5 - Price Indices and Unemployment

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University of Toronto St. George
Gustavo Indart

PRICE INDICES AND UNEMPLOYMENT Business Cycle fluctuations of national income around its trend value that follow a more or less wavelike pattern Potential output Y real GDP that the economy would produce if its productive resources were employed at their normal levels or utilization Output gap actual national income minus potential national income YY Recessionary gap a situation in which actual output is less than potential output YY Inflationary gap a situation in which actual output exceeds potential output YYRecession a downturn in the level of economic activity Often defined precisely as two consecutive quarter in which real GDP fallsEmployment the number of persons 15 years of age or older who have jobsUnemployment the number of persons 15 years of age or older who are not employed and are actively searching for a job Labour force the number of persons employed plus the number of persons unemployed Unemployment rate U unemployment expressed as a percentage of the labour forceUnemployment rateNumber of people unemployedNumber of people in the labour force100Price Indices Price level the average level of all prices in the economy expressed as an index numberInflation a rise in the average level of all prices the price level Consumer Price Index CPI an index of the average prices of goods and services commonly bought by householdsSince the price level is measured with an index number its value at any specific time has meaning only when it is compared with its value at some other timePurchasing power of money the amount of goods and services that can be purchased with a unit of moneyInflation reduces the purchasing power of money and the value of any sum fixed in nominal terms Anticipated inflation has smaller effect on the economy than unanticipated inflation Summary of Questions to be Asked
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