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Lecture 10:Deficits and Unemployment
• Deficits
• Measures of Well-Being– unemployment– inflation
• Link back to Lecture 9
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Government Budget and International Deficits
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Deficits
• An international deficit exists if our imports exceed our exports.
• Current Account – Our exports minus our imports; but it also takes
interest payment paid to and received from the rest of the world into account.
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Government Budget and International Deficits
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Do Deficits Matter?
• Governments must borrow if it spends more than it earns in tax revenue.
• If the borrowed funds are used to purchase assets that earn a profit, the investment may be sound.
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Macroeconomic Policy Challenges and Tools
• Policy Challenges
1) Boost economic growth
2) Stabilize the business cycle
3) Reduce unemployment
4) Keep inflation low
5) Reduce the government and international deficits
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Macroeconomic Policy Challenges and Tools
• Policy Tools
1) Fiscal policy• Making changes in taxes and government spending
– Long term growth– Smooth the business cycle
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Macroeconomic Policy Challenges and Tools
• Policy Tools
2) Monetary policy• Changing interest rates and the amount of money in
the economy– Control inflation– Smooth business cycle
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Jobs and Unemployment
• Jobs– In 1996, 127 million people had jobs.
• An increase of 20 million over 1985 and 23 million over 1975
• On average, 1.8 million new jobs are created every year
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Jobs and Unemployment
• The type of job you will get when you graduate will depend, to some degree, on:– the total number of jobs available– the unemployment rate– what is the unemployment rate today?– ck out today’s WSJ
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Unemployment
• Unemployment is a condition in which there are qualified workers who are available for work at the current wage rate and who do not have jobs.– To be counted as unemployed, a person must
have made some effort to find a job during the previous four weeks.
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The Labor Force and the Unemployment Rate
• Unemployment plus employment equals the labor force.
• The unemployment rate is the percentage of the labor force that cannot find work.
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Part-Time Workers
• Part-time workers are counted as employed. However, some part-time workers would accept a full-time job if one were available.
• This group should be counted as “partially employed.” They are counted as fully employed by the Bureau of Labor Statistics.
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Unemployment inthe United States
• None of our recent experiences with high unemployment come close to the peak of 25% unemployment experienced at the depths of the Great Depression (1933).
• In recent years, the United States has experienced periods of high unemployment.
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Unemployment Around the World
• Since 1980, the U.S. unemployment rate has averaged 7 percent, compared with 8.1 percent in Europe and 2.5 percent in Japan.– U.S. unemployment fluctuates with the
business cycle.– Japanese unemployment barely fluctuates at all.– European unemployment has been rising
sharply.
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Why UnemploymentIs a Problem
• The value of training and education may be significantly reduced if people can’t find entry-level jobs.
• Higher unemployment rates are statistically associated with higher rates of crime, alcoholism, depression, suicide, and domestic violence.
• The unemployed lose self-esteem.
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Jobs and Unemployment
• Unemployment– On average, 7 million people are unemployed
in the U.S.
• Unemployed worker – One who does not have a job but is available
for work, is willing to work, and has made some effort to find work within the previous four weeks
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Jobs and Unemployment
• Labor Force– Sum of the people who are unemployed and the
people who are employed
• Unemployment Rate– The percentage of the labor force who are
unemployed
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Jobs and Unemployment
• Discouraged Worker– A person who does not have a job, is available
for work, and is willing to work but who has given up the effort to find work
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Jobs and Unemployment
• The unemployment rate may be misleading because:– Discouraged workers are excluded– Part-time workers who want full-time jobs are
considered employed
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Unemployment in theUnited States
• Important Features
1) The unemployment rate during the Depression peaked in 1933 at 25%.
2) After 1934, the unemployment rate overstated the true rate because
it counts the people who had make-work jobs.
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Unemployment in theUnited States
• Important Features
3) Unemployment rates have reached high levels in recent years during
recessions.
4) The unemployment rate never falls to zero.
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Unemployment in theUnited States
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Unemployment inIndustrial Economies
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Why Unemploymentis a Problem
• Lost Production and Incomes
• Lost Human Capital– Prolonged unemployment can hurt a person’s
job prospects.
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