(a) The rise in productivity causes the SRAS curve to shift to the right.
The original equilibrium E0 is at the intersection of AD and SRAS0. When
SRAS shifts right, then the new equilibrium, E1, is at the intersection of
AD and SRAS1, and yet another equilibrium, E2, is at the intersection of AD
and SRAS2. Shifts in SRAS to the right, lead to a greater level of output
and to downward pressure on the price level.
(b) A higher price for inputs means that at any given price level for
outputs, a lower real GDP will be produced so AS will shift to the left from
SRAS0 to SRAS1. The new equilibrium, E1, has a reduced quantity of output
and a higher price level than the original equilibrium (E0).
A shift in the SRAS curve to the right will result in a greater real GDP and downward pressure on the price level, if aggregate demand remains unchanged. However, if this shift in SRAS results from gains in productivity growth, which we typically measure in terms of a few percentage points per year, the effect will be relatively small over a few months or even a couple of years. Recall how in **Choice in a World of Scarcity**, we said that a nation's production possibilities frontier is fixed in the short run, but shifts out in the long run? This is the same phenomenon using a different model.","In the long run, the most important factor that shifts the aggregate curve is productivity growth.
Productivity means how much output can be produced with a given quantity of labor. One measure of this is output per worker, or GDP per capita. Over time, productivity grows so that the same quantity of labor can produce more output.
Historically, the real growth in GDP per capita in an advanced economy like the United States has averaged about 2% to 3% per year, but productivity growth has been faster during certain extended periods like the 1960s and the late 1990s through the early 2000s, or slower during periods like the 1970s. A higher level of productivity shifts the AS curve to the right, because with improved productivity, firms can produce a greater quantity of output at every price level.
Figure 10.6 (a) shows an outward shift in productivity over two time periods. The AS curve shifts out from SRAS0 to SRAS1 to SRAS2, and the equilibrium shifts from E0 to E1 to E2. Note that with increased productivity, workers can produce more GDP. Thus, full employment corresponds to a higher level of potential GDP, which we show as a rightward shift in LRAS from LRAS0 to LRAS1 to LRAS2.
The most significant human problem associated with recessions (and their larger, uglier cousins, depressions) is that a slowdown in production means that firms need to lay off or fire some of their workers.
[Table 5.7](6-3-tracking-real-gdp-over-time#Table_19_09) lists the pattern of recessions and expansions in the U.S. economy since 1900. We call the highest point of the economy, before the recession begins, the **peak**. Conversely, the lowest point of a recession, before a recovery begins, is the **trough**. Thus, a recession lasts from peak to trough, and an economic upswing runs from trough to peak. We call the economy's movement from peak to trough and trough to peak the **business cycle**. It is intriguing to notice that the three longest trough-to-peak expansions of the twentieth century have happened since 1960. The most recent recession started in December 2007 and ended formally in June 2009. This was the most severe recession since the 1930s Great Depression. The ongoing expansion since the June 2009 trough will also be quite long, comparatively, having already reached 90 months at the end of 2016.
| Trough | Peak | Months of Contraction | Months of Expansion |
| ------------- | -------------- | --------------------- | ------------------- |
| December 1900 | September 1902 | 18 | 21 |
| August 1904 | May 1907 | 23 | 33 |
| June 1908 | January 1910 | 13 | 19 |
| January 1912 | January 1913 | 24 | 12 |
| December 1914 | August 1918 | 23 | 44 |
| March 1919 | January 1920 | 7 | 10 |
| July 1921 | May 1923 | 18 | 22 |
| July 1924 | October 1926 | 14 | 27 |
| November 1927 | August 1929 | 23 | 21 |
| March 1933 | May 1937 | 43 | 50 |
| June 1938 | February 1945 | 13 | 80 |
| October 1945 | November 1948 | 8 | 37 |
| October 1949 | July 1953 | 11 | 45 |
| May 1954 | August 1957 | 10 | 39 |
| April 1958 | April 1960 | 8 | 24 |
| February 1961 | December 1969 | 10 | 106 |
| November 1970 | November 1973 | 11 | 36 |
| March 1975 | January 1980 | 16 | 58 |
| July 1980 | July 1981 | 6 | 12 |
| November 1982 | July 1990 | 16 | 92 |
| March 1991 | March 2001 | 8 | 120 |
| November 2001 | December 2007 | 8 | 73 |
**Table 5.7** U.S. Business Cycles since 1900
A private think tank, the National Bureau of Economic Research (NBER), tracks
business cycles for the U.S. economy. However, the effects of a severe
recession often linger after the official ending date assigned by the NBER.
","Real GDP is important because it is highly correlated with other measures of economic activity, like employment and unemployment. When real GDP rises, so does employment.
During a recession losing a job imposes painful financial and personal costs on workers, and often on their extended families as well. In addition, even those who keep their jobs are likely to find that wage raises are scanty at best—or their employers may ask them to take pay cuts.
The most significant human problem associated with recessions (and their larger, uglier cousins, depressions) is that a slowdown in production means that firms need to lay off or fire some of their workers.
Table 5.7 lists the pattern of recessions and expansions in the U.S. economy since 1900. We call the highest point of the economy, before the recession begins, the peak. Conversely, the lowest point of a recession, before a recovery begins, is the trough. Thus, a recession lasts from peak to trough, and an economic upswing runs from trough to peak. We call the economy's movement from peak to trough and trough to peak the business cycle. It is intriguing to notice that the three longest trough-to-peak expansions of the twentieth century have happened since 1960. The most recent recession started in December 2007 and ended formally in June 2009. This was the most severe recession since the 1930s Great Depression. The ongoing expansion since the June 2009 trough will also be quite long, comparatively, having already reached 90 months at the end of 2016.
