Upload
curt
View
55
Download
0
Tags:
Embed Size (px)
DESCRIPTION
Chapter 10 Inflation and Unemployment. Elby , Carol, Timothy, Suki and Carmen. Learning Objectives:. With this chapter, we will learn: about inflation, how it is measured, and its effect on nominal and real incomes - PowerPoint PPT Presentation
Citation preview
CHAPTER 10INFLATION AND UNEMPLOYMENT
Elby, Carol, Timothy, Suki and Carmen
Learning Objectives:
With this chapter, we will learn: 1.about inflation, how it is measured,
and its effect on nominal and real incomes
2.the official unemployment rate, the different types of unemployment, and the definition of full employment
Consumer Price Index The Consumer Price Index (CPI): Is used to measure inflation and monitor price
changes in a representative “shopping basket” of consumer products
It also compares the prices of the current year with the bas year
Item weights: are fractions that represents the total cost of the
“shopping basket” of consumer goods used to calculate CPI
Base year: is the survey year used as a point of comparison to
subsequent years
Simple Consumer Price Index Figure 10.1 on Page 223
PricesQuantity
Consumedper Month
Expenditureper Month
ItemWeights
$20$30$50
$20 ÷ $50 = 0.4$40 ÷ $50 = 0.6
1030
$2.00$1.00
HamburgersMilkshakes
Results of 2003 Survey
Prices 2004 Price 2003 Quantity$2.20 x 10 = $22.00$1.05 x 30 = $31.50
$53.50
$2.20$1.05
Hamburgers
Milkshakes
Prices in 2004
The Prices has
increased
Expenditure per Month
has increased
$3.50That is annual
inflation of 7%
(3.50 ÷ 50) x 100 = 7%
The Consumer Price Index now moves from 100 to 107.
Normal Versus Real Income
Consumer Price Index is useful in helping consumers determine the cost of living
(the amount consumers must spend on the range of good and services they buy)
Nominal Income expressed in common dollars
Real Income expressed in base year dollars
Real Income =
Normal Versus Real Income Similar Example on Worksheet, Page 2
If Emily’s monthly income increased from $200 to $280, while the CPI rises from 100 to 120.
Will Emily be able to have enough purchasing power to keep up with inflation?
Increase rate of Wei Ling’s Income:(Price Increase)/(Price of Base Year) x 100
($80/ $200) x 100 = 40%
Now compare with the CPI increase (20% inflation rate)
Since Emily’s income by 40%, Emily will have enough purchasing power to keep up with inflation.
Limitations of the CPI The consumer price index cannot be used as
effectively due to these cases.
Consumer differences : consumer differences, since it is based on the
consumption patterns of an average household
Changes in spending patterns changes in spending patterns since it uses base-
year quantities
Product quality improvements in product quality
The GPD Deflator Indicates the price changes for all goods and
services produced in the economy It weights them in terms of the economy’s
total output Frequent updating increases the accuracy of
the GDP deflator, however the values of GDP are available slower than the CPI
Compares prices in the current year with those in a base year
Calculating the GDP DeflatorExample of Worksheet, Page 3
YearOutput of Calculators
Current Price
Output at Current
Price
Output at 2003 Price
GDP Deflator
2003 15,000 $1515,000 x $15 = $225,000
$225,000 100
2004 25,000 $18
2005 30,000 $22
Output x Current Price
Output x Reference Year Price
Annual Output at Current Price Output at Reference YearX 100
Below is an economy that produces only calculators. The reference year is 2003, where the GDP Deflator is 100; calculate the GDP Deflator for each subsequent year.
Therefore, the value of the GDP Deflator increased in proportion with the prices of
the economy’s output
25,000 x $18 = 450,000
30,000 x $22 = 660,000
$375,000
$450,000
120
146.67
Nominal versus Real GDP
Nominal GDP is expressed in current dollars and indicates the purchasing power of an entire economy
Real GDP is expressed in reference year dollars
Real GDP =
Finding Real Gross Domestic Product
YearNominal GDP
(current $ billions)
GDP Deflator(1997 = 100)
Real GDP(1997 $ billions)
[(Nominal GDP) ÷ (GDP Deflator)] x 100
1992 $700.50 92.68
1997 882.7 100.00 [(882.7) ÷ (100)] x 100 = 882.7
2002 1154.9 107.48
[(700.50) ÷ (92.68)] x 100 = 755.83
[(1154.9) ÷ (107.48)] x 100 = 1074.5
Inflation’s EffectInflation redistributes purchasing power among different
groups within the economy:IncomesCost of Living Adjustment: Terms in contracts for income adjustments to accommodate
changes in price levelsFull indexation Nominal income that automatically rises with the inflation ratePartial indexation Nominal income rises at less than the inflation rateFixed incomes Nominal income that stays constant regardless of the rate of
inflation
Inflation can also redistribute purchasing power between borrowers and lenders
borrowers win if actual inflation > anticipated inflation
lenders win if actual inflation < anticipated inflation
borrowers and lenders are unaffected if actual inflation = anticipated inflation
Borrowing and Lending
Borrowing and LendingInterest rate is established in financial markets Nominal interest rate is the interest rate
expressed in money terms Real interest rate is the nominal interest
rate minus the rate of inflation Real Interest Rate = Nominal Interest Rate – Rate of Inflation A percentage built into a nominal interest
rate to anticipate the rate of inflation for the loan period is known as inflation premium
Labour Force SurveyLabour Force Population: All residents of Canada (15 years old and
above), excluding those living in Northwest, Nunavut and Yukon Territories
Labour Force: Is made up of people in the labour force
population that have jobs or are seeking jobsParticipation Rate: Is the percentage of the entire labour force
population that makes up the labour force
Official Unemployment RateExample on Worksheet, Page 5
Once the labour force has been determined, its members can be divided into those who are employed and those who are unemployed
Official Unemployment Rate is the percentage of the unemployed people in the entire labour force
Example QuestionUsing the following information to determine a) the labour force
b) the labour force populationc) the official unemployment rate.
