econ unit3test

what are the 4 causes of economic growth

1. staple theory

2. social capital

3. innovation

4. research and development

staple theory

we will always need to buy staple goods, which makes staples the prime force in GDP growth

more spending on staple goods = economic growth

social capital

government investment into infrastructure helps economic growth

what are the ways to increase productivity

1. improve transportation

2. improve management style

3. encourage innovation

4. eliminate the progressive income tax system

5. decrease taxes

6. increase capital

what’s the formula for labor force?

it’s the definition of the labour force!

Anyone 15 or over that isn’t institutionalized and is currently working or actively looking to work

what’s the formula for unemployment rate?

(#of unemployed / labour force) x 100

formula for participation rate

(labour force / population 15+) x 100

who do we NOT include in the unemployment rate

• retired

• full-time students

• residents of the territories

• people living on reserves

• inmates in institutions

What are some flaws of GDP

• population size

• doesn’t account for non-market production like domestic chores, volunteer work, bartered services/goods

• doesn’t include the underground economy

• doesn’t include leisure

• doesn’t consider distribution of income

• doesn’t look at environmental degradation

• doesn’t account for cash deals

what are some flaws of CPI

method of measuring is outdated - avg family is not 4 and 600 goods used to create basket need to be updated bc of cultural differences among households

what are some flaws of unemployment rate

• Does not include people that are underemployed - they’re overqualified for their jobs and they’re not being fully utilized

• Doesn’t include people that are discouraged and have given up looking for jobs

• Doesn’t include people that are in transition to a new job - they have the job but have not quite started yet

what is canada’s current hdi ranking?

18th

what was canada’s ranking on the hdi last year?

16th

what was canada’s best rank on the hdi and when?

1st place from 2000-2008

who is currently in 1st place?

Switzerland; it used to be Norway

What’s the Paradox of Thrift?

We’re taught to save because it’s good for us as individuals

However it’s not good for the economy because economic growth only happens with increased consumer spending

Savings are considered a leakage to the economy

what is the Keynesian economic theory?

• Aggregated Demand is an essential component of economic growth

• You have to keep consumer demand stimulated so that the economy basically grows itself

• John Maynard Keynes preferred to lean on demand more than supply when dealing with the economy

Why did Keynes see a problem with using aggregated supply

• He lived during the civil war

• During the civil war, the only thing contributing to the economy on the supply side was war efforts

• High taxation keeps suppliers away, but consumer demand is a lot more reliable

Benefits of economic growth

INCREASES! LOTS OF INCREASES:

• Employment

• Income for consumers to go spending

• Gov’t revenues

• Standard of living

• Leisure time

What’s the real GDP growth formula?

[ (Real GDP 2 - Real GDP 1) / Real GDP 1 ] x 100

what is multiple counting?

counting a good’s value in the GDP amount BEFORE it’s part of a finished good

This means the value is counted twice - once as the raw good and once as the final good - which inflates the GDP value and gives us a garbage number

you only count goods once they are part of final products, not on their way to becoming final products

what’s the GDP formula?

GDP = C + G + I + X - M - S - T

what’s wrong with an economy defined by one world vs one nation

an economy of an entire world doesn’t include trade because there’s no one to trade with

C wouldn’t be included bc it would make up too much of the GDP

One nation has a good balance of trade, I, and G - C is still not included bc it makes up too much

Causes of unemployment and their definitions

1. Frictional unemployment - The unfortunate event where a person is on their way to starting a new job/changing jobs and the labour survey gets them when they’re technically ‘unemployed’

2. Seasonal unemployment - caused by changes in climate or business activity, like farmers or construction

3. Structural unemployment - Caused by changes in consumer demand; this causes entire industries to become ‘obsolete’ and useless, which causes job cuts

4. Cyclical unemployment - caused by the recession in the business cycle; there’s much less AD in comparison to AS so suppliers don’t want or need to spend as much on wages

5. Technological unemployment - New machinery and tech replacing workers

6. Replacement unemployment - Caused by businesses closing their plants to move production somewhere else bc it’s cheaper

7. Gov’t induced unemployment - Caused by restrictive economic policies

• Cutting spending

• Restricting country’s money supply (Increasing interest rate which decreases investments and causes unemployment)

• Enforcing minimum wage - employers don’t want to pay that much in wages so they layoff workers

Full employment vs. natural rate of unemployment

Full employment is when most individuals are employed or willing to work

There’s a natural rate of unemployment bc people are in between jobs, recently graduated, changing careers, etc.

