South-Western College Publishing - Economics
1997 Economic Vintage Rated Highly
Subject Economic Growth
Topic Productivity and Growth
Key Words Economic Growth, Expansion, Poverty, Inflation, Income Distribution
News Story

The Census Bureau reported its findings concerning the performance of the economy in 1997. The Bureau found that 1997 was a very good year -- household incomes rose at twice the rate of inflation and the percentage of the population below the poverty level fell. As President Clinton stated in his radio broadcast that cited the report, "economic growth continues to raise incomes, lift millions out of poverty and extend opportunity."

The economy has been in an expansion for almost seven years. Economists had questioned whether the benefits of this expansion would be widespread or would be concentrated primarily among the rich. The data found in the Census Report show that median household income rose for the third straight year and that virtually all sectors of the population shared in the gains. Apparently, almost all regions, races, and types of households benefited in terms of job growth and income gain

Median household income adjusted for inflation rose 1.9% in 1997. African-American households had a reported gain in income of 4.3 percent, while Hispanics experienced a rise of 4.5 percent. Both groups gained relative to whites, which the Census found had a gain of 2.5 percent. Earnings for whites were still higher than for Hispanics or African-Americans: $38,972 for whites compared with $25,050 for African-Americans and $26,628 for Hispanics. Asians topped the list with a median income of $45,249. Real earnings, that is, earnings adjusted for inflation, for full time, full year male workers rose 2.4 percent - the first increase since 1991. Female real earnings increased by 3 percent.

While the gap between rich and poor did not narrow in 1997, there was a decrease in the percentage of people in poverty. The poverty rate fell from 13.7 percent to 13.3 percent. There was no change in the percentage comprised by children children still account for 40 percent of the poverty population. The poverty rate among African-Americans fell by 2 percent while the rate for Hispanics dropped 2.3 percent. (Updated October 15, 1998)
Questions

1. Define real earnings. Why is it important to adjust for inflation when comparing incomes over time?

2. Show using aggregate demand-aggregate supply diagrams the impact of economic growth. Note that both aggregate demand and aggregate supply are expanding. What happens to unemployment? Employment? Prices?

3. Henry Aaron, an economist at the Brookings Institution, used the statement, "a rising tide raises all ships" to explain why not only the rich benefit from an expanding economy. Explain Mr. Aaron's statement.
Source Barbara Vobejda, "Poverty Rate Fell, Incomes Rose in 1997, Census Finds," The Washington Post, September 25, 1998

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