Chapter

20
Long-Run and Short-Run
Concerns: Growth,
Productivity, Unemployment,
and Inflation

Prepared by:

Fernando & Yvonn Quijano

© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
 CHAPTER 20: Long-Run and Short-Run Concerns:

Long-Run and Short-Run

Growth, Productivity, Unemployment, and Inflation

Concerns: Growth, Productivity,

Unemployment, and Inflation 20
Chapter Outline
Long-Run Output and Productivity
Growth

Recessions, Depressions, and

Unemployment
Defining and Measuring
Unemployment
Components of the Unemployment
Rate
The Costs of Unemployment
The Benefits of Recessions

Inflation
Defining Inflation
Price Indexes
The Costs of Inflation
Inflation: Public Enemy Number One?

Looking Ahead
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 LONG-RUN AND SHORT-RUN CONCERNS: GROWTH,
PRODUCTIVITY, UNEMPLOYMENT, AND INFLATION
CHAPTER 20: Long-Run and Short-Run Concerns:
Growth, Productivity, Unemployment, and Inflation

output growth The growth rate of the

output of the entire economy.

per-capita output growth The growth

rate of output per person in the
economy.

productivity growth The growth rate

of output per worker.

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 LONG-RUN OUTPUT AND PRODUCTIVITY
GROWTH
CHAPTER 20: Long-Run and Short-Run Concerns:
Growth, Productivity, Unemployment, and Inflation

FIGURE 7.1 Output per Worker Hour (Productivity), 1952 I–2005 II

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 LONG-RUN OUTPUT AND PRODUCTIVITY
GROWTH
CHAPTER 20: Long-Run and Short-Run Concerns:
Growth, Productivity, Unemployment, and Inflation

FIGURE 7.2 Capital per Worker, 1952 I–2005 II

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CHAPTER 20: Long-Run and Short-Run Concerns:
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recession Roughly, a period in which

real GDP declines for at least two
consecutive quarters. Marked by falling
output and rising unemployment.

depression A prolonged and deep

recession. The precise definitions of
prolonged and deep are debatable.

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 RECESSIONS, DEPRESSIONS, AND
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CHAPTER 20: Long-Run and Short-Run Concerns:
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TABLE 7.1 Real GDP and Unemployment Rates, 1929–1933 and 1980–1982
THE EARLY PART OF THE GREAT DEPRESSION, 1929–1933
PERCENTAGE CHANGE UNEMPLOYMENT NUMBER OF UNEMPLOYED
YEAR IN REAL GDP RATE (MILLIONS)
1929 3.2 1.5
1930 -8.6 8.9 4.3
1931 -6.4 16.3 8.0
1932 -13.0 24.1 12.1
1933 -1.4 25.2 12.8
Note: Percentage fall in real GDP between 1929 and 1933 was 26.6 percent.

THE RECESSION OF 1980–1982

PERCENTAGE NUMBER OF CAPACITY
CHANGE UNEMPLOYMENT UNEMPLOYED UTILIZATION
YEAR IN REAL GDP RATE (MILLIONS) (PERCENTAGE)
1979 5.8 6.1 85.2
1980 -0.2 7.1 7.6 80.9
1981 2.5 7.6 8.3 79.9
1982 -1.9 9.7 10.7 72.1
Note: Percentage increase in real GDP between 1979 and 1982 was 0.1 percent.
Sources: Historical Statistics of the United States and U.S. Department of Commerce, Bureau of Economic Analysis.

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 RECESSIONS, DEPRESSIONS, AND
UNEMPLOYMENT
CHAPTER 20: Long-Run and Short-Run Concerns:
Growth, Productivity, Unemployment, and Inflation

DEFINING AND MEASURING UNEMPLOYMENT

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.

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 RECESSIONS, DEPRESSIONS, AND
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CHAPTER 20: Long-Run and Short-Run Concerns:
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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.

not in the labor force A person who is

not looking for work, because he or she
either does not want a job or has given
up looking.