Table 5.7 U.S. Business Cycles since 1900
A private think tank, the National Bureau of Economic Research (NBER), tracks
business cycles for the U.S. economy. However, the effects of a severe
recession often linger after the official ending date assigned by the NBER.",overview,"{""question"": ""What is the most significant human problem associated with recessions?"", ""answer"": ""The most significant human problem associated with recessions is that a slowdown in production means that firms need to lay off or fire some of their workers.""}",What is the most significant human problem associated with recessions?,The most significant human problem associated with recessions is that a slowdown in production means that firms need to lay off or fire some of their workers.,"['real gdp', 'economic activity', 'employment', 'unemployment', 'personal costs', 'extended']"
542,05-02-01-the-effect-of-growing-us-debt,05-02,1,Converting Nominal to Real GDP,"Table 5.5 shows U.S. GDP at five-year intervals since 1960 in nominal dollars; that is, GDP measured using the actual market prices prevailing in each stated year. Figure 5.7 also reflects this data in a graph.
| Year | Nominal GDP (billions of dollars) | GDP Deflator (2005 = 100) |
| ---- | --------------------------------- | ------------------------- |
| 1960 | 543.3 | 19.0 |
| 1965 | 743.7 | 20.3 |
| 1970 | 1,075.9 | 24.8 |
| 1975 | 1,688.9 | 34.1 |
| 1980 | 2,862.5 | 48.3 |
| 1985 | 4,346.7 | 62.3 |
| 1990 | 5,979.6 | 72.7 |
| 1995 | 7,664.0 | 81.7 |
| 2000 | 10,289.7 | 89.0 |
| 2005 | 13,095.4 | 100.0 |
| 2010 | 14,958.3 | 110.0 |
Table 5.5 U.S. Nominal GDP and the GDP Deflator (Source: www.bea.gov)
**Figure 5.7 U.S. Nominal GDP, 1960-2010**
If an unwary analyst compared nominal GDP in 1960 to nominal GDP in 2010, it
might appear that national output had risen by a factor of more than
twenty-seven over this time (that is, GDP of \$14,958 billion in 2010
divided by GDP of $543 billion in 1960 = 27.5). This conclusion would be
highly misleading. Recall that we define nominal GDP as the quantity of
every final good or service produced multiplied by the price at which it was
sold, summed up for all goods and services. In order to see how much
production has actually increased, we need to extract the effects of higher
prices on nominal GDP. We can easily accomplish this using the GDP deflator.
**Figure 5.8 U.S. GDP Deflator, 1960-2010**
The **GDP deflator** is a price index measuring the average prices of all
goods and services included in the economy. We explore price indices in
detail and how we compute them in chapter on inflation, but this definition
will suffice in the context of this chapter. Table 5.5 provides the GDP
deflator data and Figure 5.8 shows it graphically.
**Figure 5.8** shows that the price level has risen dramatically since 1960. The price level in 2010 was almost six times higher than in 1960 (the deflator for 2010 was 110 versus a level of 19 in 1960). Clearly, much of the growth in nominal GDP was due to inflation, not an actual change in the quantity of goods and services produced, in other words, not in real GDP.
Recall that nominal GDP can rise for two reasons:
- an increase in output.
- and/or an increase in prices.
What is needed is to extract the increase in prices from nominal GDP so as to measure only changes in output. After all, the dollars used to measure nominal GDP in 1960 are worth more than the inflated dollars of 1990—and the price index tells exactly how much more. This adjustment is easy to do if you understand that nominal measurements are in value terms, where:
$$
\text{Value} = \text{Price} \times \text{Quantity} \\
\text{or} \\
\text{Nominal GDP} = \text{GDP Deflator} \times \text{Real GDP}
$$
Let's look at an example at the micro level. Suppose the t-shirt company, Coolshirts, sells 10 t-shirts at a price of \$9 each.
$$
\begin{aligned}
\text{Coolshirt's nominal revenue from sales} &= \text{Price} \times \text{Quantity} \\
&= \text{\$9} \times 10\\
&= \text{\$90}
\end{aligned}
$$
Then,
$$
\begin{aligned}
\text{Coolshirt's real income} &= \text{Nominal revenue} / \text{Price} \\
&= \text{\$90} / \text{\$9} \\
&= 10 \\
\end{aligned}
$$
In other words, when we compute “real” measurements we are trying to obtain actual quantities, in this case, 10 t-shirts.
With GDP, it is just a tiny bit more complicated. We start with the same formula as above:
$$
\text{Real GDP} = \text{Nominal GDP} / \text{Price Index}
$$
For reasons that we will explain in more detail below, mathematically, a price index is a two-digit decimal number like 1.00 or 0.85 or 1.25. Because some people have trouble working with decimals, when the price index is published, it has traditionally been multiplied by 100 to get integer numbers like 100, 85, or 125. What this means is that when we “deflate” nominal figures to get real figures (by dividing the nominal by the price index), we also need to remember to divide the published price index by 100 to make the math work. Thus, the formula becomes:
$$
\text{Real GDP} = (\text{Nominal GDP} \times 100) / \text{Price Index}
$$
$$
\begin{aligned}
\text{Nominal GDP} &= \text{GDP Deflator} / \text{Real GDP} \\
\text{Real GDP} &= \text{Nominal GDP} / \text{Price Index} \\
\text{Real GDP} &= (\text{Nominal GDP} x 100) / \text{Price Index}
\end{aligned}
$$
","Table 5.5 shows U.S. GDP at five-year intervals since 1960 in nominal dollars; that is, GDP measured using the actual market prices prevailing in each stated year. Figure 5.7 also reflects this data in a graph.
Table 5.5 U.S. Nominal GDP and the GDP Deflator (Source: www.bea.gov)
**Figure 5.7 U.S. Nominal GDP, 1960-2010**
If an unwary analyst compared nominal GDP in 1960 to nominal GDP in 2010, it
might appear that national output had risen by a factor of more than
twenty-seven over this time (that is, GDP of \$14,958 billion in 2010
divided by GDP of $543 billion in 1960 = 27.5). This conclusion would be
highly misleading. Recall that we define nominal GDP as the quantity of
every final good or service produced multiplied by the price at which it was
sold, summed up for all goods and services. In order to see how much
production has actually increased, we need to extract the effects of higher
prices on nominal GDP. We can easily accomplish this using the GDP deflator.
**Figure 5.8 U.S. GDP Deflator, 1960-2010**
The **GDP deflator** is a price index measuring the average prices of all
goods and services included in the economy. We explore price indices in
detail and how we compute them in chapter on inflation, but this definition
will suffice in the context of this chapter. Table 5.5 provides the GDP
deflator data and Figure 5.8 shows it graphically.
**Figure 5.8** shows that the price level has risen dramatically since 1960. The price level in 2010 was almost six times higher than in 1960 (the deflator for 2010 was 110 versus a level of 19 in 1960). Clearly, much of the growth in nominal GDP was due to inflation, not an actual change in the quantity of goods and services produced, in other words, not in real GDP.
