Download Chapter 10: Inflation and Unemployment

Chapter 10: Inflation and Unemployment
Kevin Chan, Rachel Lam, Kelvin Leung & Victoria Wong
10.1 Inflation
Inflation a(n) ___________ in the general level of prices
Deflation a(n)
in the general level of prices
The Consumer Price Index
The _____________________ (CPI) 1 is the __________ common measure of inflation.
A “_________________” of consumer products is used to monitor price changes. Ex.1 will show how
the CPI indicates price changes.
Ex. 1
Simple Consumer Price Index
This sample survey allows you to compare prices in the ______________ year with those in the
__________ year2. The actual CPI is calculated by Statistics Canada and is relatively shown in the Ex.2.
This shows the _______________ 3 for the major components of the CPI. Among a variety of Canadian
communities, every __________ the prices of about _________ representative products are added to
the CPI shopping basket to be calculated. Typically, ______________ prices, results to the percentage
_________________ in the CPI represent the inflation rate.
1
A measure of price changes for a typical basket of consumer products
2
The survey year used as a point of comparison in following years
3
The proportions of each good in the total cost of the basket of consumer goods used to calculate CPI
Ex.2
Consumer Price Index Weights
Nominal versus Real Income
The CPI can help consumers determine ____________________4, or the amount they must spend on
the entire range of goods and services they buy. A way to determine how a consumer’s purchasing
power is affected by inflation; we can express one’s _____________5 as a ______________6. The
following formula can be used to determine real income for a given year.
Real Income= _______________________
The purchasing power of a current dollar is ________________ related to the CPI: the ____________
the CPI, the higher is the purchasing power of the nominal income, and vice versa. A higher standard of
living will result by those whose incomes increase at a _____________ rate than the rise in prices.
Limitations of CPI
The CPI does not consider __________________, changes in __________, and _____________.
Consumer consumptions are only based on an average ______________. Changes in spending patterns
4
The amount consumers must spend on the entire range of goods and services they buy
5
Income expressed in current dollars
6
Income expressed in constant base-year dollars
use base-year qualities. Using the CPI it can lead to a _____________ in the stated inflation rate. The
index cannot reflect changes in quality, so as standard of living may increase due to the increased
quality it will not be reflected in the CPI.
The GDP Deflator
It is an indicator of ________________ for all ___________ and____________ produced in the economy
and weighs them in terms of the economy’s total output. It includes quantities that change each year.
It compares prices in the current year with those in a ____________ year. The values for this index are
not quickly available as values for the CPI. GDP deflator receives ___________ publicity than the CPI.
Ex. 3
Simple GDP Deflator
Nominal versus Real GDP
Nominal GDP is expressed in ________________ dollars, where as real GDP is expressed in ___________
dollars. The real GDP can be determined by the following formula:
Real GDP= _________________
Ex.4
Finding Real Gross Domestic Product
Inflation’s Effects
Inflation redistributes purchasing power between _______________, and ______________ and
____________. Many labour unions negotiate income adjustments, and in collective agreements these
adjustments are called ______________________7. Three types of indexation: _____________ indexed
incomes8, _____________ indexed incomes9, and _____________incomes10. Those whose incomes are
_____________ indexed to inflation rates maintain their purchasing power, while those with
______________ indexed or _____________ incomes lose purchasing power. Borrowers win if the
actual inflation is _____________ than anticipated inflation. Lenders win if actual inflation is
__________ than anticipated inflation. When actual inflation _______________ anticipated inflation,
than both lender and borrower are unaffected.
Real interest rate11 =
–
Nominal interest rate12 =
+
10.2 Unemployment
The Labour Force Survey
Statistics Canada keeps track of the Canadian workforce through a monthly survey. This survey
measures the _____________________, which is a random sample taken form Statistics Canada for the
labour force survey with specific exclusion.
Labour force refers to people who either have a _________ or are actively seeking ________________
Participation rate: the percentage of the entire labour force population that makes up the labour
force
Participation rate = _________________________ X 100
The Official Unemployment Rate
Unemployment rate: the number of unemployed people in the labour force as a percentage of the
entire labour force.
