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MGEA06H3 (53)
Iris Au (33)
Final

# Topic 1: Unemployment - Knowledge Summary and Exam Analysis

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School
University of Toronto Scarborough
Department
Economics for Management Studies
Course
MGEA06H3
Professor
Iris Au
Semester
Winter

Description
Knowledge Summary: Topic 1 – Part A: Unemployment Unemployment (or joblessness) occurs when people are without work and are actively seeking one A high unemployment rate hurts the economy of a country because it causes a waste of scarce economic resources and reduces the long run growth potential of the economy. An economy with high unemployment is producing within its production possibility frontier. Components of adult population: 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 Adult Population = E + U + NILF Labour force (LF) = E + U Unemployment rate (UR) = U/LF x 100% Employment rate = E/(E+U+NILF) x100% Labour force participation rate = LF/(E+U+NILF) Note to unemployment topic: • Unemployment rate will never be zero • Full employment is the level of employment obtained when the economy is operating at its full potential • When unemployment rate goes up, it may cause underemployment and discouraged workers Topic 1 – Part B: Inflation Inflation refers to the % change in (general) price level each year Issues in inflation: 1) It reduces the purchasing power of money 2) It reduces the real value of anything whose price is fixed in money terms 3) Redistribution of wealth: expected inflation vs unexpected inflation 4) Inefficiency – erosion of money as medium of exchange How to compute inflation? If we are using Quantity of Period 1 as basis for calculations: Step 1: Find total value of Bundle for period 1 = (P 1x Q 1, period + P2 x Q2, period + … P nx Q n, period ) Step 2: Find total value of Bundle for period 2 = (P 1x Q 1, period + P2 x Q2, period + … P nx Q n, period ) Step 3: Inflation = (Bundle, period – Bundle, period )/ (Bundle, period ) If we are using Quantity of Period 2 as basis for calculations: Step 1: Find total value of Bundle for period 1 = (P 1 x Q 1, period+ P 2x Q 2, period + … P n x Q n, period ) Step 2: Find total value of Bundle for period 2 = (P 1 x Q 1, period+ P 2x Q 2, period + … P n x Q n, period ) Step 3: Inflation = (Bundle, period – Bundle, period )/ (Bundle, period ) True measure of inflation = Somewhere in between the two measures (no exact value) Two Price Indexes: 1) Consumer Price Index (CPI) – measures how fast the prices of goods and services bought by a typical Canadian household change over time. It uses the base-year bundle. 2) GDP deflator – measures how fast the prices of goods and services produced within Canada change over time. It uses the current-year bundle. Note: • The differences between CPI and GDP deflator are: o CPI uses the bundle purchased by a typical households; while GPD deflator uses the bundle produced within the country (Meaning some items in the bundle will be only attribute to either CPI or GPD deflator) o GDP deflator uses the bundle that is currently produced and CPI uses a fixed bundle (the base-year bundle) (Meaning that the Quantity Period used for basis of GDP or CPI calculations is different) How do we get price index? Step 1: Get the cost of a bundle in different time period Step 2: Choose a time period as base year, say period 1 Step 3: Multiply the cost of bundle in different time period by 100/(P period 1x B period ) to get the price index (since base year = period 1) Note: • For CPI, when calculating cost of a bundle for various periods, always use Quantity of Base year • For GPD deflator, when calculating cost of a bundle for various periods, always use Quantity of Current year How do we use series? Question 1: What happene
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