Recall that nominal GDP can rise for two reasons:
an increase in output.
and/or an increase in prices.
What is needed is to extract the increase in prices from nominal GDP so as to measure only changes in output. After all, the dollars used to measure nominal GDP in 1960 are worth more than the inflated dollars of 1990—and the price index tells exactly how much more. This adjustment is easy to do if you understand that nominal measurements are in value terms, where:
$$
\text{Value} = \text{Price} \times \text{Quantity} \
\text{or} \
\text{Nominal GDP} = \text{GDP Deflator} \times \text{Real GDP}
$$
Let's look at an example at the micro level. Suppose the t-shirt company, Coolshirts, sells 10 t-shirts at a price of \$9 each.
$$
\begin{aligned}
\text{Coolshirt's nominal revenue from sales} &= \text{Price} \times \text{Quantity} \
&= \text{\$9} \times 10\
&= \text{\$90}
\end{aligned}
$$
Then,
$$
\begin{aligned}
\text{Coolshirt's real income} &= \text{Nominal revenue} / \text{Price} \
&= \text{\$90} / \text{\$9} \
&= 10 \
\end{aligned}
$$
In other words, when we compute “real” measurements we are trying to obtain actual quantities, in this case, 10 t-shirts.
With GDP, it is just a tiny bit more complicated. We start with the same formula as above:
$$
\text{Real GDP} = \text{Nominal GDP} / \text{Price Index}
$$
For reasons that we will explain in more detail below, mathematically, a price index is a two-digit decimal number like 1.00 or 0.85 or 1.25. Because some people have trouble working with decimals, when the price index is published, it has traditionally been multiplied by 100 to get integer numbers like 100, 85, or 125. What this means is that when we “deflate” nominal figures to get real figures (by dividing the nominal by the price index), we also need to remember to divide the published price index by 100 to make the math work. Thus, the formula becomes:
$$
\text{Real GDP} = (\text{Nominal GDP} \times 100) / \text{Price Index}
$$
$$
\begin{aligned}
\text{Nominal GDP} &= \text{GDP Deflator} / \text{Real GDP} \
\text{Real GDP} &= \text{Nominal GDP} / \text{Price Index} \
\text{Real GDP} &= (\text{Nominal GDP} x 100) / \text{Price Index}
\end{aligned}
$$",the-effect-of-growing-us-debt,"Question: What is the formula to calculate real GDP?
Answer: Real GDP can be calculated using the formula Real GDP = (Nominal GDP x 100) / Price Index.",What is the formula to calculate real GDP?,Real GDP can be calculated using the formula Real GDP = (Nominal GDP x 100) / Price Index.,"['table 55', 'us gdp deflator', 'actual market']"
543,12-02-06-the-phillips-curve-for-the-united-states,12-02,6,Summary,,,the-phillips-curve-for-the-united-states,"{""question"": ""What is the output schema for the JSON instance?"", ""answer"": ""{\""properties\"": {\""question\"": {\""title\"": \""Question\"", \""description\"": \""question\"", \""type\"": \""string\""}, \""answer\"": {\""title\"": \""Answer\"", \""description\"": \""answer\"", \""type\"": \""string\""}}, \""required\"": [\""question\"", \""answer\""]}""}",,,"['dynamic programming', 'gabor frames', 'multiresolution hierarchy']"
544,17-02-01-expectations-about-future-exchange-rates,17-02,1,Expectations about Future Exchange Rates,"One reason to demand a currency on the foreign exchange market is the belief that the currency's value is about to increase. One reason to supply a currency—that is, sell it on the foreign exchange market—is the expectation that the currency's value is about to decline.
For example, imagine that a leading business newspaper, like the Wall Street Journal or the Financial Times, runs an article predicting that the Mexican peso will appreciate in value. **Figure 17.5** illustrates the likely effects of such an article.
Demand for the Mexican peso shifts to the right, from $D_0$, to $D_1$, as
investors become eager to purchase pesos. Conversely, the supply of pesos
shifts to the left, from S0 to S1, because investors will be less willing to
give them up. The result is that the equilibrium exchange rate rises from 10
cents/peso to 12 cents/peso and the equilibrium exchange quantity rises from
85 billion to 90 billion pesos as the equilibrium moves from $E_0$ to $E_1$.
**Figure 17.5** also illustrates some peculiar traits of supply and demand diagrams in the foreign exchange market. In contrast to all the other cases of supply and demand you have considered, in the foreign exchange market, supply and demand typically both move at the same time. Groups of participants in the foreign exchange market, like firms and investors, include some who are buyers and some who are sellers. An expectation of a future shift in the exchange rate affects both buyers and sellers—that is, it affects both demand and supply for a currency.
**Figure 17.5** Exchange Rate Market for Mexican Peso Reacts to
Expectations about Future Exchange Rates
The shifts in demand and supply curves both cause the exchange rate to shift in the same direction. In this example, they both make the peso exchange rate stronger. However, the shifts in demand and supply work in opposing directions on the quantity traded. In this example, the rising demand for pesos is causing the quantity to rise while the falling supply of pesos is causing quantity to fall. In this specific example, the result is a higher quantity. However, in other cases, the result could be that quantity remains unchanged or declines.
This example also helps to explain why exchange rates often move quite substantially in a short period of a few weeks or months. When investors expect a country's currency to strengthen in the future, they buy the currency and cause it to appreciate immediately. The currency's appreciation can lead other investors to believe that future appreciation is likely, and thus lead to even further appreciation. Similarly, a fear that a currency might weaken quickly leads to an actual weakening of the currency, which often reinforces the belief that the currency will weaken further.
Thus, beliefs about the future path of exchange rates can be self-reinforcing, at least for a time, and a large share of the trading in foreign exchange markets involves dealers trying to outguess each other on what direction exchange rates will move next.","One reason to demand a currency on the foreign exchange market is the belief that the currency's value is about to increase. One reason to supply a currency—that is, sell it on the foreign exchange market—is the expectation that the currency's value is about to decline.
For example, imagine that a leading business newspaper, like the Wall Street Journal or the Financial Times, runs an article predicting that the Mexican peso will appreciate in value. Figure 17.5 illustrates the likely effects of such an article.
