Week 11: employment; wealth and income distribution

Question 1

Consumer Price Index

Answer 1

• 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

Question 2

Calculating Inflation/Deflation using
CPI

Answer 2

((New CPI – Old CPI) / Old CPI) * 100

ex. 2012 CPI 109 and 2013 CPI 122

((122 – 109) / 109) * 100
= 11.9% inflation

Question 3

Nominal income

Answer 3

expressed in current dollars

Question 4

Real income

Answer 4

• expressed in base-year dollars
• equals nominal income divided by the value of the CPI
  (expressed in hundredths)
• recent base year: 2012

Question 5

Limitations of the CPI

Answer 5

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

Question 6

GDP deflator

Answer 6

• 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

Question 7

Inflation’s Effects

Answer 7

• full indexation
• partial indexation
• fixed incomes

Question 8

Full indexation

Answer 8

nominal income rises at the inflation rate

ex. wages go up when inflation goes up every 3 months

Question 9

Partial indexation

Answer 9

nominal income rises at less than the inflation rate

ex. inflation increases 10% and you get 3% wage increase

Question 10

Fixed incomes

Answer 10

nominal income stays constant

ex. retired people

Question 11

Inflation and Purchasing power

Answer 11

• inflation can also redistribute purchasing power between borrowers and lenders
• banks build interest in loans to predict inflation

Question 12

Borrowers win

Answer 12

if actual inflation > anticipated inflation

ex. you borrow $100 and pay back $100 10 years later

Question 13

Lenders win

Answer 13

if actual inflation < anticipated inflation

Question 14

Borrowers and lenders unaffected

Answer 14

if actual inflation = anticipated inflation

Question 15

Labour Force Survey

Answer 15

tracks a randomly selected sample of Canadian households

Question 16

Labour force population

Answer 16

• includes Canadians between 15 and 65
• excludes children, old people, people with disabilities, mental health issues, prisoners, military people

Question 17

Labour force

Answer 17

• includes all those who either have a job or are actively seeking employment
• excludes rich people who don’t work

Question 18

Participation rate

Answer 18

the labour force given as a percentage of the labour force population

Question 19

Official unemployment rate

Answer 19

• 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

Question 20

Drawbacks of the Official Unemployment Rate

Answer 20

• 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

Question 21

4 Types of Unemployment

Answer 21

• frictional
• structural
• cyclical
• seasonal

Question 22

Frictional unemployment

Answer 22

being temporarily between jobs or looking for a first job

ex. looking for another job after quitting

Question 23

Structural unemployment

Answer 23

a mismatch between people and jobs

ex. being laid off, replaced by AI (algaculture)

Question 24

Cyclical unemployment

Answer 24

fluctuations in output and spending

ex. happens during a recession or depression which increases unemployment

Question 25

Seasonal unemployment

Answer 25

the seasonal nature of some occupations and industries

ex. working at a Christmas tree farm

Question 26

Full employment

Answer 26

• 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%

Question 27

Costs of Unemployment

Answer 27

• high unemployment hurts people and economy
• = actual real output - potential output