plus structural unemployment. © 2012 Pearson Education, Inc. Publishing as Prentice Hall 20 of 42

Unemployment The Costs of Unemployment Social Consequences PART II Concepts and Problems in Macroeconomics The costs of unemployment are neither evenly distributed across the population nor easily quantified. The social consequences of the Depression of the 1930 s are perhaps the hardest to comprehend. Few emerged from this period unscathed. At the bottom were the poor and the fully unemployed, about 25 percent of the labor force. Even those who kept their jobs found themselves working part-time. Many people lost all or part of their savings as the stock market crashed and thousands of banks failed. © 2012 Pearson Education, Inc. Publishing as Prentice Hall 21 of 42

Inflation The Consumer Price Index PART II Concepts and Problems in Macroeconomics 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. © 2012 Pearson Education, Inc. Publishing as Prentice Hall 22 of 42

Inflation PART II Concepts and Problems in Macroeconomics The Consumer Price Index ▲ FIGURE 7. 1 The CPI Market Basket The CPI market basket shows how a typical consumer divides his or her money among various goods and services. Most of a consumer’s money goes toward housing, transportation, and food and beverages. © 2012 Pearson Education, Inc. Publishing as Prentice Hall 23 of 42

PART II Concepts and Problems in Macroeconomics The CPI market basket shows that most of a typical consumer’s money goes toward: a. Recreation, medical care, and education. b. Food and beverage, apparel, and other goods and services. c. Housing, transportation, and food and beverages. d. None of the above. The typical consumer spends about the same amount of money on each of the categories listed in the choices above. © 2012 Pearson Education, Inc. Publishing as Prentice Hall 24 of 42

PART II Concepts and Problems in Macroeconomics The CPI market basket shows that most of a typical consumer’s money goes toward: a. Recreation, medical care, and education. b. Food and beverage, apparel, and other goods and services. c. Housing, transportation, and food and beverages. d. None of the above. The typical consumer spends about the same amount of money on each of the categories listed in the choices above. © 2012 Pearson Education, Inc. Publishing as Prentice Hall 25 of 42

Inflation The Consumer Price Index PART II Concepts and Problems in Macroeconomics TABLE 7. 5 The CPI, 1950– 2009 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 Percentage Change in CPI 1. 3 7. 9 1. 9 0. 8 0. 7 -0. 4 1. 5 3. 3 2. 8 0. 7 1. 0 1. 3 1. 6 2. 9 3. 1 4. 2 5. 5 CPI 24. 1 26. 0 26. 5 26. 7 26. 9 26. 8 27. 2 28. 1 28. 9 29. 1 29. 6 29. 9 30. 2 30. 6 31. 0 31. 5 32. 4 33. 4 34. 8 36. 7 © 2012 Pearson Education, Inc. Publishing as Prentice Hall 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 Percentage Change in CPI 5. 7 4. 4 3. 2 6. 2 11. 0 9. 1 5. 8 6. 5 7. 6 11. 3 13. 5 10. 3 6. 2 3. 2 4. 3 3. 6 1. 9 3. 6 4. 1 4. 8 CPI 38. 8 40. 5 41. 8 44. 4 49. 3 53. 8 56. 9 60. 6 72. 6 65. 2 82. 4 90. 9 96. 5 99. 6 103. 9 107. 6 109. 6 113. 6 118. 3 124. 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Percentage Change in CPI 5. 4 4. 2 3. 0 2. 6 2. 8 3. 0 2. 3 1. 6 2. 2 3. 4 2. 8 1. 6 2. 3 2. 7 3. 4 3. 2 2. 8 3. 9 -0. 4 CPI 130. 7 136. 2 140. 3 144. 5 148. 2 152. 4 156. 9 160. 5 163. 0 166. 6 172. 2 177. 1 179. 9 184. 0 188. 9 195. 3 201. 6 207. 3 215. 3 214. 5 26 of 42

Inflation The Consumer Price Index producer price indexes (PPIs) Measures of prices that producers receive for products at all stages in the production process. PART II Concepts and Problems in Macroeconomics The indexes are calculated separately for various stages in the production process. The three main categories are finished goods, intermediate materials, and crude materials, although there are subcategories within each of these categories. © 2012 Pearson Education, Inc. Publishing as Prentice Hall 27 of 42

Inflation The Costs of Inflation During inflations, most prices—including input prices like wages—tend to rise together, and input prices determine both the incomes of workers and the incomes of owners of capital and land. PART II Concepts and Problems in Macroeconomics So inflation by itself does not necessarily reduce ones purchasing power. © 2012 Pearson Education, Inc. Publishing as Prentice Hall 28 of 42

ECONOMICS IN PRACTICE The Politics of Cost-of-Living Adjustments PART II Concepts and Problems in Macroeconomics In the last few years many state governments in the United States have begun to see the costs associated with retiring state workers escalate as the number of retirees has grown. For many of these publicsector retirees, pensions have been tied to the cost of living. No Cost-of-Living Increase for State Retirees in July The Baltimore Sun © 2012 Pearson Education, Inc. Publishing as Prentice Hall 29 of 42

