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Economic Instability

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TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance) ... RECREATION (televisions, pets and pet products, sports equipment, admissions) ... – PowerPoint PPT presentation

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Title: Economic Instability


1
Economic Instability
  • Unemployment v. Inflation

2
Questions to Ponder
  • Are you (or a friend) looking for a job this
    summer?
  • How easy is it to find a job? What kind of jobs
    are available? How are the wages?
  • What causes unemployment in the US?
  • How does the causes of unemployment compare to
    your own lack of jobs?

3
What do you think the unemployment rate is for
the US?
  • DOWN in April 2007 5.2 looking for work.
  • 7,000 new jobs in April.
  • Unemployment rate in 2004 ran at 5.5
  • 8,149,000 looking for work in 2004.

4
So what is the unemployment rate like in 2008?
  • Jumped from 4.8 in February 2008 to 5.1 in
    March, 2008.
  • Highest in 2.5 years!

5
The reasons for unemployment
  • Frictional Unemployment
  • Structural Unemployment
  • Seasonal Unemployment
  • Cyclical Unemployment

6
Frictional Unemployment
  • People in between jobs.
  • Short period of time while changing jobs.
  • 3 - 4 frictional employment is considered
    normal.

7
Structural Unemployment
  • When changes in market supply or demand
    conditions affect major industries or regions.

8
Causes of Structural Unemployment
  • Decline in demand for a product
  • Increased foreign competition
  • Automation of production
  • Increased raw material costs
  • Lack of labor mobility between occupations or
    regions.

9
Seasonal Unemployment
  • Most seasonal unemployment is tends to occur in
    certain industries.
  • Hotel and catering
  • Tourism
  • Fruit picking
  • Christmas

10
Cyclical Unemployment
  • When aggregate demand in the economy is not
    sufficient to provide jobs for all those who seek
    work.
  • Recession
  • Depression

11
Cyclical Unemployment
  • When the economy is operating at production
    capacity there is full employment aggregate
    demand.

12
Natural Rate of Unemployment
  • The lowest level of unemployment that can be
    maintained without setting off increases in
    inflation.
  • 2005 3.1
  • 2007 4.5 (as of February)
  • Same number of new workers coming into the job
    market yearly.

13
One other kind of Unemployment
  • HIDDEN UNEMPLOYMENT
  • Reported number is only people
  • Actively seeking work.

14
Unemployment Rate does not include
  • Discouraged workers who have stopped looking.
  • Those who work part-time when they want
    full-time work
  • Those working that are overqualified for the job.
  • underemployed

15
Definitions for Unemployment
  • Labor Force Employed unemployed
  • Unemployment Rate number of unemployed / total
    labor force
  • Labor Force Participation Rate labor force /
    population 16 and over

16
Suspicious Unemployment Statistics
  • Natural Rate of Unemployment
  • Level of unemployment at which there is no
    cyclical unemployment.
  • Full Employment
  • Level of employment that occurs when the
    unemployment rate is at the natural rate.

17
The Natural Rate of Unemployment
  • Depending on whom you talk to
  • 4 to 5 is considered the natural rate.
  • Consists of only structural and frictional
    unemployment.

18
What is so wrong if everyone who wants a job has
a job???
19
THE ANSWER????
  • INFLATION
  • The trade-off with more employment.

20
Inflation
  • Continual rise in the general level of prices in
    an economy.
  • Concern is when the prices go up faster than
    wages!

21
How do we measure inflation?
  • CPI
  • Consumer Price Index
  • Comparing prices of items at different points in
    time.
  • CPI is the most commonly used index to measure
    inflation.

22
What goods are in the MARKET BASKET for the CPI?
  • What would you put in the market basket?
  • HINT 200 items!

23
What is in the 2005 market basket?
  • FOOD AND BEVERAGES (breakfast cereal, milk,
    coffee, chicken, wine, service meals and snacks)
  • HOUSING (rent of primary residence, owners'
    equivalent rent, fuel oil, bedroom furniture)
  • APPAREL (men's shirts and sweaters, women's
    dresses, jewelry)

24
What is in the market basket?
  • TRANSPORTATION (new vehicles, airline fares,
    gasoline, motor vehicle insurance)
  • MEDICAL CARE (prescription drugs and medical
    supplies, physicians' services, eyeglasses and
    eye care, hospital services)
  • RECREATION (televisions, pets and pet products,
    sports equipment, admissions)

25
What is in the market basket?
  • EDUCATION AND COMMUNICATION (college tuition,
    postage, telephone services, computer software
    and accessories)
  • OTHER GOODS AND SERVICES (tobacco and smoking
    products, haircuts and other personal services,
    funeral expenses).

26
What is the CPI pattern in 2008?
  • CPI measures the dollars worth.
  • Check out the website
  • http//minneapolisfed.org/Research/data/us/calc/in
    dex.cfm

27
CPI Prices are 2.7 higher than last year
(February 2006). Since 2007 to today prices
are up 4.3
  • In 2006, you bought goods and services for 1
    that in 2007 are costing 1.03 for the same goods
    and services.
  • In 2007, you bought goods and services for 1, it
    now would cost 1.05 for the same goods in 2008.