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 RECESSIONS, DEPRESSIONS, AND
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CHAPTER 20: Long-Run and Short-Run Concerns:
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labor force The number of people

employed plus the number of
unemployed.

labor force = employed + unemployed

population = labor force + not in labor force

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CHAPTER 20: Long-Run and Short-Run Concerns:
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unemployment rate The ratio of the

number of people unemployed to the
total number of people in the labor force.

unemployed
unemployme nt rate 
employed  unemployed

labor force participation rate The ratio

of the labor force to the total population
16 years old or older.

unemployed
employed  unemployed

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 RECESSIONS, DEPRESSIONS, AND
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CHAPTER 20: Long-Run and Short-Run Concerns:
Growth, Productivity, Unemployment, and Inflation

TABLE 7.2 Employed, Unemployed, and the Labor Force, 1953–2004

(1) (2) (3) (4) (5) (6)
POPULATION LABOR
16 YEARS LABOR FORCE
OLD OR OVER FORCE EMPLOYED UNEMPLOYED PARTICIPATION UNEMPLOYMENT
(MILLIONS) (MILLIONS) (MILLIONS) (MILLIONS) RATE RATE

1953 107.1 63.0 61.2 1.8 58.9 2.9

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
1982 172.3 110.2 99.5 10.7 64.0 9.7
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
2004 223.4 147.4 139.3 8.1 66.0 5.5
Note: Figures are civilian only (military excluded).
Source: Economic Report of the President, 2005, Table B-35.

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 RECESSIONS, DEPRESSIONS, AND
UNEMPLOYMENT
CHAPTER 20: Long-Run and Short-Run Concerns:

COMPONENTS OF THE UNEMPLOYMENT RATE

Growth, Productivity, Unemployment, and Inflation

Unemployment Rates for Different

Demographic Groups
TABLE 7.3 Unemployment Rates by Demographic Group, 1982 and 2005
NOVEMBER JULY
YEARS 1982 2005
Total 10.8 5.2
White 9.6 4.4
Men 20+ 9.0 3.4
Women 20+ 8.1 4.3
Both sexes 16–19 21.8 13.4
African-American 20.2 10.2
Men 20+ 19.3 8.3
Women 20+ 16.5 8.9
Both sexes 16–19 51.1 36.4
Source: U.S. Department of Labor, Bureau of Labor Statistics. Data are not seasonally adjusted.

There are large differences in unemployment rates across demographic groups.

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 RECESSIONS, DEPRESSIONS, AND
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CHAPTER 20: Long-Run and Short-Run Concerns:

Unemployment Rates in States and Regions

Growth, Productivity, Unemployment, and Inflation

TABLE 7.4 Regional Differences in Unemployment, 1975, 1982, 1991, and

2003
1975 1982 1991 2003
U.S. avg. 8.5 9.7 6.7 6.0
Cal. 9.9 9.9 7.5 6.7
Fla. 10.7 8.2 7.3 5.1
Ill. 7.1 11.3 7.1 6.7
Mass. 11.2 7.9 9.0 5.8
Mich. 12.5 15.5 9.2 7.3
N.J. 10.2 9.0 6.6 5.9
N.Y. 9.5 8.6 7.2 6.3
N.C. 8.6 9.0 5.8 6.5
Ohio 9.1 12.5 6.4 6.1
Tex. 5.6 6.9 6.6 6.8
Sources: Statistical Abstract of the United States, various editions.

The national unemployment rate does not tell the whole story. A low national rate of
unemployment does not mean that the entire nation is growing and producing at the
same rate.
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 RECESSIONS, DEPRESSIONS, AND
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CHAPTER 20: Long-Run and Short-Run Concerns:
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Discouraged-Worker Effects

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.

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 RECESSIONS, DEPRESSIONS, AND
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CHAPTER 20: Long-Run and Short-Run Concerns:
Growth, Productivity, Unemployment, and Inflation

The Duration of Unemployment

TABLE 7.5 Average Duration of Unemployment, 1979–2004
WEEKS WEEKS
1979 10.8 1992 17.7
1980 11.9 1993 18.0
1981 13.7 1994 18.8
1982 15.6 1995 16.6
1983 20.0 1996 16.7
1984 18.2 1997 15.8
1985 15.6 1998 14.5
1986 15.0 1999 13.4
1987 14.5 2000 12.6
1988 13.5 2001 13.1
1989 11.9 2002 16.6
1990 12.0 2003 19.2
1991 13.7 2004 19.6
Sources: U.S. Department of Labor, Bureau of Labor Statistics.

