CHAPTER 11

Economic Challenges
SECTION 1: Unemployment
SECTION 2: Inflation
SECTION 3: Poverty and Income Distribution

1
 SECTION 1
Unemployment

Objectives:
 What is the unemployment rate?
 What are the four major types of
unemployment?
 What are the main economic costs of high
unemployment?

2
 SECTION 1
Unemployment

Unemployment rate
 a labor force statistic
 the percentage of people in the nonmilitary
labor force who are unemployed

3
 SECTION 1
Unemployment

Four major types of unemployment:

 frictional
 structural
 seasonal
 cyclical

4
 SECTION 1
Unemployment
Economic costs of high
unemployment:
 reduced production of goods and services
 reduced business sales
 increased need for federal support of the
unemployed

5
 SECTION 2
Inflation

Objectives:
 What do economists look at when evaluating
price changes over time?
 What causes inflation?
 What are the two main price indexes that
economists use to measure inflation?
 How does inflation affect the economy?

6
 SECTION 2
Inflation
What economists examine when
evaluating price fluctuations:
 price levels
 inflation
 deflation

7
 SECTION 2
Inflation

Causes of inflation:
 demand-pull inflation—when demand
surpasses production
 cost-push inflation—when producers
increase prices to cover higher resource
costs
 future price expectations

8
 SECTION 2
Inflation
Main price indexes that economists
use to measure inflation:
 consumer price index
 producer price index

9
 SECTION 2
Inflation

Effects of inflation:
 decreased purchasing power of the dollar
 decreased value of real wages
 decreased saving and investing
 increased interest rates
 increased production costs

10
 SECTION 3
Poverty and Income Distribution

Objectives:
 How do economists determine the number of
poor people in the United States?
 How do economists measure the distribution
of income?
 What policies does the U.S. government use
to reduce the income gap and decrease
poverty?
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 SECTION 3
Poverty and Income Distribution

The poverty threshold—the lowest

income that a household of a certain
size or composition needs to maintain
a basic standard of living—is used to
determine the poverty rate in the
United States.

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 SECTION 3
Poverty and Income Distribution

How economists measure the

distribution of income:
 Lorenz Curve
 Gini Index

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 SECTION 3
Poverty and Income Distribution

Federal policies to reduce the income

gap and decrease poverty:
 increasing access to educational resources
 providing training for low-skilled workers
 redistributing income
 raising minimum wage
 setting wage levels
 prohibiting companies from building in foreign
countries where labor is cheaper
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 CHAPTER 11
Wrap-Up
1. Which type of unemployment is most damaging to
the U.S. economy? Explain your answer.
2. Explain the concept of full employment.
3. Identify the following as examples of demand-pull
inflation or cost-push inflation:
a. an increase in the price of a popular toy at Christmas
when the stores are sold out of the product
b. an increase in the price of orange juice because of a
drought in Florida
c. an increase in the price of Chunky Chicken products
because of a union-negotiated wage increase for
production workers
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 CHAPTER 11
Wrap-Up
4. Calculate the consumer price index using the
following hypothetical information, and determine
the percentage of change in the price level from
1998 to 2000: 1998 market basket ($7,000), 2000
market basket ($10,000).
5. What are some of the limitations of income
distribution measurements?
6. What is the relationship between the Lorenz Curve
and the Gini Index?

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