Download Ch. 10: Infl & Unem Ppt

Day 2
By: Aakriti, Gloria, Cynthia, Theresa
Daily Plan
Unemployment
Activities
Hall of GDP
The GDP Deflator
The GDP deflator
• measures price changes for all goods and
services produced in the economy and weights
them in terms of the economy’s total output
(GDP).
– includes quantities that change each year
– compares prices in the current year with those
in a base year
•
The values for the GDP deflator are not as
quickly available as values for CPI.
Therefore it receives less publicity than
then CPI. The results of the two indicators
(GDP deflator and CPI) give similar but not
identical estimates of inflation.
Nominal Versus Real GDP
•
Nominal GDP
– is expressed in current dollars
•
Real GDP
– is expressed in base-year dollars
– Gives an indication of the purchasing power
of an entire economy
Real GDP (real
output in terms of =
dollars from some
reference year)
Nominal GDP
Current value of the GDP
Deflator (expressed in
hundredths)
Inflation’s Effects (a)
• If household ↑ but Inflation ↑ at a higher
rate, then household’s purchasing power ↓.
• If household ↑ and inflation rate ↑
proportionally, then household maintains
purchasing power.
• Cost – of – living adjustment clauses
(COLA)  Provisions for income
adjustment to accommodate changes in
price level, which are included in wage
contracts.
•
Inflation redistributes purchasing power in
arbitrary ways because of various types of
indexation
– full indexation (nominal income rises at the
inflation rate)
– partial indexation (nominal income rises at less
than the inflation rate)
– fixed incomes (nominal income stays constant)
Inflation’s Effects (b)
• Nominal Interest rate: The interest rate
expressed in money terms.
- in 2010, A borrows $2000 at 7% per annum,
7% is the nominal interest rate, he has to pay
$140 ($2000 * 7%) interest to the bank.
• Real interest rate: The nominal interest rate
minus the rate of inflation.
- in 2010, if the inflation rate is 3%, then the real
interest rate is: 7% - 3% = 4%, so the bank only
receives $80 ($2000 * 4%) in real interest.
• Inflation premium: a percentage built into a
nominal interest rate to anticipate the rate
of inflation for the loan period. Lenders,
therefore, determine what real interest rate
they desire and add an inflation premium to
determine the nominal interest rate.
• Nominal interest rate = desired real interest
rate + inflation premium.
Nominal
interest rate
7%
=
desired real
inflation premium
+
interest rate
5%
2%
If the inflation rate turns out to be higher, suppose, the
inflation rate is actually 4%, then the real interest rate is 3%
(7% - 4%), which is lower than the desired real interest rate,
which is 5%. Therefore, the lenders are worse off, while
borrowers are better off.
•
Inflation can also redistribute purchasing
power between borrowers and lenders
– borrowers win if actual inflation > anticipated
inflation
– lenders win if actual inflation < anticipated
inflation
– borrowers and lenders are unaffected if actual
inflation = anticipated inflation
Practice Questions (1)
•
The GDP deflator is the following ratio
multiplied by 100:
a. reference-year quantities valued at reference-year
prices, divided by reference-year quantities valued at
current-year prices.
b. reference-year quantities valued at current-year prices,
divided by reference-year quantities valued at baseyear prices.
c. current-year quantities valued at reference-year prices,
divided by current-year quantities valued at currentyear prices.
d. current-year quantities valued at current-year prices,
divided by current-year quantities valued at
reference-year prices.
Practice Questions (2)
• Which of the following groups
is most hurt by unexpected
inflation?
