Week 1 - Introduction Unemployment & Inflation
Unemployment rate is never negative or zero
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
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.
o NRU DOES NOT equal to zero!
Underemployment: workers have jobs but their skills are not fully utilized.
Discouraged workers: those who want a job but, after unsuccessful searches,
have given up looking.
o Discouraged workers are NOT counted in the labour force.
Inflation refers to the % in (general) price level each year.
www.notesolution.com How do you compute inflation?
We need to:
o Gather information on the prices and quantities of goods and services
o Compute the cost of bundle: *
o Calculate the % in the cost of bundle.
Cost of period-1 bundle in period 1 = P1X B 1
Cost of period-1 bundle in period 2 = P2X B 1
How much have prices rise? = [(P2XB 1(P 1B )1/ (P 1 B )1 X 100%
Cost of period-2 bundle in period 1 = P1X B 2
Cost of period-2 bundle in period 2 = P2X B 2
How much have prices rise? = [(P2XB 2(P 1B )2/ (P 1 B )2 X 100%
Two Price Indices
Consumer Price Index (CPI) it measures how fast the prices of goods and
services bought by a typical Canadian household change over time. It uses the base-
GDP deflator it measures how fast the prices of goods and services produced
within Canada change over time. It uses the current-year bundle.
CPI uses the bundle purchased by a typical household; while GDP deflator
uses the bundle produced within the country.
Changes in the prices of imported consumption goods.
o CPI = change
o GDP deflator = no change because the goods are not produced within
www.notesolution.com Changes in the prices of goods that are only bought by firms or government.
o CPI = no change because the consumer is not buying the product
o GDP deflator = change because the goods are being produced in the
How Do We Get Price Index?
If we want to construct a price index, we will:
o Get the cost of a bundle in different time periods.
o Choose a time period as base year, say, period 1.
o Multiply the cost of bundle in different time period by (P 1X B represent
cost of base-year bundle) to get the price index.
To get year Bs income measured in year As dollars = (PA/ PB) X Income B
What are the issues in inflation?
It reduces the purchasing power of money (the amount of goods and services that can
be purchased with a unit of money).
The same amount of money buys fewer goods
It reduces the real value of anything whose price is fixed in money terms.
Redistribution of wealth Unexpected inflation would redistribute wealth
Inefficiency erosion of money as medium of exchange.
In the base year, the index = 100
CPI is the most commonly used price index to compute inflation rate.
Bank of Canada works on keeping inflation low and stable.
Producer Price Index (PPI) is used by firms to catch how fast the costs are
www.notesolution.com increasing. Seldom used.
As a household, we worry more about GDP deflator and CPI.
Week 2 - Measurement of National Income GDP
How To Measure Aggregate Output
Gross Domestic Product (the aggregate output) the total value of goods and
services produced in the economy during a given period.
There are 3 ways to measure GDP:
o The expenditure approach Use by the government
o The income approach Use by the government
o The value added approach
The Expenditure Approach
The expenditure approach, sometime called gross domestic expenditure
(GDE), adds up the expenditure needed to purchase the final output (end use,
not for the production for goods and services) produced during a given
GDP from the expenditure approach = C + I + G + NX
o Net exports and not exports because
Consumption, investment and government spending may
include final goods and services produced outside the country
(i.e. imported goods)
Given GDP measures final goods and services produced within
the country, we need to subtract imports.