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Midterm 1 Notes.pdf

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Rizwan Tahir

MeasuringJobs and Inflation Sunday, January 29, 2012 4:51 PM Employment and Unemployment Why Unemployment is a Problem: 1. Lost production and incomes - scary when can’t support self 2. Lost human capital - lose skills so value of person declines with time Labour Force Survey: ○ Working Age Population - total number of people aged 15 and over ○ Labour Force - sum of the employed and the unemployed ○ Employed - have full-time or part-time jobs ○ 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 weeks Four Labour Market Indicators: 1. Unemployment Rate - the percentage of people in the labour force who are unemployed Unemployment Rate = (Number of People Unemployed / Labour Force)*100 2. 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 3. 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 4. Employment-to-PopulationRatio - percentage of people of working-age who have jobs Employment-to-Population Ratio = (Number of People Employed / Working-Age Population)*100 Unemployment and Full Employment UnderutilizedLabour Excluded: ○ 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 "Natural" Unemployment: ○ The Churning Economy  Due to transitions throughoutstages of life and the transitions that businesses make make ○ The Sources of Unemployment  Enter unemployment when... 1) Lose their jobs and search for another job (job losers) 2) Leave their jobs and search for another job (job leavers) 3) Enter (entrants) or reenter (reentrants)the labour force to search for a job  End spell of unemployment when… 1) Hired of recalled 2) Withdraw from the labour force ○ Frictions, Structural Change, and Cycles  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 unemploymentseen at trough and unusually low unemploymentseen as peak in business cycles ○ What is "Natural" Unemployment?  Natural Unemployment - the unemploymentthat arises from normal frictions and structural change when there is no cyclical unemployment(ie. when all unemploymentis frictional and structural)  Natural Unemployment Rate - natural unemploymentas a percent of the labour force  Full Employment - unemploymentrate equals the natural unemployment rate Real GDP and Unemployment Over the Cycle: ○ Potential GDP - the quantityof 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 The Price Level and Inflation ○ Inflation Rate - annual percentage change of the price level ○ Price Level - the average level of prices Why Inflation is a Problem: ○ Redistributes Income and Wealth  If value of money varies unpredictablyover time, then the amounts really paid and received also fluctuate unpredictably ○ Diverts Resources from Production  People spend energy forecasting inflation rather than producing goods/services, so wasteful ○ Hyperinflation - an inflation rate so rapid that workers are paid twice a day because money loses value so quickly The Consumer Price Index: ○ 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 Constructing the CPI: The CPI Basket - contains goods and services representedin the index and the relative ○ The CPI Basket - contains goods and services representedin the index and the relative importance attached to each of them - applies to average urban household ○ The MonthlyPrice Survey - check the prices of all items in 30 metropolitan areas ○ Calculating CPI 1. Calculate the cost of CPI basket at base-period prices 2. Calculate cost of CPI basket at current-periodprices 3. Calculate CPI for both CPI = (Cost of CPI Basket @ Current Prices / Cost of CPI Basket @ Base Prices)*100 Measuring the Inflation Rate: Inflation Rate = [(CPI This Year - CPI Last Year) / CPI Last Year]*100 The Biased CPI: ○ New goods bias ○ Quality change bias ○ Commodity substitutionbias ○ Outlet substitutionbias AlternativePrice Indexes: GDP Deflator = (Nominal GDP / Real GDP)*100 Chained Price Index for Consumption = (Nominal Consumption Expenditure / Real Consumption Expenditure)*100 Core Inflation: ○ Core Inflation Rate - inflation rate excluding volatile elements ○ Typically use core CPI inflation rate which is the percentage change excluding food and fuel Measuring GDP and Economic Growth Sunday, January 29, 2012 4:51 PM Gross Domestic Product GDP Defined: ○ The market value of final goods and services produced within a country in a given time period ○ Market Value  The price at which items are traded in markets ○ Final Goods and Services  A final good or service is an item that is bought by its final user during a specified time period  An intermediategood or service is an item that is produced by one firm, bought by another firm, and used as a component of a final good or service  Double countingwould occur if we add the value of intermediate goods or services and final goods or services ○ Produced Within a Country  What is produced in a country counts towards that country's GDP ○ In a Given Time Period  Measures the value of total productionas well as total income and expenditureto show a link between productivity and living standards GDP and the Circular Flow of Expenditureand Income: ○ Households and Firms  Households and firms buy labour, capital, and land in factor markets  Firms pay householdsincome for the use of these services  Firms pay householdsincome for the use of these services  Firms retained earnings are one part of the household sectors income  Consumption Expenditure - the total payment for the goods or services households buy from firms  Investment - the purchase of new plant, equipment,and buildingsby firms  When a firm has unsold inventory, we see this as the firm buying goods from itself ○ Governments  Government Expenditure - government expenditureon goods and services from firms; taxes not part of circular flow, nor are financial transfers like welfare ○ Rest of the World  Net Exports - the value of exports minus the value of imports  If positive, net flow from Canadian firms to Rest of the World  If negative, net flow from Rest of the World to Canadian firms ○ GDP Equals Expenditure Equals Income  Y = C + I + G + X - M ○ Why is Domestic Product "Gross"?  Depreciation - decrease in value of a firms capital resulting from wear and tear and obsolescence  Gross Investment - total amount spent buying new capital and replacing depreciated capital  Net Investment - the amount by which the value of capital increases  Gross because does not account for depreciation Measuring Canada's GDP The ExpenditureApproach: Y = C + I + G + X - M ○ C - Personal Expenditureson Consumer Goods and Services ○ I - Business Investment ○ G - government Expenditureson Goods and Services ○ X - M - Net Exports of Goods and Services (exports minus imports) ○ Y - GDP or AE (aggregate expenditure) The Income Approach: add together everything below ○ Wages, salaries, and supplementarylabour income ○ Corporate profits ○ Interest and miscellaneous investment income ○ Farmers income ○ Income from non-farm unincorporatedbusinesses ○ Indirect taxes less subsidies ○ Depreciation Nominal GDP and Real GDP: ○ Real GDP - value of final goods and services produced in a given year when values at the prices of a reference base year ○ Nominal GDP - value of final goods and services produced in a given year valued at the prices of that year The Uses and Limitations of Real GDP The Standard of Living Over Time: ○ Calculated using real GDP per person ○ Long Term Trend  (The Growth of) Potential GDP - value of GDP when all labour, land, capital, and  (The Growth of) Potential GDP - value of GDP when all labour, land, capital, and entrepreneurial ability are fully employed  F
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