ECON 104 1st Edition Lecture 3 Outline of Last Lecture I Economic Statistics II Basic Economic Definitions III Different Economic Ideologies Outline of Current Lecture I The Development of Macroeconomics A Where Macroeconomics Came From B How We Affected the Macroeconomy C How Inflation Enters the Formula II Depression vs Recession A Definition Examples B Differences With Latest Recession III The Three Goals of Macroeconomics IV Goal 1 Employment A Current Unemployment B How Unemployment is Measured C How Labor Force Participation Rates Show Us Problems With The Economy D Five Types of Unemployment E Costs of Unemployment and Underemployment Current Lecture I The Development of Macroeconomics Where Macroeconomics Came From THEN considered a depression crisis NOW considered a recession meltdown October 1929 Stock Crash Stocks fell 91 between October 1929 and June 1932 Dow fell 31 overall in the last year September 2008 Stock Crash Stock prices fell to half their peak values similar to initial 1929 These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute decline 1930 1932 Financial Meltdown 9000 banks fail No bail out not FDIC Overall GDP falls by 25 2008 2012 Financial Meltdown 465 banks fail 54 in 2012 20 so far in 2013 only 25 total 20002007 avg 3 1 year Huge government bail out FDIC GDP decline today closer to 2 1933 25 U S Unemployment World Depression this is about 12 5 million people out of a labor force of about 50 million 1930 1933 1938 Deflation 2010 Unemployment peaks at 10 6 15 million people out of a labor force of 155 million Alternative Measures U 6 went as high as 18 2009 deflation 4 increase in prices How We Affected the Macroeconomy THEN NOW 1933 Federal Deposit Insurance Corporation FDIC Federal Reserve Bank FED since 1913 FDIC Still a huge part of the solution today Insures deposits and manages bank failures 1935 Social Security passed to create future stability Social Security In pretty good shape today Surplus of trillions 1936 John Maynard Keynes The General Theory of Unemployment TARP 2008 Bailed out the large banks 1940s WWII recovery of economy Unemployment down to 1 2 in 1944 Stimulus Act of 2009 800 billion by government over 2 years 1946 Employment Act The Congress hereby declares that it is the continuing policy and responsibility of the Federal Government to promote maximum employment production and purchasing power The things we did during the great depression and what we learned from it that is the beginning of macroeconomics Note that the stock market didn t cause the Great Depression but merely triggered events that eventually caused it Also note that the initial decline in 2008 was similar to that in 1929 but it did not continue for as long This time banks got bailed out and people were insured so they eventually go their money back unlike in 1929 How Inflation Enters the Formula 1972 1982 high inflation average 8 2 Three Years 1979 1981 over 10 Stagflation high inflation and unemployment Unemployment average 6 9 from 1979 1981 Currently and for many years inflation is not a problem Right now and for the last 4 years we have had more concerns about deflation or too little inflation II YEAR 2007 2008 2009 2010 2011 2012 2013 INFLATION RATE CPI U 2 8 3 8 4 1 6 3 2 2 1 1 5 Depression vs Recession Definition Examples Recession 3 quarters of economic turndown 2008 was the worst recession since the Great Depression Paul Volker former FED Chairman Great Recession Art MacEwan UMass Boston Repression brought about by economic policy of deregulation pro rich and anti labor policy Differences With Latest Recession Women are now half of workforce more likely to be breadwinners 3 4 of jobs lost in recession were to men yet women only make 78 cents for a man s dollar Consumer debt is much higher than any time in U S history so people have less savings to start with and higher mortgages The Three Main Goals of Macroeconomics III GOALS PROBLEMS Employment Unemployment Price Stability Low Inflation High Inflation or Deflation Growth Lack of Growth Stagnation IV Goal 1 Employment Current Unemployment Current Unemployment 6 7 as of August 2013 with 10 400 000 unemployed workers Alternative measures of unemployment U 6 put unemployment at 13 1 On January 11 2011 the chair of the Federal Reserve Bank Ben Bernanke said it would probably take 4 5 years for unemployment to fall to a normal level of 6 an two years to fall to 8 Seems like he is right so far Which year are you graduating Under 8 September 2012 1 75 Years at or under 6 3 years and counting and 4 5 would be much better news How Unemployment is Measured Unemployed anyone who wants to work is not currently employed and is currently seeking unemployment within the past 4 weeks Unemployment Rate employed labor force Labor Force number of employed plus unemployed Labor Force Participation Rate fraction of the working age population that is employed or seeking employment unemployed How Labor Force Participation Rates Show Us Problems With The Economy Current labor force participation rate 62 8 Current size of labor force 154 937 million people The population is growing but the labor force is not e g from 65 7 in 2008 to 63 6 in 2012 For comparison the LFPR in December 2000 was 67 3 lowest since 1978 at 62 3 LFPR grew in general from 1948 1999 but is has been shrinking since then Five Types of Unemployment 1 Frictional Unemployment searching for jobs Number of jobs equals number of workers good for efficiency utility 2 Seasonal Unemployment work varies with the seasons Predictable we make seasonal adjustments 3 Structural Unemployment mismatch between skills needed in jobs and skills possessed by job seekers Number of jobs equals number of workers but they can t get together without retraining etc These first three are when the economy is at capacity or part of full employment This type of unemployment is considered efficient unfortunate for many of the individuals but good for the economy When the economy does not create enough jobs as a result of a recession we add the fourth type of employment 4 Cyclical Unemployment there are not enough jobs to go around no matter how hard people look for jobs some can t get them The number of jobs are less than the number of workers Keynes argued that this type of unemployment is inefficient unfair harmful and needs to be fixed by the government intervening in the economy 5 Hidden