Demand for the Mexican peso shifts to the right, from $D_0$, to $D_1$, as
investors become eager to purchase pesos. Conversely, the supply of pesos
shifts to the left, from S0 to S1, because investors will be less willing to
give them up. The result is that the equilibrium exchange rate rises from 10
cents/peso to 12 cents/peso and the equilibrium exchange quantity rises from
85 billion to 90 billion pesos as the equilibrium moves from $E_0$ to $E_1$.
**Figure 17.5** also illustrates some peculiar traits of supply and demand diagrams in the foreign exchange market. In contrast to all the other cases of supply and demand you have considered, in the foreign exchange market, supply and demand typically both move at the same time. Groups of participants in the foreign exchange market, like firms and investors, include some who are buyers and some who are sellers. An expectation of a future shift in the exchange rate affects both buyers and sellers—that is, it affects both demand and supply for a currency.
Figure 17.5 Exchange Rate Market for Mexican Peso Reacts to
Expectations about Future Exchange Rates
The shifts in demand and supply curves both cause the exchange rate to shift in the same direction. In this example, they both make the peso exchange rate stronger. However, the shifts in demand and supply work in opposing directions on the quantity traded. In this example, the rising demand for pesos is causing the quantity to rise while the falling supply of pesos is causing quantity to fall. In this specific example, the result is a higher quantity. However, in other cases, the result could be that quantity remains unchanged or declines.
This example also helps to explain why exchange rates often move quite substantially in a short period of a few weeks or months. When investors expect a country's currency to strengthen in the future, they buy the currency and cause it to appreciate immediately. The currency's appreciation can lead other investors to believe that future appreciation is likely, and thus lead to even further appreciation. Similarly, a fear that a currency might weaken quickly leads to an actual weakening of the currency, which often reinforces the belief that the currency will weaken further.
Thus, beliefs about the future path of exchange rates can be self-reinforcing, at least for a time, and a large share of the trading in foreign exchange markets involves dealers trying to outguess each other on what direction exchange rates will move next.",expectations-about-future-exchange-rates,"What is one reason to supply a currency on the foreign exchange market?
Answer: The expectation that the currency's value is about to decline.",What is one reason to supply a currency on the foreign exchange market?,The expectation that the currency's value is about to decline.,"['exchange rate market', 'mexo', 'foreign exchange market', 'buyers']"
545,02-02-00-overview,02-02,0,Overview,"
By the end of this section, you will be able to:
- Interpret production possibilities frontier graphs
- Contrast a budget constraint and a production possibilities frontier
- Explain the relationship between a production possibilities frontier and the law of diminishing returns
- Contrast productive efficiency and allocative efficiency
- Define comparative advantage
Just as individuals cannot have everything they want and must instead make choices, society as a whole cannot have everything it might want, either. This section of the chapter will explain the constraints society faces, using a model called the **production possibilities frontier (PPF)**. There are more similarities than differences between individual choice and social choice. As you read this section, focus on the similarities.
Because society has limited resources (e.g., labor, land, capital, raw materials) at any point in time, there is a limit to the quantities of goods and services it can produce. Suppose a society desires two products, healthcare and education. The production possibilities frontier in [Figure 2.3](2-2-the-production-possibilities-frontier-and-social-choices#CNX_Econ_C02_010) illustrates this situation.
**Figure 2.3 A Healthcare vs. Education Production Possibilities Frontier**
This production possibilities frontier shows a tradeoff between devoting
social resources to healthcare and devoting them to education. At A all
resources go to healthcare and at B, most go to healthcare. At D most
resources go to education, and at F, all go to education.
[Figure 2.3](2-2-the-production-possibilities-frontier-and-social-choices#CNX_Econ_C02_010) shows healthcare on the vertical axis and education on the horizontal axis.
If the society were to allocate all of its resources to healthcare, it could produce at point A. However, it would not have any resources to produce education.
If it were to allocate all its resources to education, it could produce at point F, but it would not have any resources to produce healthcare.
Alternatively, society could choose to produce any combination of healthcare and education on the production possibilities frontier. In effect, the production possibilities frontier plays the same role for society as the budget constraint plays for an individual. Society can choose any combination of the two goods on or inside the PPF. However, it does not have enough resources to produce outside the PPF.
Most importantly, the production possibilities frontier clearly shows the tradeoff between healthcare and education. Suppose society has chosen to operate at point B, and it is considering producing more education. Because the PPF is downward sloping from left to right, the only way society can obtain more education is by giving up some healthcare. That is the tradeoff society faces. Suppose it considers moving from point B to point C. What would the opportunity cost be for the additional education? The opportunity cost would be the healthcare society has to forgo. Just as with Alphonso's budget constraint, the **slope** of the production possibilities frontier shows the opportunity cost. By now you might be saying, “Hey, this PPF is sounding like the budget constraint.” If so, read the following Clear It Up feature.","By the end of this section, you will be able to:
Interpret production possibilities frontier graphs
Contrast a budget constraint and a production possibilities frontier
Explain the relationship between a production possibilities frontier and the law of diminishing returns
Contrast productive efficiency and allocative efficiency
Define comparative advantage
Just as individuals cannot have everything they want and must instead make choices, society as a whole cannot have everything it might want, either. This section of the chapter will explain the constraints society faces, using a model called the production possibilities frontier (PPF). There are more similarities than differences between individual choice and social choice. As you read this section, focus on the similarities.
Because society has limited resources (e.g., labor, land, capital, raw materials) at any point in time, there is a limit to the quantities of goods and services it can produce. Suppose a society desires two products, healthcare and education. The production possibilities frontier in Figure 2.3 illustrates this situation.
When the demand for the good produced (output) increases, both the output price and profitability increase. As a result, producers demand more labor to ramp up production.
- A well-trained and educated workforce causes an increase in the demand for that labor by employers.
- Increased levels of productivity within the workforce will cause the demand for labor to shift to the right or to increase.
**Decreasing Demand**:
- If the workforce is not well-trained or educated, employers will not hire from within that labor pool, since they will need to spend a **significant amount** of time and money training that workforce.
Demand for lesser-skilled workers will shift to the left.
Technology changes can act as either substitutes for or complements to labor:
- When technology acts as a substitute, it replaces the need for the number of workers an employer needs to hire. For example, word processing decreased the number of typists needed in the workplace. This shifted the demand curve for typists left.
