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Chapter 4.2-4.3

ECON202 Chapter Notes - Chapter 4.2-4.3: Unemployment, Weighted Arithmetic Mean, Gdp Deflator

Course Code
Harvey King

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Figure 4.6 Labour Market in a Recession
How do we get out of this situation?
Market cures for cyclical unemployment include the eventual re-negotiation of wages to a lower
level --> towards where LS crosses LD(1).
Many economists think that the economy recovers so slowly that government cures are needed,
in the form of increases in government spending that via multiplier effects will lead to an
increase in the demand for labour.
The government would need to carry out countercyclical fiscal and monetary policy to increase
aggregate expenditure, pushing LD(1) back towards LD(0).
One of our tasks in this course is to explore this adjustment process.
4.2.6 Societal Costs of Unemployment
Unemployment is painful for the individual who is unemployed, but we also focus on four
societal costs of unemployment:
The unemployed are not producing goods and services, and do not earn income national
income falls as a result.
Unemployment damages a person's work skills and work habits, a problem which gets worse the
longer you are unemployed.
There is strong personal suffering and psychological costs the unemployed have lower health
rates, higher suicide rates, and higher spousal and child abuse rates.
Property crimes rates tend to rise and fall with the unemployment rate.
Applied Analysis 4.1, "Youth Unemployment," explores how and why youth unemployment is
significantly higher than overall unemployment, especially in recession years.
4.3 Inflation and the Price Index
So far in this course (in Module 2), we have so far examined individual prices in the economy,
but we also need to examine some form of average prices.
4.3.1 Measuring Average Prices and Inflation
The average level of prices (the price level) is measured by a price index, which is a weighted
average of prices in the Canadian economy.
The most commonly used price index is the Consumer Price Index (CPI), which attempts to
measure the cost of buying a basket of goods that the average Canadian household would buy,
compared to buying that same basket in the base year of 2002.
The CPI is calculated monthly based on data surveys in the major Canadian cities.
In March 2016, the CPI was at 127.9, indicating that it costs 25.5% more to buy the average
basket of goods than it did to buy that basket in 2002. (Source: Statistics Canada's CANSIM II
database, Table 326-0022.)
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