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 RECESSIONS, DEPRESSIONS, AND
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CHAPTER 20: Long-Run and Short-Run Concerns:
Growth, Productivity, Unemployment, and Inflation

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:

■ Frictional unemployment

■ Structural unemployment

■ Cyclical unemployment

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 RECESSIONS, DEPRESSIONS, AND
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CHAPTER 20: Long-Run and Short-Run Concerns:
Growth, Productivity, Unemployment, and Inflation

Frictional and Structural Unemployment

frictional unemployment The portion

of unemployment that is due to the
normal working of 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.

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CHAPTER 20: Long-Run and Short-Run Concerns:
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natural rate of unemployment The

unemployment that occurs as a normal
part of the functioning of the economy.
Sometimes taken as the sum of frictional
unemployment and structural
unemployment.

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CHAPTER 20: Long-Run and Short-Run Concerns:
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Cyclical Unemployment and Lost Output

cyclical unemployment The increase

in unemployment that occurs during
recessions and depressions.

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 RECESSIONS, DEPRESSIONS, AND
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CHAPTER 20: Long-Run and Short-Run Concerns:
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Social Consequences

In addition to economic hardship, prolonged

unemployment may also bring with it social and personal
ills: anxiety, depression, deterioration of physical and
psychological health, drug abuse (including alcoholism),
and suicide.

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 RECESSIONS, DEPRESSIONS, AND
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CHAPTER 20: Long-Run and Short-Run Concerns:
Growth, Productivity, Unemployment, and Inflation

THE BENEFITS OF RECESSIONS

TABLE 7.6 Inflation Rates, 1974–1976 and 1980–1983

RECESSION INFLATION
BEGINS RATE
1974 11.0
1975 9.1
1976 5.8
1980 13.5
1981 10.3
1982 6.2
1983 3.2
Source: See Table 17.8.

Recessions may help to reduce inflation.

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 INFLATION
CHAPTER 20: Long-Run and Short-Run Concerns:
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TABLE 7.7 Inflation During Three Expansions

INFLATION RATE
1972 3.2
1973 6.2
1974 11.0
1976 5.8
1977 6.5
1978 7.6
1979 11.3
1980 13.5
1984 4.3
1985 3.6
1986 1.9
1987 3.6
1988 4.1
1989 4.8
Source: See Table 7.8.

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 INFLATION
CHAPTER 20: Long-Run and Short-Run Concerns:
Growth, Productivity, Unemployment, and Inflation

DEFINING INFLATION

inflation An increase in the overall price

level.

deflation A decrease in the overall price

level.

sustained inflation An increase in the

overall price level that continues over a
significant period.

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 INFLATION
CHAPTER 20: Long-Run and Short-Run Concerns:
Growth, Productivity, Unemployment, and Inflation

PRICE INDEXES

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.

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 INFLATION
CHAPTER 20: Long-Run and Short-Run Concerns:
Growth, Productivity, Unemployment, and Inflation

FIGURE 7.3 The CPI Market Basket

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 INFLATION
CHAPTER 20: Long-Run and Short-Run Concerns:

TABLE 7.8 The CPI, 1950–2004

Growth, Productivity, Unemployment, and Inflation

PERCENTAGE PERCENTAGE PERCENTAGE

CHANGE CHANGE CHANGE
IN CPI CPI IN CPI CPI IN CPI CPI
1950 1.3 24.1 1968 4.2 34.8 1986 1.9 109.6
1951 7.9 26.0 1969 5.5 36.7 1987 3.6 113.6
1952 1.9 26.5 1970 5.7 38.8 1988 4.1 118.3
1953 0.8 26.7 1971 4.4 40.5 1989 4.8 124.0
1954 0.7 26.9 1972 3.2 41.8 1990 5.4 130.7
1955 -0.4 26.8 1973 6.2 44.4 1991 4.2 136.2
1956 1.5 27.2 1974 11.0 49.3 1992 3.0 140.3
1957 3.3 28.1 1975 9.1 53.8 1993 3.0 144.5
1958 2.8 28.9 1976 5.8 56.9 1994 2.6 148.2
1959 0.7 29.1 1977 6.5 60.6 1995 2.8 152.4
1960 1.7 29.6 1978 7.6 65.2 1996 3.0 156.9
1961 1.0 29.9 1979 11.3 72.6 1997 2.3 160.5
1962 1.0 30.2 1980 13.5 82.4 1998 1.6 163.0
1963 1.3 30.6 1981 10.3 90.9 1999 2.2 166.6
1964 1.3 31.0 1982 6.2 96.5 2000 3.4 172.2
1965 1.6 31.5 1983 3.2 99.6 2001 2.8 177.1
1966 2.9 32.4 1984 4.3 103.9 2002 1.6 179.9
1967 3.1 33.4 1985 3.6 107.6 2003 2.3 184.0
2004 2.7 188.9
Sources: Bureau of Labor Statistics, U.S. Department of Labor.

Changes in the CPI somewhat overstate changes in the cost of living.

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 INFLATION
CHAPTER 20: Long-Run and Short-Run Concerns:
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producer price indexes (PPIs)

Measures of prices that producers
receive for products at all 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.

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 INFLATION
CHAPTER 20: Long-Run and Short-Run Concerns:
Growth, Productivity, Unemployment, and Inflation

THE COSTS OF INFLATION

People’s income from wages and salaries, profits, interest, and rent increases
during inflations. The wage rate is the price of labor, rent is the price of land,
and so on. During inflations, most prices—including input prices—tend to rise
together, and input prices determine both the incomes of workers and the
incomes of owners of capital and land.

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 INFLATION
CHAPTER 20: Long-Run and Short-Run Concerns:
Growth, Productivity, Unemployment, and Inflation

Inflation Changes the Distribution of Income

If your income is fixed and prices rise, your

ability to purchase goods and services falls
proportionately.

Effects on Debtors and Creditors

real interest rate The difference

between the interest rate on a loan and
the inflation rate.

Inflation that is higher than expected benefits debtors; inflation that is lower than expected
benefits creditors.
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 INFLATION
CHAPTER 20: Long-Run and Short-Run Concerns:
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Administrative Costs and Inefficiencies

• Inflation creates administrative costs and

inefficiencies. Without inflation, time could
be used more efficiently.

• The opportunity cost of holding cash is

high during inflations. People therefore
hold less cash and need to stop at the
bank more often.

• People are not fully informed about price

changes and may make mistakes that
lead to a misallocation of resources.

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 INFLATION
CHAPTER 20: Long-Run and Short-Run Concerns:
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Increased Risk and Slower Economic Growth

When unanticipated inflation occurs

regularly, the degree of risk associated with
investments in the economy increases.

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 INFLATION
CHAPTER 20: Long-Run and Short-Run Concerns:
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INFLATION: PUBLIC ENEMY NUMBER ONE?

• Some people consider inflation to be our

public enemy number one. Elected
leaders have vigorously pursued policies
designed to stop inflation.

• The recessions of 1974 to 1975 and 1980

to 1982 were the price we had to pay to
stop inflation. Stopping inflation is costly.

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 REVIEW TERMS AND CONCEPTS
CHAPTER 20: Long-Run and Short-Run Concerns:
Growth, Productivity, Unemployment, and Inflation

consumer price index (CPI) producer price indexes (PPIs)

cyclical unemployment productivity growth
deflation real interest rate
depression recession
discouraged-worker effect structural unemployment
employed sustained inflation
frictional unemployment unemployed
inflation unemployment rate
labor force 1. Labor force = employed + unemployed
labor force participation rate 2. Population = labor force + not in labor force
natural rate of unemployment
unemployed
not in the labor force 3. Unemployme nt rate 
employed  unemployed
output growth
labor force
per-capita output growth 4. Labor force participation rate  population

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