A Healthy Economy
The Employment Act of 1946 expanded the US government’s role in the economy. It focused on three key goals: achieving full employment, stabilizing prices, and growing the economy.
Full employment is achieved when about 5 percent of the labor force are without work and 95 percent have jobs. It might seem strange that our economy achieves full employment when the unemployment rate is 5 percent. However, some unemployment occurs naturally in an economy. For example, frictional unemployment occurs when people are between jobs. These workers may be receiving job training, or they may be seeking a better position. Frictional unemployment is a normal and healthy part of an economy. Seasonal unemployment is another normal type of unemployment. Seasonal employment results from expected changes in the economy. For example, jobs are sometimes created or lost during different seasons. Fewer ski instructors are employed in July, and fewer lifeguards are employed in December.
Economists are more concerned about two other types of unemployment: structural unemployment and cyclical unemployment. Structural unemployment results from changes in the structure of the economy. For example, new technology creates some jobs but eliminates others. Today we need many workers to make and service computers and software. However, not many workers are needed to make or repair typewriters.
Cyclical employment results from changes in the nation’s business cycle. A business cycle has two main parts, or phases. The expansion phase occurs when the gross domestic product (GDP; the total market value of goods and services produced by a country in a single year) rises over time. The contraction phase occurs when the GDP falls over time. Cyclical unemployment happens mainly during contraction. Firms produce fewer goods, so workers are laid off.
Inflation and Deflation
Price instability is the up-swing or down-swing in the prices of goods we buy. There are two types of price instability: inflation and deflation. Inflation is more common than deflation.
Inflation occurs when the overall price level for goods and services increases over time. The inflation rate is the percentage of price increases. The inflation rate shows the overall price increase for all products, not for a specific item such as an MP3 player or a car.
Economists debate the causes of inflation. It could be caused by too much demand: too much money is available for purchasing too few goods. This results in people “bidding up” the price of goods. Inflation might also be caused by increased costs. Higher wages, more expensive energy, or other increased costs could force firms to charge higher prices for their output.
An inflation rate of 2 or 3 percent per year is considered normal. When the inflation rate rises above 10 percent, it is viewed as a serious problem. A high inflation rate reduces the value of our money. The purchasing power of each dollar falls. This makes it difficult for businesses, government, and people to plan how-to use scarce resources.
Deflation occurs when the overall price for goods and services decreases over time. This might seem positive because consumers like lower prices. But deflation is a serious problem. Even a small percent decline in price level sends negative signals to businesses. When businesses sense there is a deflation, they tend to decrease production and lay off workers.
Economic growth is another way economists assess the nation’s economic performance. Economic growth occurs when the real GDP (the size of the economy adjusted for inflation) increases over a significant period of time. To determine whether our economy is growing, economists look at long-term trends. There have been many brief contractions and two severe depressions over the past century or so. Overall, however, the expansions have outweighed the brief contractions. Therefore, the long-term trend in the US economy has been one of economic growth.
Causes of Economic
Economic growth is the result of a wise use of society’s resources, or factors of production.
- Natural resources: Good soil and fresh water support agriculture. Deep-water harbors support trade. Supplies of oil and minerals support mining industries and fuel the economy.
- Human resources (labor): Education, job training, and health care build a skilled and healthy labor force. Support for entrepreneurs helps create new businesses, products, and services.
- Capital goods: Capital goods-such as buildings, vehicles, and computers-are the human-made items needed to make products.
Other factors support the wise use of resources. For example, government must be honest and must enforce fair rules. This provides incentives for people to work hard and for firms to produce efficiently.