- An increase in the availability of certain technologies may increase the demand for labor. Technology that acts as a complement to labor will increase the demand for certain types of labor, resulting in a rightward shift of the demand curve. For example, the increased use of word processing and other software has increased the demand for information technology professionals who can resolve software and hardware issues related to a firm's network.
**Impact of technology on skills:**
- More and better technology will increase demand for skilled workers who know how to use technology to enhance workplace productivity.
Yet, those workers who do not adapt to changes in technology will experience a decrease in demand.
- An increase in the number of companies producing a given product will increase the demand for labor resulting in a shift to the right.
- A decrease in the number of companies producing a given product will decrease the demand for labor resulting in a shift to the left.
Complying with government regulations can increase or decrease the demand for labor at any given wage.
- In the healthcare industry, government rules may require that nurses be hired to carry out certain medical procedures. This will increase the demand for nurses.
- Less-trained healthcare workers would be prohibited from carrying out these procedures, and the demand for these workers will shift to the left.
Labor is not the only input into the production process. For example, a salesperson at a call center needs a telephone and a computer terminal to enter data and record sales.
- If prices of other inputs fall, production will become more profitable and suppliers will demand more labor to increase production. This will cause a rightward shift in the demand curve for labor.
- The opposite is also true. Higher prices for other inputs lower demand for labor.
","When the demand for the good produced (output) increases, both the output price and profitability increase. As a result, producers demand more labor to ramp up production.
- A well-trained and educated workforce causes an increase in the demand for that labor by employers.
- Increased levels of productivity within the workforce will cause the demand for labor to shift to the right or to increase.
**Decreasing Demand**:
- If the workforce is not well-trained or educated, employers will not hire from within that labor pool, since they will need to spend a **significant amount** of time and money training that workforce.
Demand for lesser-skilled workers will shift to the left.
Technology changes can act as either substitutes for or complements to labor:
- When technology acts as a substitute, it replaces the need for the number of workers an employer needs to hire. For example, word processing decreased the number of typists needed in the workplace. This shifted the demand curve for typists left.
- An increase in the availability of certain technologies may increase the demand for labor. Technology that acts as a complement to labor will increase the demand for certain types of labor, resulting in a rightward shift of the demand curve. For example, the increased use of word processing and other software has increased the demand for information technology professionals who can resolve software and hardware issues related to a firm's network.
**Impact of technology on skills:**
- More and better technology will increase demand for skilled workers who know how to use technology to enhance workplace productivity.
Yet, those workers who do not adapt to changes in technology will experience a decrease in demand.
- An increase in the number of companies producing a given product will increase the demand for labor resulting in a shift to the right.
- A decrease in the number of companies producing a given product will decrease the demand for labor resulting in a shift to the left.
Complying with government regulations can increase or decrease the demand for labor at any given wage.
- In the healthcare industry, government rules may require that nurses be hired to carry out certain medical procedures. This will increase the demand for nurses.
- Less-trained healthcare workers would be prohibited from carrying out these procedures, and the demand for these workers will shift to the left.
Labor is not the only input into the production process. For example, a salesperson at a call center needs a telephone and a computer terminal to enter data and record sales.
- If prices of other inputs fall, production will become more profitable and suppliers will demand more labor to increase production. This will cause a rightward shift in the demand curve for labor.
- The opposite is also true. Higher prices for other inputs lower demand for labor.
",movement-along-consumption-and-savings-functions,"{""question"": ""What happens to the demand for labor when the output price and profitability increase?"", ""answer"": ""The demand for labor increases.""}",What happens to the demand for labor when the output price and profitability increase?,The demand for labor increases.,"['demand', 'good produced', 'profitability increase', 'word processing', 'information technology professionals']"
547,01-02-00-overview,01-02,0,Overview,"
- Describe microeconomics
- Describe macroeconomics
- Contrast monetary policy and fiscal policy
Economics is concerned with the well-being of _all_ people, including those with jobs and those without jobs, as well as those with high incomes and those with low incomes. Economics acknowledges that production of useful goods and services can create problems of environmental pollution. It explores the question of how investing in education helps to develop workers' skills. It probes questions like how to tell when big businesses or big labor unions are operating in a way that benefits society as a whole and when they are operating in a way that benefits their owners or members at the expense of others. It looks at how government spending, taxes, and regulations affect decisions about production and consumption.
It should be clear by now that economics covers considerable ground. We can divide that ground into two parts: **Microeconomics** focuses on the actions of individual agents within the economy, like households, workers, and businesses. **Macroeconomics** looks at the economy as a whole. It focuses on broad issues such as growth of production, the number of unemployed people, the inflationary increase in prices, government deficits, and levels of exports and imports. Microeconomics and macroeconomics are not separate subjects, but rather complementary perspectives on the overall subject of the economy.
- **Microeconomics** focuses on the actions of individual agents within the economy, like households, workers, and businesses.
- **Microeconomics** looks at the economy as a whole. It focuses on broad issues such as growth of production, the number of unemployed people, the inflationary increase in prices, government deficits, and levels of exports and imports.
To understand why both microeconomic and macroeconomic perspectives are useful, consider the problem of studying a biological ecosystem like a lake. One person who sets out to study the lake might focus on specific topics: certain kinds of algae or plant life; the characteristics of particular fish or snails; or the trees surrounding the lake. Another person might take an overall view and instead consider the lake's ecosystem from top to bottom; what eats what, how the system stays in a rough balance, and what environmental stresses affect this balance.
Insights about particular plants and animals help researchers to understand the overall food chain, while insights about the overall food chain help to explain the environment in which individual plants and animals live. Both approaches are useful, and both examine the same lake, but the viewpoints are different. In a similar way, both microeconomics and macroeconomics study the same economy, but each has a different viewpoint.
Whether you are scrutinizing lakes or economics, the micro and the macro insights should blend with each other. In economics, the micro decisions of individual businesses are influenced by whether the macroeconomy is healthy. For example, firms will be more likely to hire workers if the overall economy is growing. In turn, the macroeconomy's performance ultimately depends on the microeconomic decisions that individual households and businesses make.","Describe microeconomics
Describe macroeconomics
Contrast monetary policy and fiscal policy
Economics is concerned with the well-being of all people, including those with jobs and those without jobs, as well as those with high incomes and those with low incomes. Economics acknowledges that production of useful goods and services can create problems of environmental pollution. It explores the question of how investing in education helps to develop workers' skills. It probes questions like how to tell when big businesses or big labor unions are operating in a way that benefits society as a whole and when they are operating in a way that benefits their owners or members at the expense of others. It looks at how government spending, taxes, and regulations affect decisions about production and consumption.
