Chapter 5 Flashcards
Unemployment rate formula
UR= (#unemployed/ #LF) x 100
Involuntary part time rate formula
IPR = (#involuntary part time/ # LF) x 100
Labour force participation rate formula
LFPR = (#LF/ # working age pop) x 100
Employment rate formula
ER = (# employed/ working age pop) x 100
Why is unemployment a problem
1.) lost incomes and production
2.) lost human capital
Labor Force categories (2 broadest)
1.) working age population (15 +)
2.) unable to work (too young, retired)
Working age population 2 categories
1.) In labour force
2.) Not in labour force
Labour force (definition)
The sum of people who are employed and unemployed
Labour force 2 categories
1.) unemployed
2.) employed
Employed 2 categories
1.) full time
2.) part time
Part time workers 2 categories
1.) voluntary part time
2.) involuntary part time
People counted as unemployed must be
available for work
and one of
1.) on temporary layoff with expectation of recall
2.) without work but has looked for work in past 4 weeks
3.) has a new job to start within 4 weeks
What are people in the working age population who are neither employed nor unemployed classified as?
not in the labour force
Unemployment rate definition
the percentage of people in the labour force who are unemployed
Involuntary part time rate definition
percentage of people in the labour force who work part time but want full time jobs
Labour force participation rate definition
the percentage of the working age population who are members of the labour force
employment rate definition
percentage of people working age who have jobs
wider definitions of unemployment bring in 3 types of underemployed labour excluded from the official measure, they are:
1.) discouraged searchers
2.) long term future starts
3.) involuntary part timers
discouraged searchers (definition)
a person who currently is neither working nor looking for work but has indicated that he or she wants a job, is available for work sometime in the recent past but has stopped looking because of repeated failure
Long term future starts (definition)
someone with a job that starts more than 4 weeks in the future (classified not in the labour force)
Involuntary part timers
part time workers who would like full time jobs and cant find them and not counted as such in the official stats
frictional unemployment (definition)
Unemployment that arises from normal labour turnover. This comes from people entering and leaving the labour force and from the ongoing creation and destruction of jobs
“good unemployment”
structural unemployment (definition)
the unemployment that arises when changes in technology or international competition change the skills needed to preform jobs or change the locations of the jobs
Cyclical unemployment (definition)
the higher than normal unemployment at a business cycle trough and the lower than normal unemployment at a business cycle peak
“natural” unemployment (definition)
the unemployment arises from frictional and structural change when there is no cyclical unemployment - when all the unemployment is frictional or structural
Natural unemployment rate
natural unemployment as a percentage of the labour force
4 most important factors influencing the unemployment rate
1.) the age distribution of the population
2.) the scale of structural change
3.) the real wage rate
4.) unemployment benefits
the age distribution of population and the unemployment rate
an economy with a young population has a large number of new job seekers every year and has a high level of frictional unemployment. An economy with an ageing population has few new job seekers and a low level of frictional unemployment
the scale of structural change and the unemployment rate
when pace and volume of technological change is high more jobs are lost and the skill to preform them looses value
the real wage and the unemployment rate
The natural unemployment rate is influenced by the wage rate. High wages / high minimum wage puts real wages above the level that balances supply and demand in labour market. This creates a surplus of workers and unemployment arises
unemployment benefits and the unemployment rate
unemployment benefits increase the natural unemployment rate by lowering the opportunity cost of job search
Potential GDP (definition)
the quantity of real GDP at full employment
Output gap (definition)
the gap between real GDP and potential GDP
Price level (definition)
the average level of prices and the value of money
Inflation
a persistently rising price level
deflation
a persistently falling price level
2 reasons for interest in price level, inflation and deflation
1.) we want to measure the annual percentage change of the price level (inflation or deflation rate)
2.) we want to distinguish between the money values and real values of economic variables such as student loan
Why inflation and deflation are problems
Is only a problem when their are unexpected bursts
1.) redistributes income
2.) redistributes wealth
3.) lowers real GDP and employment
4.) diverts resources from production
Consumer price index - CPI (definition)
a measure of the average of the prices paid by urban consumers for a fixed basket of consumer goods and services - tells you about the value of money in your pocket
3 stages involving CPI
1.) Selecting the CPI basket
2.) Conducting the monthly price survey
3.) calculating the CPI
3 steps to calculate CPI
1.) find the cost of the CPI basket at base prices
2.) Find the cost of the CPI basket at current prices
3.) calculate the CPI for the base period and current period
CPI formula
CPI= (cost of CPI basket at current-period prices/cost of CPI at base period prices) x 100
inflation rate formula
inflation rate = (CPI this year - CPI last year/ CPI last year) x 100
High inflation vs High price level
- high inflation is when prices rise rapidly
- high price level is after a sustained period of rising prices
4 main sources of bias in CPI
1.) new goods bias
2.) quality change bias
3.) commodity substitution bias
4.) outlet substitution bias
what is new goods bias
upward bias onto CPI caused by the good being newer and therefore more expensive (computer vs typewriter)
what is quality change bias
many goods get better every year, part of the rise in goods is the payment for improved quality but the CPI counts this as inflation
commodity substitution bias
CPI ignores substitution of goods
outlet substitution bias
when prices are higher people use discount stores more frequently
consequences of the bias
- distorts private contracts and increases government outlays
- many private agreements such as wage contracts are linked to CPI
- close to a 3rd of fed gov outlays are linked directly to CPI
- small bias adds up
magnitude of bias
recent estimate by bank of Canada economist - about 0.6 % per year
2 alternative price indexes
1.) GDP deflator
2.) Chained price index for consumption
GDP deflator (definition)
an index of the prices of all the items included in GDP and is the ratio of nominal GDP to real GDP
GDP deflator (formula)
GDP Deflator = (nominal GDP/ Real GDP) x 100
chained price index for consumption- CPIC (definition)
an index of the prices of all the items included in consumption expenditure in GDP and is the ratio of nominal consumption expenditure to real consumption expenditure
chained price index - CIPC (formula)
CIPC = (nominal consumption expenditure/ real consumption expenditure) x 100
Core inflation rate
the inflation rate excluding volatile elements in attempts to do just that and reveal and underlying trend
real wage rate/price of labour (formula)
nominal wage/ GDP deflator
what real variable in macro is different
interest rate
real variable (formula)
nominal variable/ price level
Natural unemployment
frictional unemployment + structural unemployment
R1 are those who are…
unemployed for one year or more
R2 are those who are…
unemployed for 3 months or less
R5 adds
discouraged searchers
R7 adds
involuntary part timers to R4
What is Hyper-Inflation
Inflation of 50% a month or more