a. those with fixed incomes
b. those with partially indexed
incomes
c. those with fully indexed incomes
d. Borrowers
UNEMPLOYMENT THEATRE
THE LABOUR FORCE SURVEY
•
•
The labour force survey, conducted by Statistics tracks a
randomly selected sample of 53 000 Canadian households
The survey measures
• the labour force population, which includes Canadians 15
years of age or over, with specific exclusions
• the labour force, which includes all those who either have a
job or are actively seeking employment
• the participation rate, which is the percentage of the labour
force population that makes up the labour force
• the official unemployment rate, which is the number of
unemployed people in the labour force as a percentage of
the entire labour force
PARTICIPATION RATES
• NOTE:
• participation rate for women has increase steadily until early 1990s and has
remained stable since
• Decline in participation rate of men (due to early retirement)
• increase in participation of young people since 1975 (students work part
time)
CALCULATIONS
Participation rate
Participation rate =
Labour force
X 100
Labour force population
=
16 689 400
24 945 100
Official Unemployment Rate
Unemployment rate = Unemployment in labour force
Labour force
= 1 277 600
16 689 400
= 7.7%
x 100
X 100
X 100 = 66.9%
DRAWBACKS OF THE OFFICIAL
UNEMPLOYMENT RATE (A)
• The unemployment rate may overstate or understate the
true level of unemployment because of the way its
calculated
• This is caused by three factors
Underemployment
• it does not include underemployed workers who
are underutilized either as part-time workers or
by working at jobs not appropriate to their skills
or education
• The official rate sometimes understates un
employment by ignoring underemployed workers
DRAWBACKS OF THE OFFICIAL
UNEMPLOYMENT RATE (B)
Discouraged workers
• It excludes discouraged workers
who are unemployed and have
given up looking for work
• Since they are not actively
seeking employment they should
not be included in the labor force
• This sometimes caused the official
rate to understate unemployment
DRAWBACKS OF THE OFFICIAL
UNEMPLOYMENT RATE (C)
Dishonesty
• People may give dishonest responses
during the labour market survey (may
say they are actively looking for work
when they are not)
• This makes it possible for the official
rate to overstate unemployment
TYPES OF UNEMPLOYMENT (A)
• There are four types of
unemployment
1. Frictional unemployment =
unemployment due to being temporarily
between jobs or looking for a first job
• Ex. Recent collage graduate looking for
job, and a person who has voluntarily left
one job to look for another
TYPES OF UNEMPLOYMENT (B)
2. Structural unemployment= unemployment due to a
mismatch between people and jobs.
 It is caused by gradual changes in the economy such
as adjustments in what items are produced, how they
are produced, and where they are produced
 Workers gaining new skills, moving to obtain work
elsewhere and the development of new industries in a
region can all take time, thus structural
unemployment can persist for long periods
 Ex. Worker loses job in manufacturing because of
automation
TYPES OF UNEMPLOYMENT (C)
3. Cyclical unemployment= unemployment due to
fluctuations in output and spending
• Ex. Auto worker may work overtime in periods of
strong consumer demand for cars and be laid off in
leaner times
4. Seasonal unemployment= unemployment due to the
seasonal nature of some occupations and industries
• Seasonal unemployment is significant in Canada
because of its climate and the importance of its
primary resource industries
• Ex. Agriculture, construction and tourism industries
FULL EMPLOMENT CABIN
Full Employment
Full employment
 is the highest reasonable expectation of
employment for the economy as a whole
 is defined in terms of the natural
unemployment rate, which includes frictional
and at least some structural unemployment
 in Canada is presently associated with an
unemployment rate between 6% and 7%
The Rise in the Natural Unemployment Rate
In recent decades Canada’s estimated
natural unemployment rate rose because
of several main trends
structural change, with shrinking
manufacturing and expanding services
past reforms to unemployment
insurance (some of which have been
reversed)
higher minimum wages in many
provinces
STRUCTURAL CHANGE
structural adjustments in an economy occur
when there are changes regarding what
products are produced and how they are
produced.
The change in Canadian economy and the
removal of international trade barriers can
displace workers and increase long term
structural unemployment
UNEMPLOYMENT INSURANCE
•Unemployment insurance can be a factor in
increasing the unemployment rate.
•This can be a factor that increases the
unemployment rate between 0.5 to 2 percent
•The government has change this to employee
insurance and have made it more difficult to
claim benefits
MINIMUM WAGES
Wage increases and employment have an inverse
relationship because if a 10 percent increase in
minimum wage it reduces employment by 1
percent in males and 2.7 percent in females
The Costs of Unemployment
High unemployment hurts individuals and the Canadian
economy as a whole
To measure the cost of unemployment for the entire
economy is to calculating the potential output.
Potential output is the real output or gross domestic
product associated with full employment.
To measure the real output follows Okun’s law-----for every
percentage point the unemployment rate exceeds the natural
unemployment rate, the gap between the potential output
and the actual output is 2.5 percent。
Practice Questions (5&6)
• True or False
– Full employment is the same as zero
unemployment
– Unemployment insurance can be a factor in
increasing the unemployment rate
– Full employment is defined in terms of the
natural unemployment rate, which includes
frictional unemployment.
• What are the factors that effect natural and
actual unemployment trends?
Boom Bust & Echo (a)
•
David Foot suggests that our ages can give
us insights into our economic futures
– the baby boom generation (born between 1947
and 1966) which includes Generation X (born
between 1960 and 1966)
– the baby bust generation (born between 1967
and 1979)
– the baby boom echo (born between 1980 and
1995) which includes Generation X-II (born
between 1990 and 1995)
Boom Bust & Echo (b)
•
According to Foot
– economic conditions are easiest for the baby
bust generation and the first parts of the
baby boom generation and baby boom echo
– economic conditions are hardest for
Generation X and Generation X-II
Canada’s Population Pyramids
P244
Female
Male
90
80
70
Age
60
50
40
30
20
10
0
300
250
200
150
100
50
0
50
100
Population in thousands
150
200
250
300