It should be clear by now that economics covers considerable ground. We can divide that ground into two parts: Microeconomics focuses on the actions of individual agents within the economy, like households, workers, and businesses. Macroeconomics looks at the economy as a whole. It focuses on broad issues such as growth of production, the number of unemployed people, the inflationary increase in prices, government deficits, and levels of exports and imports. Microeconomics and macroeconomics are not separate subjects, but rather complementary perspectives on the overall subject of the economy.
Microeconomics focuses on the actions of individual agents within the economy, like households, workers, and businesses.
Microeconomics looks at the economy as a whole. It focuses on broad issues such as growth of production, the number of unemployed people, the inflationary increase in prices, government deficits, and levels of exports and imports.
To understand why both microeconomic and macroeconomic perspectives are useful, consider the problem of studying a biological ecosystem like a lake. One person who sets out to study the lake might focus on specific topics: certain kinds of algae or plant life; the characteristics of particular fish or snails; or the trees surrounding the lake. Another person might take an overall view and instead consider the lake's ecosystem from top to bottom; what eats what, how the system stays in a rough balance, and what environmental stresses affect this balance.
Insights about particular plants and animals help researchers to understand the overall food chain, while insights about the overall food chain help to explain the environment in which individual plants and animals live. Both approaches are useful, and both examine the same lake, but the viewpoints are different. In a similar way, both microeconomics and macroeconomics study the same economy, but each has a different viewpoint.
Whether you are scrutinizing lakes or economics, the micro and the macro insights should blend with each other. In economics, the micro decisions of individual businesses are influenced by whether the macroeconomy is healthy. For example, firms will be more likely to hire workers if the overall economy is growing. In turn, the macroeconomy's performance ultimately depends on the microeconomic decisions that individual households and businesses make.",overview,"Question: What is the focus of microeconomics?
Answer: Microeconomics focuses on the actions of individual agents within the economy, like households, workers, and businesses.",What is the focus of microeconomics?,"Microeconomics focuses on the actions of individual agents within the economy, like households, workers, and businesses.","['maceconomics', 'fiscal policy', 'employment', 'social pollution', 'big businesses', 'big labor']"
548,04-00-00-the-great-depression,04-00,0,Baby Boomers Come of Age,"The Census Bureau reports that as of 2013, 20% of the U.S. population was over 60 years old, which means that almost 63 million people are reaching an age when they will need increased medical care.
The baby boomer population, the group born between 1946 and 1964, is comprised of approximately 74 million people who have just reached retirement age. As this population grows older, they will be faced with common healthcare issues such as heart conditions, arthritis, and Alzheimer's that may require hospitalization, long-term, or at-home nursing care.
Aging baby boomers and advances in life-saving and life-extending technologies will increase the demand for healthcare and nursing. Additionally, the Affordable Care Act, which expands access to healthcare for millions of Americans, has further increased the demand, although with the election of Donald J. Trump, this increase may not be sustained.
According to the Bureau of Labor Statistics (BLS), registered nursing jobs are expected to increase by 16% between 2014 and 2024. The median annual wage of $67,490 (in 2015) is also expected to increase. The BLS forecasts that 439,000 new nurses will be in demand by 2022.
This data tells economists that the market for healthcare professionals, and nurses in particular, will face several challenges. Our study of supply and demand will help us to analyze what might happen in the labor market for nursing and other healthcare professionals, as we will discuss in the second half of this case at the end of the chapter.","The Census Bureau reports that as of 2013, 20% of the U.S. population was over 60 years old, which means that almost 63 million people are reaching an age when they will need increased medical care.
The baby boomer population, the group born between 1946 and 1964, is comprised of approximately 74 million people who have just reached retirement age. As this population grows older, they will be faced with common healthcare issues such as heart conditions, arthritis, and Alzheimer's that may require hospitalization, long-term, or at-home nursing care.
Aging baby boomers and advances in life-saving and life-extending technologies will increase the demand for healthcare and nursing. Additionally, the Affordable Care Act, which expands access to healthcare for millions of Americans, has further increased the demand, although with the election of Donald J. Trump, this increase may not be sustained.
According to the Bureau of Labor Statistics (BLS), registered nursing jobs are expected to increase by 16% between 2014 and 2024. The median annual wage of $67,490 (in 2015) is also expected to increase. The BLS forecasts that 439,000 new nurses will be in demand by 2022.
This data tells economists that the market for healthcare professionals, and nurses in particular, will face several challenges. Our study of supply and demand will help us to analyze what might happen in the labor market for nursing and other healthcare professionals, as we will discuss in the second half of this case at the end of the chapter.",the-great-depression,"{
""question"": ""What is the expected increase in registered nursing jobs between 2014 and 2024?"",
""answer"": ""16%""
}",What is the expected increase in registered nursing jobs between 2014 and 2024?,16%,"['nursing', 'us population', 'medical care', 'heart conditions']"
549,05-00-00-introduction-to-labor-and-financial-markets,05-00,0,Bring It Home,,,introduction-to-labor-and-financial-markets,"{""question"": ""What is the purpose of the JSON schema?"", ""answer"": ""The purpose of the JSON schema is to define the structure and format of JSON data.""}",,,"['dynamic programming', 'gabor frames', 'multiresolution hierarchy']"
550,06-03-01-overview,06-03,1,Capital Deepening,"
When society increases the level of capital per person, we call the result
**capital deepening.**
The idea of capital deepening can apply both to additional human capital per
worker and to additional physical capital per worker.
Rising levels of education for persons 25 and older show the deepening of human capital in the U.S. economy (see **Figure 6.5**). Even today, under one-third of U.S. adults have completed a four- year college degree. There is clearly room for additional deepening of human capital to occur.
As recently as 1970, for example, only about half of U.S. adults had at least a high school diploma. By the start of the twenty first century, more than 80% of adults had graduated from high school. The idea of human capital deepening also applies to the years of experience that workers have, but the average experience level of U.S. workers has not changed much in recent decades.