Unemployed members of the labour force 2.3 millionTotal Population 15 years of age and over 58.9 millionParticipation Rate 64% Workers with full-time jobs 21.4 millionPart-time workers who do not wish to have full time jobs 4.2
millionPart-time workers who wish to have full-time jobs 3.5 millionTotal population less than 15 years of age 14.6 million
Finding the labour forceA) The labour force is found by adding the number of
unemployed members of the labour force, workers with full-time jobs, part-time workers who wish to have full-time jobs, and part-time workers who do not wish to have full-time jobs.
(2.3 million + 21.4 million + 3.5 million + 4.2 million) = 31.4 million
Labour Force = 31.4 million
Remember, the labour force is made up of people who have jobs or are seeking jobs.
Finding the labour force population
B) The labour force population is found by rearranging the formula used to find the participation rate, by dividing the labour force by the participation rate
Participation Rate = x 100
(31.4 million/64%) = 49.1 million
Labour Force Population = 49.1 million
Finding the official unemployment rate
C) The official unemployment rate is found by dividing the total number of unemployed members of the labour force by the labour force, then multiplying by 100
Unemployment Rate = x 100
(2.3 million/31.4 million) x 100 = 7.3%
Unemployment Rate = 7.3%
Drawbacks of the Official Unemployment Rate
UNDEREMPLOYMENT is when workers are not fully utilizing their skills and education in their jobs. The rate sometimes understates unemployment by ignoring this factor.
Unemployment statistics do not consider people who give up on looking for jobs after searching for a job without luck. These people are called DISCOURAGED WORKERS and are not considered part of the labor force.
Some people are not honest when responding to Statistics Canada’s labor market survey stating that they are looking for work when they are not. DISHONESTY may overstate employment.
Types of Unemployment
FRICTIONAL UNEMPLOYMENT: Workers who are temporarily between jobs or starting to
look for a first jobSTRUCTURAL UNEMPLOYMENT: A mismatch between people and jobs. This type of
unemployment occurs primarily because of gradual changes in the economy.
CYCLICAL UNEMPLOYMENT: Due to fluctuations in output and spending; causes
unemployment to rise and fall.SEASONAL UNEMPLOYMENT: Canadian industries such as agriculture, construction,
and tourism.
The Rise in the Natural Unemployment Rate
In recent decades Canada’s estimated natural unemployment rate rose because of several main trends structural change, with shrinking
manufacturing and expanding services past reforms to unemployment insurance
(some of which have been reversed) higher minimum wages in many provinces
Full Employment
is the highest expectation of employment for the economy as a whole that also includes natural unemployment
Natural Unemployment Rate, which includes frictional and at least some structural unemployment
Canada is presently associated with an unemployment rate between 6% and 7%
Factors affecting Unemployment Trends
In recent decades Canada’s estimated natural unemployment rate rose because of several main trends structural change, with shrinking
manufacturing and expanding services past reforms to unemployment insurance
(some of which have been reversed) Changing participation rates (increasing
young people in labour force) higher minimum wages in many provinces
The Costs of Unemployment High unemployment hurts individuals
and the Canadian economy as a whole The cost of unemployment for the entire
economy can be measured by the difference between actual real output and potential output which is the real output associated with full employment
Okun’s LawPotential Output: the real output or gross domestic product
associated with full employment.For every percentage point that the unemployment rate exceeds
the natural unemployment rate, the gap between potential output and actual output is 2.5%.
For example: In 2002, the real GDP in 1997 dollars was $1074.5 billion The assumed natural unemployment rate is was 6.5% The unemployment rate was 7.7%(7.7%-6.5%) x (2.5%) $1074.5 x 3%= (1.2 x 2.5) = 32.2 billion= 3%Therefore, in 1997 dollars, the real GDP could have been 32.3
billion higher.
END OF CHAPTER 10INFLATION & UNEMPLOYMENT
Elby, Carol, Timothy, Suki and Carmen