Week 11: employment; wealth and income distribution Flashcards
Consumer Price Index
- what people buy every day
- common measure of inflation
- monitors price changes in a representative ‘shopping basket’
- includes quantities in a shopping basket determined in a base year
- food and energy prices are variable so its excluded
Calculating Inflation/Deflation using
CPI
((New CPI – Old CPI) / Old CPI) * 100
ex. 2012 CPI 109 and 2013 CPI 122
((122 – 109) / 109) * 100
= 11.9% inflation
Nominal income
expressed in current dollars
Real income
- expressed in base-year dollars
- equals nominal income divided by the value of the CPI
(expressed in hundredths) - recent base year: 2012
Limitations of the CPI
does not take full account of:
- consumer differences, since it is based on the consumption patterns of an average household
- changes in spending patterns, since it uses base-year quantities
- improvements in product quality
- slow bc data is reported every 3 months
GDP deflator
- indicates price changes for all products appearing in GDP
- includes quantities that change each year
- compares prices in the current year with those in a reference year
- like CPI
Inflation’s Effects
- full indexation
- partial indexation
- fixed incomes
Full indexation
nominal income rises at the inflation rate
ex. wages go up when inflation goes up every 3 months
Partial indexation
nominal income rises at less than the inflation rate
ex. inflation increases 10% and you get 3% wage increase
Fixed incomes
nominal income stays constant
ex. retired people
Inflation and Purchasing power
- inflation can also redistribute purchasing power between borrowers and lenders
- banks build interest in loans to predict inflation
Borrowers win
if actual inflation > anticipated inflation
ex. you borrow $100 and pay back $100 10 years later
Lenders win
if actual inflation < anticipated inflation
Borrowers and lenders unaffected
if actual inflation = anticipated inflation
Labour Force Survey
tracks a randomly selected sample of Canadian households
Labour force population
- includes Canadians between 15 and 65
- excludes children, old people, people with disabilities, mental health issues, prisoners, military people
Labour force
- includes all those who either have a job or are actively seeking employment
- excludes rich people who don’t work
Participation rate
the labour force given as a percentage of the labour force population
Official unemployment rate
- the number of unemployed people in the labour force as a percentage of the entire labour force
- people who stopped submitting job apps are not considered unemployed
Drawbacks of the Official Unemployment Rate
- excludes part-timers and ex. people working in retail with PhDs
- excludes discouraged workers who are unemployed and have given up looking for work
- based partly on dishonest responses
4 Types of Unemployment
- frictional
- structural
- cyclical
- seasonal
Frictional unemployment
being temporarily between jobs or looking for a first job
ex. looking for another job after quitting
Structural unemployment
a mismatch between people and jobs
ex. being laid off, replaced by AI (algaculture)
Cyclical unemployment
fluctuations in output and spending
ex. happens during a recession or depression which increases unemployment
Seasonal unemployment
the seasonal nature of some occupations and industries
ex. working at a Christmas tree farm
Full employment
- the highest reasonable expectation of employment for the economy as a whole
- defined in terms of the natural unemployment rate: frictional and some structural unemployment
- Canadian unemployment rate between 6% and 7%
Costs of Unemployment
- high unemployment hurts people and economy
- = actual real output - potential output