Inflation The Costs of Inflation May Change the Distribution of Income PART II Concepts and Problems in Macroeconomics real interest rate The difference between the interest rate on a loan and the inflation rate. © 2012 Pearson Education, Inc. Publishing as Prentice Hall 30 of 42

PART II Concepts and Problems in Macroeconomics The interest rate stated in a loan contract is: a. The real rate of interest. b. The nominal rate of interest minus the rate of inflation. c. The real rate of interest plus the rate of inflation. d. The same as the rate of inflation. © 2012 Pearson Education, Inc. Publishing as Prentice Hall 31 of 42

PART II Concepts and Problems in Macroeconomics The interest rate stated in a loan contract is: a. The real rate of interest. b. The nominal rate of interest minus the rate of inflation. c. The real rate of interest plus the rate of inflation. d. The same as the rate of inflation. © 2012 Pearson Education, Inc. Publishing as Prentice Hall 32 of 42

Inflation The Costs of Inflation Administrative Costs and Inefficiencies PART II Concepts and Problems in Macroeconomics There may be costs associated even with anticipated inflation. One is the administrative cost associated with simply keeping up. Public Enemy Number One? Economists have debated the seriousness of the costs of inflation for decades. No matter what the real economic cost of inflation, people do not like it. © 2012 Pearson Education, Inc. Publishing as Prentice Hall 33 of 42

Long-Run Growth output growth The growth rate of the output of the entire economy. PART II Concepts and Problems in Macroeconomics per-capita output growth The growth rate of output person in the economy. productivity growth The growth rate of output per worker. © 2012 Pearson Education, Inc. Publishing as Prentice Hall 34 of 42

PART II Concepts and Problems in Macroeconomics Which of the following is part of an ideal economy? a. Rapid growth of output per worker. b. Low unemployment. c. Low inflation. d. All of the above. © 2012 Pearson Education, Inc. Publishing as Prentice Hall 35 of 42

PART II Concepts and Problems in Macroeconomics Which of the following is part of an ideal economy? a. Rapid growth of output per worker. b. Low unemployment. c. Low inflation. d. All of the above. © 2012 Pearson Education, Inc. Publishing as Prentice Hall 36 of 42

Long-Run Growth PART II Concepts and Problems in Macroeconomics Output and Productivity Growth ▲ FIGURE 7. 2 Output per Worker Hour (Productivity), 1952 I– 2010 I Productivity grew much faster in the 1950 s and 1960 s than since. © 2012 Pearson Education, Inc. Publishing as Prentice Hall 37 of 42

PART II Concepts and Problems in Macroeconomics The two features immediately clear when you examine the trend in productivity in the United States over the past fifty years are: a. An upward trend and fairly sizable fluctuations around that trend. b. An upward trend and relatively small fluctuations around that trend. c. A downward trend and fairly sizable fluctuations around that trend. d. A downward trend and relatively small fluctuations around that trend. © 2012 Pearson Education, Inc. Publishing as Prentice Hall 38 of 42

PART II Concepts and Problems in Macroeconomics The two features immediately clear when you examine the trend in productivity in the United States over the past fifty years are: a. An upward trend and fairly sizable fluctuations around that trend. b. An upward trend and relatively small fluctuations around that trend. c. A downward trend and fairly sizable fluctuations around that trend. d. A downward trend and relatively small fluctuations around that trend. © 2012 Pearson Education, Inc. Publishing as Prentice Hall 39 of 42

Long-Run Growth PART II Concepts and Problems in Macroeconomics Output and Productivity Growth ▲ FIGURE 7. 3 Capital per Worker, 1952 I– 2010 I Capital per worker grew until about 1980 and then leveled off somewhat. © 2012 Pearson Education, Inc. Publishing as Prentice Hall 40 of 42

Looking Ahead PART II Concepts and Problems in Macroeconomics This ends our introduction to the basic concepts and problems of macroeconomics. The first chapter of this part introduced the field; the second chapter discussed the measurement of national product and national income; and this chapter discussed unemployment, inflation, and long-run growth. We are now ready to begin the analysis of how the macroeconomy works. © 2012 Pearson Education, Inc. Publishing as Prentice Hall 41 of 42

PART II Concepts and Problems in Macroeconomics REVIEW TERMS AND CONCEPTS consumer price index (CPI) producer price indexes (PPIs) cyclical unemployment productivity growth discouraged-worker effect real interest rate employed structural unemployment frictional unemployment unemployed labor force unemployment rate labor force participation rate 1. labor force = employed + unemployed natural rate of unemployment 2. population = labor force + not in labor force not in the labor force 3. output growth per-capita output growth © 2012 Pearson Education, Inc. Publishing as Prentice Hall 4. 42 of 42