**Figure 6.5 Human Capital Deepening in the U.S.** (Source: US Department of
Education, National Center for Education Statistics)
Thus, the key dimension for deepening human capital in the U.S. economy
focuses more on additional education and training than on a higher average
level of work experience.
**Figure 6.6** shows physical capital deepening in the U.S. economy.
The value of the physical capital, measured by plant and equipment, used by the average worker in the U.S. economy has risen over the decades.
The increase may have leveled off somewhat in the 1970s and 1980s, which were, not coincidentally, times of slower-than-usual growth in worker productivity.
We see a renewed increase in physical capital per worker in the late 1990s, followed by a flattening in the early 2000s.
The average U.S. worker in the late 2000s was working with physical capital worth almost three times as much as that of the average worker of the early 1950s.
**Figure 6.6 Physical Capital per Worker in the United States** (Source:
Center for International Comparisons of Production, Income and Prices,
University of Pennsylvania)
Not only does the current U.S. economy have better-educated workers with more and improved physical capital than it did several decades ago, but these workers have access to more advanced technologies. Growth in technology is impossible to measure with a simple line on a graph, but evidence that we live in an age of technological marvels is all around us—discoveries in genetics and in the structure of particles, the wireless internet, and other inventions almost too numerous to count. The U.S. Patent and Trademark Office typically has issued more than 150,000 patents annually in recent years.","When society increases the level of capital per person, we call the result
**capital deepening.**
The idea of capital deepening can apply both to additional human capital per
worker and to additional physical capital per worker.
Rising levels of education for persons 25 and older show the deepening of human capital in the U.S. economy (see Figure 6.5). Even today, under one-third of U.S. adults have completed a four- year college degree. There is clearly room for additional deepening of human capital to occur.
As recently as 1970, for example, only about half of U.S. adults had at least a high school diploma. By the start of the twenty first century, more than 80% of adults had graduated from high school. The idea of human capital deepening also applies to the years of experience that workers have, but the average experience level of U.S. workers has not changed much in recent decades.
When economists refer to “potential GDP” they are referring to the level of
output that an economy can achieve when all resources (land, labor, capital,
and entrepreneurial ability) are fully employed.
Over the long run, the level of potential GDP determines the size of real GDP. When economists refer to “potential GDP” they are referring to that level of output that an economy can achieve when all resources (land, labor, capital, and entrepreneurial ability) are fully employed. While the unemployment rate in labor markets will never be zero, full employment in the labor market refers to zero cyclical unemployment. There will still be some level of unemployment due to frictional or structural unemployment, but when the economy is operating with zero cyclical unemployment, economists say that the economy is at the natural rate of unemployment or at full employment.
Economists benchmark actual or real GDP against the potential GDP to determine how well the economy is performing. As explained in **Economic Growth**, we can explain GDP growth by increases and investment in physical capital and human capital per person as well as advances in technology.
**Physical capital per person** refers to the amount and kind of machinery and equipment available to help people get work done. Compare, for example, your productivity in typing a term paper on a typewriter to working on your laptop with word processing software. Clearly, you will be able to be more productive using word processing software. The technology and level of capital of your laptop and software has increased your productivity. More broadly, the development of GPS technology and Universal Product Codes (those barcodes on every product we buy) has made it much easier for firms to track shipments, tabulate inventories, and sell and distribute products.
These two technological innovations, and many others, have increased a nation's ability to produce goods and services for a given population. Likewise, increasing human capital involves increasing levels of knowledge, education, and skill sets per person through vocational or higher education. Physical and human capital improvements with technological advances will increase overall productivity and, thus, GDP.
To see how these improvements have increased productivity and output at the national level, we should examine evidence from the United States. The United States experienced significant growth in the twentieth century due to phenomenal changes in infrastructure, equipment, and technological improvements in physical capital and human capital. The population more than tripled in the twentieth century, from 76 million in 1900 to over 300 million in 2016. The human capital of modern workers is far higher today because the education and skills of workers have risen dramatically. In 1900, only about one-eighth of the U.S. population had completed high school and just one person in 40 had completed a four-year college degree. By 2010, more than 87% of Americans had a high school degree and over 29% had a four-year college degree as well. In 2014, 40% of working-age Americans had a four-year college degree. The average amount of physical capital per worker has grown dramatically.
The technology available to modern workers is extraordinarily better than a century ago: cars, airplanes, electrical machinery, smartphones, computers, chemical and biological advances, materials science, health care—the list of technological advances could run on and on. More workers, higher skill levels, larger amounts of physical capital per worker, and amazingly better technology, and potential GDP for the U.S. economy has clearly increased a great deal since 1900.
Over time the GDP has fallen below its potential level and, at times, has exceeded it. For example, from 2008 to 2009, the U.S. economy tumbled into recession and remains below its potential GDP to this day. At other times, like in the late 1990s, the economy ran at its potential GDP—or even slightly ahead.
**Figure 12.1** Potential and Actual GDP (in 2009 Dollars)
Actual GDP falls below potential GDP during and after recessions, like the recessions of 1980 and 1981-82, 1990-91, 2001, and 2008-2009 and continues below potential GDP through 2016. In other cases, actual GDP can be above potential GDP for a time, as in the late 1990s.
**Figure 12.1** shows the actual data for the increase in real GDP since 1960. The slightly smoother line shows potential GDP since 1960 as estimated by the nonpartisan Congressional Budget Office. Most economic recessions and upswings are times when the economy is 1-3% below or above potential GDP in a given year. Clearly, short-run fluctuations around potential GDP do exist, but over the long run, the upward trend of potential GDP determines the size of the economy.
In the aggregate demand/aggregate supply model, we show potential GDP as a vertical line. Neoclassical economists who focus on potential GDP as the primary determinant of real GDP argue that the long-run aggregate supply (LRAS) curve is located at potential GDP—that is, we draw the LRAS curve as a vertical line at the level of potential GDP, as **Figure 12.2** shows.
**Figure 12.2** A Vertical AS Curve
A vertical LRAS curve means that the level of aggregate supply (or potential GDP) will determine the economy's real GDP, regardless of the level of aggregate demand. Over time, increases in the quantity and quality of physical capital, increases in human capital, and technological advancements shift potential GDP and the vertical LRAS curve gradually to the right. Economists often describe this gradual increase in an economy's potential GDP as a nation's long-term economic growth.
