Class Notes (923,168)
CA (543,132)
UTSC (33,027)
MGEA06H3 (176)
Iris Au (165)
Lecture

Lecture notes for week 1

5 Pages
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Department
Economics for Management Studies
Course Code
MGEA06H3
Professor
Iris Au

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ABOUT THE COURSE
x Coordinator: Ata Mazaheri
x Need help for the course?
o The TAs are your first option.
o TA office: MW 369
o My Office hours
Wednesday: 11 – 1 PM, 4 – 6 PM
Thursday: 2 – 3:30 PM
Friday: 12 – 1 PM
INTRODUCTION—UNEMPLOYMENT AND INFLATION
Outline
x What is macroeconomics?
x Unemployment—unemployment rate & labour force participation rate
x Inflation—CPI & GDP Deflator
What is Macroeconomics?
x While microeconomics is about a specific market, macroeconomics is about the economy as a whole (i.e. the aggregates).
x In macroeconomics, we look at the things like: national income, level of unemployment, inflation rate, the exchange rate, etc.
x Macroeconomics is not simply a matter of adding things up, because the dynamics are different!
Example 1: Unemployment
x A simple microeconomic approach to unemployment:
x Question: What is special about the microeconomic approach?
x Answer: No unemployment because the quantity demanded = quantity supplied.
x We know there is unemployment, and sometimes it can be very serious.
o The Great Depression of the 1930s.
o Recessions of early 1980s and 1990s.
Example 2: Inflation—Percentage change in the general price level
x A microeconomic approach to inflation involves two markets and a shift in demand.
Suppose DX 9 and DY ;:
x Question: What is special about the microeconomic approach?
x Answer: No change in overall prices and no inflation. This is not true.
x We know there is inflation, and sometimes it can be very serious.
o In the 1950s, the 70’s and early 80’s, inflation in Canada approaching and sometimes exceeding 10% per year.
o In other countries it has sometimes been over 100% per year. Sometimes, inflation has gone completely wacky, destroying
the currency, with prices changing hourly (hyperinflation).
x Question: What do we learn so far?
x Answer: Macroeconomics sees things in a different way than microeconomics. We need a different way than microeconomics to
look at aggregate behaviour.
o We have to keep in mind that all behaviour has to have their roots in micro!
www.notesolution.com
Unemployment
x We do the “labour force surveythat 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 current do not have a paid job but are looking for one.
3. Not in the labour force (NLIF): those who do not have a job and are not looking for one.
x 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:
Unemployment rate = # of unemployed ÷ labour force × 100%
Employment rate = the percentage of adult population that is employed:
Employment rate = # of employed ÷ adult population × 100%
The labour-force participation rate = the percentage of adult population that is in the labour force:
Labour-force participation rate = labour force ÷ adult population × 100%
x Let’s look at some data.
x Question: What do we observe?
x Answer: Unemployment is never zero! In November 2008, the unemployment rate in Canada is 6.3% and in Ontario it is 7.1%.
x Question: Why unemployment rate will never be zero?
x Answer: There are “frictions” in the economy, which include:
o Changes in the industry of the economy—some expand and some contract
o Changes in the economic structure of regions—some do well, others do not
o Normal movements in the labour market—people move in and out of the labour market
x We think of “full employment” as unemployment rate about 6% or 7%.
o Full employment is the level of employment obtained when the economy is operating at its full potential.
x Who knows what happens to the unemployment rate this year, as the world experiences a recession! We do expect the
unemployment rate to go up (OCED predicts it will be 7.0% in 2009 and 7.5% in 2010 for Canada)
x Note: When unemployment rate 9, 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 an unsuccessful search, have given up looking. They are no longer
counted as unemployed.
Example:
Case 1: Labour force = 600, # of unemployed = 36
x What is the # of employed? 600 – 36 = 564 people are employed
x Among the employed 100 of them are part-time workers, how many full-time workers? 564 – 100 = 464 full-time workers
x What is the unemployment rate? 36/600 × 100% = 6%
Case 2: Labour force = 550, # of unemployed = 55
x What is the # of employed? 550 – 55 = 495
x Among the employed 150 of them are part-time workers, how many full-time workers? 495 – 150 = 345
x What is the unemployment rate? 55/550 × 100% = 10%
x Note: If the size of the LF remains unchanged in Case 2, what would be the unemployment rate?
50 dropped out of labour force and 55 are unemployed
(55 + 50) / 600 × 100% = 17.5%
o 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 U and will ; the ur).
x Lesson: We have to interpret the unemployment data with caution.
Another example: From 2006’s First Exam Questions 4 – 5
The adult population of Atlantis is constant at 20 000. In the initial period, 9 000 people have full-time jobs, 1 920 people have part-time
jobs, 1080 people have no jobs and are actively looking for work, and 8 000 people are at home and are not looking for work. Questions
4 and 5 deal with this situation.
4. In the initial period, the unemployment rate in Atlantis is:
A) 5.4% B) 6% C) 7.2% D) 8% E) 8.033% F) 9% G) 10
H) 10.71% I) 11% J) 12% K) 13.5% L) 15% M) 18% N) 20%
O) 25% P) none of the above
1080 / (20 000 – 8 000) × 100% = 1 080 / 12 000 × 100% = 9%
5. 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 work, while 116 are filled by people who were formerly unemployed. In the later period,
the unemployment rate in Atlantis is:
A) 5.4% B) 6% C) 7.2% D) 8% E) 8.033% F) 9% G) 10
H) 10.71% I) 11% J) 12% K) 13.5% L) 15% M) 18% N) 20%
O) 25% P) none of the above
Labour force increases by 50 to 12 050. The number of unemployed decreases by 116 to 964.
964 / 12 050 × 100% = 8%
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Description
ABOUT THE COURSE N Coordinator: Ata Mazaheri N Need help for the course? o The TAs are your first option. o TA office: MW 369 o My Office hours Wednesday: 11 1 PM, 4 6 PM Thursday: 2 3:30 PM Friday: 12 1 PM INTRODUCTIONUNEMPLOYMENT AND INFLATION Outline N What is macroeconomics? N Unemploymentunemployment rate & labour force participation rate N InflationCPI & GDP Deflator What is Macroeconomics? N While microeconomics is about a specific market, macroeconomics is about the economy as a whole (i.e. the aggregates). N In macroeconomics, we look at the things like: national income, level of unemployment, inflation rate, the exchange rate, etc. N Macroeconomics is not simply a matter of adding things up, because the dynamics are different! Example 1: Unemployment N A simple microeconomic approach to unemployment: N Question: What is special about the microeconomic approach? N Answer: No unemployment because the quantity demanded = quantity supplied. N We know there is unemployment, and sometimes it can be very serious. o The Great Depression of the 1930s. o Recessions of early 1980s and 1990s. Example 2: InflationPercentage change in the general price level N A microeconomic approach to inflation involves two markets and a shift in demand. Suppose D X and DY;: N Question: What is special about the microeconomic approach? N Answer: No change in overall prices and no inflation. This is not true. N We know there is inflation, and sometimes it can be very serious. o In the 1950s, the 70s and early 80s, inflation in Canada approaching and sometimes exceeding 10% per year. o In other countries it has sometimes been over 100% per year. Sometimes, inflation has gone completely wacky, destroying the currency, with prices changing hourly (hyperinflation). N Question: What do we learn so far? N Answer: Macroeconomics sees things in a different way than microeconomics. We needdifferent way than microeconomics to look at aggregate behaviour. o We have to keep in mind that all behaviour has to have their roots in micro! www.notesolution.com
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