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EC140 Study Guide - Midterm Guide: Market Basket, Labour Force Survey, Unemployment

Course Code
Rizwan Tahir
Study Guide

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Employment and Unemployment
Lost production and incomes - scary when can’t support self
Lost human capital - lose skills so value of person declines with time
Why Unemployment is a Problem:
Working Age Population - total number of people aged 15 and over
Labour Force - sum of the employed and the unemployed
Unemployed - available for work and without work but made job search efforts in last
4 weeks, or laid off and waiting to be called back, or waiting to start new job in 4
Labour Force Survey:
Unemployment Rate - the percentage of people in the labour force who are
Unemployment Rate = (Number of People Unemployed / Labour Force)*100
Involuntary Part-Time Rate - the percentage of people in the labour force who work
part-time but who want full-time
Involuntary Part-Time Rate = (Number of Involuntary Part-Timers / Labour Force)*100
Labour Force Participation Rate - percentage of working age population who are
members in the labour force
Labour Force Participation Rate = (Labour Force / Working-Age Population)*100
Employment-to-Population Ratio - percentage of people of working-age who have jobs
Employment-to-Population Ratio = (Number of People Employed / Working-Age
Four Labour Market Indicators:
Unemployment and Full Employment
Marginally Attached Workers - a person who is currently neither working nor looking
for work but indicates they want and are available for a job and have looked in the
recent past
Discouraged Worker - a marginally attached worker who has stopped looking for a job
because of repeated failure to find one
Involuntary Part-Timers - part-time workers who want full-time jobs
Underutilized Labour Excluded:
Due to transitions throughout stages of life and the transitions that businesses
The Churning Economy
"Natural" Unemployment:
Measuring Jobs and Inflation
Sunday, January 29, 2012
4:51 PM
Chapter 21 Page 1

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Lose their jobs and search for another job (job losers)
Leave their jobs and search for another job (job leavers)
Enter (entrants) or reenter (reentrants) the labour force to search for a job
Enter unemployment when...
Hired of recalled
Withdraw from the labour force
End spell of unemployment when…
The Sources of Unemployment
Frictional Unemployment - arises from normal labour turnover (ie. from people
entering and leaving the labour force and from the ongoing creation and
destruction of jobs). This is a permanent and healthy phenomenon.
Structural Unemployment - arises when changes in technology or international
competition change the skills needed to perform jobs or change the location of
jobs. Lasts longer than frictional unemployment.
Cyclical Unemployment - higher-than-normal unemployment seen at trough and
unusually low unemployment seen as peak in business cycles
Frictions, Structural Change, and Cycles
Natural Unemployment - the unemployment that arises from normal frictions
and structural change when there is no cyclical unemployment (ie. when all
unemployment is frictional and structural)
Natural Unemployment Rate - natural unemployment as a percent of the labour
Full Employment - unemployment rate equals the natural unemployment rate
What is "Natural" Unemployment?
Potential GDP - the quantity of real GDP at full-employment
Output Gap - the gap between real GDP and potential GDP
When output gap is negative, unemployment rate exceeds natural unemployment rate
Real GDP and Unemployment Over the Cycle:
The Price Level and Inflation
Inflation Rate - annual percentage change of the price level
Price Level - the average level of prices
If value of money varies unpredictably over time, then the amounts really paid
and received also fluctuate unpredictably
Redistributes Income and Wealth
People spend energy forecasting inflation rather than producing goods/services,
so wasteful
Diverts Resources from Production
Hyperinflation - an inflation rate so rapid that workers are paid twice a day because
money loses value so quickly
Why Inflation is a Problem:
CPI - a measure of the average prices paid by urban consumers for a fixed basket of
consumer goods and services
Reference base period always equals 100
The Consumer Price Index:
The CPI Basket - contains goods and services represented in the index and the relative
Constructing the CPI:
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The CPI Basket - contains goods and services represented in the index and the relative
importance attached to each of them - applies to average urban household
The Monthly Price Survey - check the prices of all items in 30 metropolitan areas
Calculate the cost of CPI basket at base-period prices
Calculate cost of CPI basket at current-period prices
Calculate CPI for both
CPI = (Cost of CPI Basket @ Current Prices / Cost of CPI Basket @ Base Prices)*100
Calculating CPI
Measuring the Inflation Rate:
Inflation Rate = [(CPI This Year - CPI Last Year) / CPI Last Year]*100
New goods bias
Quality change bias
Commodity substitution bias
Outlet substitution bias
The Biased CPI:
GDP Deflator = (Nominal GDP / Real GDP)*100
Chained Price Index for Consumption = (Nominal Consumption Expenditure / Real
Consumption Expenditure)*100
Alternative Price Indexes:
Core Inflation Rate - inflation rate excluding volatile elements
Typically use core CPI inflation rate which is the percentage change excluding food and
Core Inflation:
Chapter 21 Page 3
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