The second in a series of videos on economic issues and the Federal Reserve focuses on gross domestic product, or GDP. Engaging graphics and straightforward ...
","When economists refer to “potential GDP” they are referring to the level of
output that an economy can achieve when all resources (land, labor, capital,
and entrepreneurial ability) are fully employed.
Over the long run, the level of potential GDP determines the size of real GDP. When economists refer to “potential GDP” they are referring to that level of output that an economy can achieve when all resources (land, labor, capital, and entrepreneurial ability) are fully employed. While the unemployment rate in labor markets will never be zero, full employment in the labor market refers to zero cyclical unemployment. There will still be some level of unemployment due to frictional or structural unemployment, but when the economy is operating with zero cyclical unemployment, economists say that the economy is at the natural rate of unemployment or at full employment.
Economists benchmark actual or real GDP against the potential GDP to determine how well the economy is performing. As explained in Economic Growth, we can explain GDP growth by increases and investment in physical capital and human capital per person as well as advances in technology.
Physical capital per person refers to the amount and kind of machinery and equipment available to help people get work done. Compare, for example, your productivity in typing a term paper on a typewriter to working on your laptop with word processing software. Clearly, you will be able to be more productive using word processing software. The technology and level of capital of your laptop and software has increased your productivity. More broadly, the development of GPS technology and Universal Product Codes (those barcodes on every product we buy) has made it much easier for firms to track shipments, tabulate inventories, and sell and distribute products.
These two technological innovations, and many others, have increased a nation's ability to produce goods and services for a given population. Likewise, increasing human capital involves increasing levels of knowledge, education, and skill sets per person through vocational or higher education. Physical and human capital improvements with technological advances will increase overall productivity and, thus, GDP.
To see how these improvements have increased productivity and output at the national level, we should examine evidence from the United States. The United States experienced significant growth in the twentieth century due to phenomenal changes in infrastructure, equipment, and technological improvements in physical capital and human capital. The population more than tripled in the twentieth century, from 76 million in 1900 to over 300 million in 2016. The human capital of modern workers is far higher today because the education and skills of workers have risen dramatically. In 1900, only about one-eighth of the U.S. population had completed high school and just one person in 40 had completed a four-year college degree. By 2010, more than 87% of Americans had a high school degree and over 29% had a four-year college degree as well. In 2014, 40% of working-age Americans had a four-year college degree. The average amount of physical capital per worker has grown dramatically.
The technology available to modern workers is extraordinarily better than a century ago: cars, airplanes, electrical machinery, smartphones, computers, chemical and biological advances, materials science, health care—the list of technological advances could run on and on. More workers, higher skill levels, larger amounts of physical capital per worker, and amazingly better technology, and potential GDP for the U.S. economy has clearly increased a great deal since 1900.
Over time the GDP has fallen below its potential level and, at times, has exceeded it. For example, from 2008 to 2009, the U.S. economy tumbled into recession and remains below its potential GDP to this day. At other times, like in the late 1990s, the economy ran at its potential GDP—or even slightly ahead.
Supply ≠ Quantity Supplied
[Figure 3.3](3-1-demand-supply-and-equilibrium-in-markets-for-goods-and-services#CNX_Econ_C03_002) illustrates the law of supply as it affects the gasoline market. Like demand, we can illustrate supply using a table or a graph.
A **supply curve** is a graphic illustration of the relationship between price, shown on the vertical axis, and quantity, shown on the horizontal axis.
The shape of supply curves will vary somewhat according to the product: steeper, flatter, straighter, or curved. Nearly all supply curves, however, slope up from left to right and illustrate the law of supply: as the price rises, say, from $1.00 per gallon to $2.20 per gallon, the quantity supplied increases from 500 gallons to 720 gallons. Conversely, as the price falls, the quantity supplied decreases, all else constant.
**Figure 3.3 A Supply Curve for Gasoline**
A **supply schedule** is a table, like [Table 3.2](3-1-demand-supply-and-equilibrium-in-markets-for-goods-and-services#Table_03_02), that shows the quantity supplied at a range of different prices. Again, we measure price in dollars per gallon of gasoline and we measure quantity supplied in millions of gallons.
The supply schedule and the supply curve are just two different ways of showing the same information. Notice that the horizontal and vertical axes on the graph for the supply curve are the same as for the demand curve, i.e. _the independent variable price is on the vertical axis and the dependent variable quantity is on the horizontal_, just like for the demand curve.
| Price (per gallon) | Quantity Supplied (millions of gallons) |
| ------------------ | --------------------------------------- |
| $1.00 | 500 |
| $1.20 | 550 |
| $1.40 | 600 |
| $1.60 | 640 |
| $1.80 | 680 |
| $2.00 | 700 |
| $2.20 | 720 |
**Table 3.2** Price and Supply of Gasoline
In this video, we explore the relationship between price and quantity
supplied. Why does the supply curve slope upward? The supply curve shows how
much of a good suppliers are willing to supply at different prices. For
instance, oil suppliers in Alaska and Saudi Arabia face different costs of
extraction, affecting the price at which they are willing to supply oil.
","In economic terminology, supply is not the same as quantity supplied. When economists refer to supply, they mean the relationship between a range of prices and the quantities supplied at those prices, a relationship that we can illustrate with a supply curve or a supply schedule. When economists refer to quantity supplied, they mean only a certain point on the supply curve, or one quantity on the supply schedule. In short, supply refers to the curve and quantity supplied refers to the (specific) point on the curve.
Supply ≠ Quantity Supplied
Figure 3.3 illustrates the law of supply as it affects the gasoline market. Like demand, we can illustrate supply using a table or a graph.
A supply curve is a graphic illustration of the relationship between price, shown on the vertical axis, and quantity, shown on the horizontal axis.
The shape of supply curves will vary somewhat according to the product: steeper, flatter, straighter, or curved. Nearly all supply curves, however, slope up from left to right and illustrate the law of supply: as the price rises, say, from $1.00 per gallon to $2.20 per gallon, the quantity supplied increases from 500 gallons to 720 gallons. Conversely, as the price falls, the quantity supplied decreases, all else constant.
In this video I explain the market for foreign exchange and national
currencies. If you want more practice, check out the Ultimate Review Packet
for FREE: ht...