28
Types of Inflation
  • Demand-Pull Inflation
  • Cost-Push Inflation
  • Monetary Inflation
  • Stagflation
  • Hyperinflation

29
Demand-Pull Inflation
  • When the demand for goods and services exceeds
    the production capacity.
  • Prices rising because of shortages.

30
Cost-Push Inflation
  • Inflation can arise from changes in the costs of
    production of goods and services.
  • Increase in the price of raw materials
  • Increase in the price of labor
  • Increase in the cost of capital.

31
Cost-Push v. Demand Pull
  • They push and pull prices up.
  • Labor contracts containing COLA clauses.
  • Cost-Of-Living Adjustments.

32
Monetary Inflation
  • Inflation caused by excessive growth in the money
    supply.
  • Value of money decreases if it isnt that rare.

33
Rule for Monetary Inflation VELOCITY
  • Quantity Equation
  • M x V T x P
  • Money supply times the velocity at which it
    changes hands equals the number of transactions
    times the average level of prices.

34
M x V T x P
  • Direct relationship between the money supply and
    the price level.

35
What happens when the quantity equation is off?
  • Hyperinflation
  • Money supply increases much, much faster than an
    economys output of goods and services.
  • THINK RUSSIA in 1990s.

36
Phillips Curve The relationship between
unemployment and inflation.
  • INVERSE relationship.
  • Unemployment goes UP, then inflation goes DOWN.

37
Stagflation When things REALLY go wrong on the
Phillips Curve
  • Inflation and unemployment were at higher levels.
  • Combination of stagnation and inflation.
  • Both were increasing.

38
1970s What caused Stagflation?
  • Spending on the Vietnam War PLUS spending on
    domestic social programs. more debt and higher
    taxes.
  • Inflationary expectations
  • Rise in energy costs caused by OPEC
  • Monopolistic pricing

39
What is wrong with Inflation?
  • Inflation reduces REAL INCOME of those whose
    incomes do not rise as fast as the price level.
  • Hurts
  • People holding assets in MONEY
  • Lenders

40
Special Note Phillips Curve International
  • Pg. 293-294 El Desempleo
  • Europe 1970s had higher inflation and
    unemployment.
  • Worse because
  • Labor union practices
  • Tax structures
  • Government economic policies

41
Consequences of Unemployment
  • Income Effects
  • Loss of income and benefits (Health insurance)
  • Loss of income to others because of reduced
    purchasing power
  • Reduced tax income and increased outlays of
    government.

42
Consequences of Unemployment
  • Income Effects
  • Loss of income and benefits (Health insurance)
  • Loss of income to others because of reduced
    purchasing power
  • Reduced tax income and increased outlays of
    government.

43
Consequences of Unemployment
  • Real Output Effects
  • Each 1 of unemployment results in a reduction of
    100-billion in output.
  • Lower real investment means less growth and
    reduced future output.

44
Consequences of Unemployment
  • Social Effects
  • Health Problems
  • Increased suicides
  • Break up of families
  • Increased child abuse
  • Increased crime

45
Consequences of INFLATION
  • Income Effects
  • Reduced purchasing power of the dollar
  • Reduced real income for fixed income receivers
  • Reduced real wealth of savings

46
Income Effects of Inflation (cont.)
  • Benefits those whose incomes rise faster than the
    inflation rate.
  • Benefits owners of real assets (real estate,
    precious metals (kinda!))
  • Benefits debtors

47
How Inflation effects Real Output
  • Inflation initially stimulates output
  • Near full employment, there arise bottlenecks in
    supplies
  • Costs begin rising faster than prices
  • Interest rates accelerate, discouraging new
    investment.

48
Final Notes Putting today in perspective.
  • Today the unemployment rate is?
  • 5.1
  • Highest unemployment rate
  • 1933 25
  • Lowest Unemployment rate
  • 1998 3.9

49
Final Notes Putting Inflation in perspective
  • The current inflation rate is?
  • 4.3
  • The highest inflation rate?
  • 1981 13.5
  • WWII 15
  • The lowest inflation rate?
  • 1998 2002 1.6
  • -10 in 1932 (Depression)

50
How do we compare with the world?
  • OFFICIALLY speaking?
  • Zimbabwe
  • 913.6 in 2007!

51
Special Concerns with inflation in 2008
  • Food prices.
  • Rice prices up 75 in just 2008.
  • Corn
  • Dont even go there!
  • Wheat prices up.
  • 130 globally
  • A loaf of bread in the US is 20-cents higher than
    four months ago.

52
Problems in many LDCs (Less developed countries)
  • In developed nations, food accounts for 10 of
    the budget.
  • Due to global inflation in food prices in LDCs
    food accounts for 80 of the budget.

53
Unemployment Picture for 2008?
  • Recession will continue to affect CYCLICAL
    unemployment.
  • ESTIMATES!!!
  • 5.3 in the US?
  • 6.1 globally??

54
What a great time to graduate!
55
Dont worry TOO much!
  • There are solutions
  • Monetary Policy
  • Fiscal Policy
  • Global Planning
  • TIMING!
  • These contractions of the economy are needed
    sometimes.
  • Painful though they are!
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