7
Provisions for income adjustments to accommodate changes in price levels, which are included in wage contracts
8
Nominal incomes that automatically increase by the rate of inflation
9
Nominal incomes that increase by less than the rate of inflation
10
Nominal incomes that remain fixed at some dollar amount regardless of the rate of inflation
11
The nominal interest rate minus the rate of inflation
12
The interest rate expressed in money terms
Unemployment rate = _____________________________ X 100
Drawbacks of the Official Unemployment Rate
Official unemployment rate is not accurate; it may either understate or overstate the true level of
unemployment in the Canadian economy. The factors affecting the official rates are _______________, _____________________ and ________________________.
1) Underemployment
the problem of workers being underutilized, either as part-time workers or by working at jobs not
appropriate to their skills or education.
2) Discouraged workers
Unemployed workers who have given up looking for work
3) Dishonesty
Types of Unemployment
____________ Unemployment
Unemployment due to being temporarily between jobs or looking for a first job
_____________Unemployment
Unemployment due to a mismatch between people and jobs
_____________Unemployment
Unemployment due to fluctuations in output and spending
_____________Unemployment
Unemployment due to seasonal nature of some occupations and industries
Full Employment
The ________________________________ of employment for the economy as a whole and it is defined
in term of ________________________. This rate includes functional unemployment but neither cyclical
unemployment nor seasonal unemployment.
 Structural Change
the change from _________________________ to ____________________________
 Unemployment insurance
Unemployment insurance allows job seekers to devote more ___________ and ____________ to
search for employment, hence it increases frictional unemployment.
 Change participation rate
young unskilled workers have a higher ______________________ than experienced workers
 Minimum wages
increase the number of people looking for work.
The Costs of Unemployment
A long period of unemployment can create stress and discouragement, disrupt family life, lower selfesteem, and cause financial hardship to jobless workers and their families. Thus the economy
__________ the output of workers could have produced.
By calculating the __________________________, which is the measurement of the real output, or
GDP, associated with full employment, we can get the cost of unemployment for the entire economy.
According to ____________________ for every percentage point that the unemployment rate exceeds
the __________________________ the gap between potential output and real output is _________.
Ex.5
Given the data as follow
__________________________________________________________________________________
Total population 15 years of age and over
15 million
Those 15 years of age and over not in the labour force population
2.8 million
Part-time workers who wish to have full-time jobs
200 000
Part-time workers who do not wish to have full-time job
600 000
Workers with full-time jobs
1.5 million
Unemployed members of the labour force
100 000
__________________________________________________________________________________
Calculate
a) the labour force population
b) the labour force
c) the participation rate
d) the official unemployment rate
e) the unemployment rate, include underemployment and discouraged workers
Boom, Bust & Echo
David K. Foot is a well-known Canadian ________________ and __________________. He suggests
that our ages can give us insights about our future. Foot wrote the book __________________. It
outlines some of the effects of Canada’s huge ____________________ (people born from
_______________), __________________ (people born from _______________), and
___________________________ (people born from ______________).
______________ is the study of human populations used to understand the past and to predict the
future. The 2 key factors to predict: the number of people in each ________________ & the
_____________ the each person will participate to a given ________________.
The Baby Boom (1947 – 1966)
The reason to this was due of the __________________ economy which was robust and young people
wanted large families. Another reason was the high immigration levels prevailed during the 1950’s.
The __________________ had a lot of wonderful opportunities after the vast numbers of young babyboomers into the marketplace during the ______________.
Things were tough for the late- 1950s group due to horrendous obstacles in the market place, and were
unable to get their careers on track. The 3.1 million people born from 1961 to 1966 are referred to the
__________________ in Douglas Capland’s fictional novel and the term is still widely used today.
While front-end boomers were earning ___________ more than their fathers by age 30 and backenders were making ________ less their fathers.
The ____________________ had to cope with their parents. While the 60 year olds were successful, the
father sees his son’s failure as a result of lack of ___________________.
The Baby Bust (1967-1979)
The commercial introduction of the __________________ in 1961 and increase of women in the labour
market led a decline in ________________ over the 1960s.
As a result, this decline in birth rates became known as _____________.
These baby busters have little to no _____________ in finding part-time jobs in high school, unlike their
siblings.
In the 1990s, university entry standards have declined, hence making it _____________ for these baby
busters to get into the school of their choice.
The Baby Echo (1980-1995)
As of 1998, there were _________ million members of the _____________ generation.
Like the baby boom, the echo has a ___________ end born in the 1980s, that will have an easier ride
then its ___________ end, born in the first half of the 1990s.
Gen X-II should be better prepared than its parents were to cope with ____________ youth
employment and other difficulties associated with a large cohort.