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Department
Economics for Management Studies
Course
MGEA06H3
Professor
Iris Au
Semester
Winter

Description
1 ECMA06 – Introduction Introduction – Unemployment & Inflation Outline • What is macroeconomics? • Unemployment – unemployment rate & labour force participation rate • Inflation – CPI & GDP Deflator www.notesolution.com 2 What is Macroeconomics? • While microeconomics is about a specific market, macroeconomics is about the economy as a whole (i.e. the aggregates). • Macroeconomics is not simply a matter of adding things up, because the dynamics are different! • Macroeconomics sees things in a different way than microeconomics. We need a different way than microeconomics to look at aggregate behaviour. ⇒ Keep in mind that all behaviour has to have a root in micro! • In macroeconomics, we look at the things like: national income, level of unemployment, inflation rate, the exchange rate, etc. www.notesolution.com 3 ECMA06 – Introduction Unemployment - 7.6% in Canada currently • We do the “labour force survey” that classifies the adult population (age 15 or above) into 3 groups: 1)Employed (E): those who get a paid job. 2)Unemployed (U): those who currently do not have a job but are looking for one. 3)Not in the labour force (NILF): those who do not have a job and are not looking for one. (example: students studying full-time, retired citizens of the country) • By classifying the adult populations in these 3 groups, we can calculate the following: Labour force (LF) = # of employed + # of unemployed Unemployment rate (UR) = the percentage of the labour force that is unemployed: www.notesolution.com 4 Employment rate = the percentage of adult population that is employed: DON’T USE “1 – UNEMPLOYMENT RATE” TO CALCULATE EMPLOYMENT RATE The labour-force participation rate (LFPR) = the percentage of adult population that is in the labour force: • Let’s look at some data. • Observations: - Unemployment rate is never negative or zero - Unemployment rate varies across provinces. Manitoba has the lowest UR while Newfoundland & Labrador has the highest. www.notesolution.com 5 ECMA06 – Introduction - Unemployment rate is not constant; changes from time to time. • Question: Why unemployment rate will never be zero? • Answer: There are “frictions” in the economy, which include: ⇒ Industries – some expand, some contract ⇒ Regions – some do well, others do not ⇒ Normal movements – people move in and out of the labour market www.notesolution.com 6 Full Employment/Natural Rate of Unemployment • You probably hear the terms “full employment” and “the natural rate of unemployment”. • Full employment is the level of employment obtained when the economy is operating at its full potential. • The natural rate of unemployment (NRU) is the unemployment rate when the economy is operating at its full potential. ⇒ NRU is not constant, it changes over time. ⇒ Even though the economy is producing at full employment, NRU DOES NOT equal to zero! ⇒ In the early 2000s, we believed the NRU in Canada was about 6%. However, with the outbreak of the recent financial crisis, the NRU may increase. www.notesolution.com 7 ECMA06 – Introduction • When unemployment rate ↑ , it may understate the following problems: 1) Underemployment: workers have jobs but their skills are not fully utilized. 2) Discouraged workers: those who want a job but, after unsuccessful searches, have given up looking. * Discouraged workers are NOT counted in the labour force. Example: Case 1: Labour force = 600, # of unemployed = 36 • What is the # of employed? E = LF – U = 600 – 36 = 564 • What is the unemployment rate? UR = (LF/U) X 100% = 6% www.notesolution.com 8 www.notesolution.com 9 ECMA06 – Introduction Case 2: Suppose the economy experiences an adverse shock and 50 unemployed workers become discouraged workers and drop out from the labour force. After these 50 workers dropped out from the labour force, the # of unemployed is equal to 55. • What is the size of the labour force? LF = 600 – 50 = 550 • What is unemployment rate? UR = (U/LF) X 100% = (55/550) X 100% =10% • If the size of the LF remains unchanged at 600 in Case 2, what would the unemployment rate be? UR = [(55 + 50) / 600] X 100% = 17.5% www.notesolution.com 10 Note: Therefore, it is possible that the (true/actual) unemployment rate in Case 2 to be higher than 10%, especially if the economy experiences an adverse shock and some unemployed workers become discouraged workers (they are no longer counted as unemployed & will ↓ the unemployment rate). • Lesson: we have to interpret the unemployment data carefully. www.notesolution.com 11 ECMA06 – Introduction Another example: From 2006 First Term Test The adult population of Atlantis is constant at 20,000. In the initial period, 9000 people have full-time jobs, 1920 people have part-time jobs, 1080 people have no jobs and are actively looking for work, and 8000 people are at home and are not looking for work. Question 1: In the initial period, what is the unemployment rate in Atlantis? UR = (U/LF) X 100% = (1080/12000) X 100% = 9% Question 2: In a later period, government policy helps industry generate 166 new full-time jobs. Of these 166 new jobs, 50 are filled by people who were formerly at home not looking for a job, while 116 are filled by people who were formerly unemployed. In the later period, the unemployment rate in Atlantis is: UR = (U/LF) X 100% = (1080 – 116) / (12000 + 50) X 100% = 8% www.notesolution.com 12 Inflation • Inflation refers to the % Δ in (general) price level each year. • Question: How to compute? • Answer: We need to: ⇒ Gather information on the prices and quantities of goods and services bought. ⇒ Compute the cost of bundle: * ⇒ Calculate the % Δ in the cost of bundle. * Let: P = (P 1,, 2 , 3 , 4 , 5, P ) n Q = (Q Q 1,Q 2 Q 3 Q 4 …, 5 ) n Since = P Q + P Q + P Q + P Q + …+ P Q , 1 1 2 2 3 3 4 4 n n then = P • Q www.notesolution.com 13 ECMA06 – Introduction (We make use of vector algebra and the concept of “dot product”). www.notesolution.com 14 Example: How to Measure Changes in Prices Suppose an average household consumes two goods only. Period 1 Period 2 (Base year) (Current year) Price Quantity Price Quantity Food $1 4000 $1 8000 Transport $6000 1 $12000 2/3 ation Food: 4,000; Transportation: 1 Using the Period-1 Bundle to Calculate the % Δ in Price • Cost of period-1 bundle in period 1: P 1 B =1 ($1 X 4000) + ($6000 X 1) = $10,000 • Cost of period-1 bundle in period 2: P 2 B =1 ($1 X 4000) + ($12000 X 1) = $16,000 • How much have prices rise? = [(P 2B )1(P X1 ) 1 (P X1B )]1X 100% = [($16,000 – $10,000) / ($10,000)] X 100% www.notesolution.com 15 ECMA06 – Introduction = 60% www.notesolution.com 16 Food: 8,000; Transportation: 2/3 Using the Period-2 Bundle to Calculate the % Δ in Price • Cost of period-2 bundle in period 1: P 1 B =2 ($1 X 8000) + ($6000 X 2/3) = $12,000 • Cost of period-2 bundle in period 2: P X B = ($1 X 8000) + ($12000 X 2/3) = $16,000 2 2 • How much have prices rise? = [(P XB )–(P XB ) / (P X B )] X 100% 2 2 1 2 1 2 = [($16,000 – $12,000) / ($12,000)] X 100% = 33.3% • Question: Which one measures the rise in prices correctly? a) Using Period-1 bundle b) Using Period-2 bundle c) Neither one is correct. www.notesolution.com 17 ECMA06 – Introduction • Answer: in real life, the true measure is somewhere in between. www.notesolution.com 18 • You probably notice that using Period-1 bundle gives a bigger increase in prices. Is this typical? • The answer is YES, but why? ⇒ Period-1 bundle (or the initial bundle) tends to give
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