Natural rate of unemployment is 6-7%

What is inflation?

the general increase in prices over a period of time

Causes our purchasing power to decline bc our money is worth less

types of inflation

1. Zero inflation - no inflation at all

2. Hyper inflation - also called run away inflation; money is losing value at a ridiculous rate

3. Deflation - Decrease in general prices over time which increases purchasing power

Causes of inflation and how the government combats it

1. Cost-push inflation - When wages or other costs rise so the cost is passed onto the consumer to make up for it

   • Use wage and price controls to fix it

2. Demand pull inflation - There is too much spending/demand, not enough supply to keep up, so prices surge and inflation goes crazy

• This is completely natural! law of supply and demand is at play

• Gov’t fixes it by ensuring that AD does not exceed FE (full employment of factors of production)

  • Decrease gov spending

  • Increase taxes

3. Imported inflation - When a country imports goods that come from a country with ridiculous inflation

   • Inflation gets worse in that country

   • We pay an inflated price, so we have to charge more to make up for it

   • NO SOLUTION TO THIS - inflation has to be controlled in country of origin

costs of inflation

• Banks and creditors make less money bc the fixed interest rate is less than the rate of inflation

• Workers that are not in unions cannot get wage increases equal to the rate of inflation

• Government makes less money off of fixed license fees bc these don’t change with inflation

• Retirees or people living on fixed incomes won’t be able to keep up with inflated costs

• Exporters bc exports lose value as prices go up

Benefits of inflation

• Debtors - real value of their payment decreases with inflation

• Businesses which are able to pass on their costs to consumers by increasing prices - this is cost push inflation

What are the CPI components

• Food and beverages

• Housing

• Apparel

• Transport

• Medical care

• Recreation

• Education and communication

• other goods and services

Food and beverages weighting?

14.794%

Housing weighting?

42.107%

Apparel weighting?

2.810$

transportation weighting?

15.738%

medical care weighting?

8.833%

recreation weighting?

5.821%

education and communication weighting?

6.770%

other goods and services weighting?

3.127%

CPI formula

(price of basket now / price of basket in base year) x 100

remember to multiply $ amounts by weightings and then find totals for current and previous year.

formula for indexing pensions/wages?

CPI 1 Wage or pension 1
——— = —————————
CPI 2 Wage or pension 2

cross multiply as needed!

inflation rate formula

[ (CPI 2 - CPI 1) / CPI 1 ] x 100

what is NOT included in the GDP

1. Intermediate goods that are going to be used to make something else

2. Non-production transactions like stock market activities, bonds, mutual funds

3. Non-market activities like illegal activities or DIY jobs

what is GDP?

The dollar value of all financial goods and services produced within a country’s borders within a year

what year did we stop using GNP?

1986

what policy would fix structural unemployment

Free retraining programs from the government

what policy would fix technological unemployment

• free retraining programs

• create jobs specifically for those who lost their previous jobs to tech

what policy would fix replacement unemployment

• Decrease corporate taxes so that businesses are encouraged to remain in Canada

what policy would fix seasonal unemployment

• Create jobs just for seasonal workers so that they can work year-round

what policy would fix frictional unemployment

• No solution

• you’d have to change the criteria itself for unemployment

what policy would fix cyclical unemployment

• Increase government spending

• Decrease taxes

• Goal is to get out off the recession stage

what factors affect supply

• change in prod. costs

• change in # of inputs available

• change in MR

• weather

• earthquakes

• labour strikes

• OPEC and oil prices increasing

• taxation

• increase in inflationary pressure

what is stagflation

high unemployment + high inflation rates

• goes against what the Phillips curve says, which is that unemployment and inflation are typically inversely proportional