Macroeconomics - CPI, Inflation, and Employment

Inflation

a general rise in the price levels of an economy

Consumer Price Index

A measure used by countries to determine inflation rate by tracking the prices of a ‘basket’ of goods that are significant in the average lifestyle

Inflation

a general rise in the price levels of an economy

Consumer Price Index

A measure used by countries to determine inflation rate by tracking the prices of a ‘basket’ of goods that are significant in the average lifestyle

Items in the Basket

clothing and footwear, alcoholic beverages and tobacco products, health care, shelter, transportation, food, recreation and education, household operations and furnishings

CPI Formula

CPI_t = C_t/C_o x 100

limitations of CPI

only considers a sample of population, fixed weight, changing composition, substitutes, quality changes, other purchases

real income

the buying power of income and/or income adjusted for inflation

real income formula

real income = (nominal income) / (CPI / 100)

labour force

the total of all Canadians holding jobs plus all of those actively seeking work, aged 15 +

employment rate formula

employment rate = [(# of employed) / (labour force)] x 100

unemployment rate

all of those who are not working but who are actively seeking and available for work, includes workers who are temporary laid off

participation rate formula

participation rate = (employed people + unemployed people) / (working age non-institutionalized people)

seasonally adjusted unemployment rate

an unemployment rate adjusted to eliminate recurring and unavoidable unemployment due to seasonal factor, such as farming, fishing, construction, etc

underemployment

a situation in which workers hold jobs that do not fully utilize their skills or employ them only part-time when they would prefer to work full time

• a limitation of employment statistics because they are weighted the same as full time workers

discouraged workers

those who would like to work but have stopped looking because they are believe nothing is available for them

• a limitation of employment statistics because they are not considered part of the labour force and thus not included in the unemployed stats

out of the labour force

people who did not work in the past four weeks, includes full time students, homemakers, discouraged workers

frictional unemployment

unemployment caused by workers who are between jobs or who are entering or reentering the labour force

seasonal unemployment

unemployment caused by recurring climatic factors, such as the impact of winter on tourism, farming, construction, etc

structural unemployment

unemployment caused by long-term changes in the economy

For example; shift from goods production to services, technological unemployment

replacement unemployment

when firms move production to foreign countries due to cheaper labour

geographical unemployment

the skills of available workers do not match the skills requirements and location of employment opportunities

cyclical unemployment

unemployment caused by a downturn in the business cycle

economic costs of unemployment

real GDP is lower than it could be if resources were being used

Okun’s Law

for every percentage point that the actual unemployment exceeds the natural employment rate, a GDP gap of 2% occurs

social costs of unemployment

there is an unequal burden on those between 15-24 and those living in atlantic provinces, loss of skill and self esteem, social unrest

GDP Deflator

used to adjust nominal GDP to real (constant dollar) GDP, takes into account changes in consumer and capital goods

demand-pull inflation

inflation caused by excessive increases in demand relative to available production, inventories decrease, causing businesses to increase their prices (usually occurs during the peak)

Cost-Push Inflation

inflation caused by the passing down of increased production costs to consumer goods/services, increases in costs can also force business to decrease supply, resulting in higher prices (can happen when wages, taxes, or price of raw materials increases)

Structural Inflation

changes in the structure of the economy that causes prices to be inflexible downwards

stagflation

a situation when the economy is experiencing little economic growth, high unemployment, and inflation at the same time

hyper inflation

serious period of price inflation when the inflation when the inflation rate 50% per month

effects of inflation

causes the redistribution of income, hurts savers, dampens output, potentially lead to a depression

Philips Curve

an inverse and stable relationship between inflation and unemployment rates