Jan 18_cpi, Inflation, Emplyment
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Transcript of Jan 18_cpi, Inflation, Emplyment
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The Consumer PriceIndex:Defined Measures the price level for consumer goods.
Obtained by comparing, the cost of a fixedbasket of commodities purchased by Canadianconsumers in a given year with the cost of thesame basket in the base year
An indicator of changes in the consumerprices experienced by Canadians.
Since the basket contains commodities ofunchanging or equivalent quantity and quality\the index reflects only price movements.
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Current CPI Weights & Time Base
Those goods (about 600) represented in the CPIare weighted according to their relative importancein the total expenditures of consumers
CPI weights and items are obtained from surveysconducted every ten or fewer years. The currentweights are based on 2005 consumer survey
The current time base is 2002=100
www.statcan.ca/english/sdds/2301.htm
http://www.statcan.ca/english/sdds/2301.htmhttp://www.statcan.ca/english/sdds/2301.htm -
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Constructing and Calculating aSimple CPI
1. Determine the market basket
choose the base year and the contents.
2. Find the prices for the items in the basket in thebase year and the current year.
3. Compute the cost of the basket in the base year
and the current year.
Now calculate the CPI
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Calculate a Simple CPIUnion of University Provinces
Good 2000 2000Qn P
$
2001 2001Qn P
$
2002 2002Qn P
$
BooksPencilsPens
10$50100 $ 1100$ 5
12.$50200. $ 150..$10
100....$6050.. $1.50
20..$20
CPI 2002 (base year 2000)Bottom 2000 Q's x 2000 P's = $1100Top 2000 Qs x 2002 Ps = $2750
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Calculating a Simple CPI
$50 x 10 = $500$1.00 x 100 = $100
$5 x 100 = $500P00 x Q00
$1100
$60 x 10 = $600$1.50 x 100 = $150
$20 x 100 = $2000P02 x Q00
$2750
100)Q(P)Q(PCPI
basketyrbaseyrbase
basketyrbasecurrent
x100
)Q(P)Q(PCPI
basket0000
basket000202
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Calculating a Simple CPI
= 250 (Base year 00 = 100)
100$1100
$2750CPI02
One more major price index is calculated -
PPI: producer price index: market basket of
goods & services bought by firms.
note CPI= 100 in the base year.
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Problems in Measuring CPI
1. Substitution bias Consumers respond to relative price changes by
buying more of the relatively cheap goods
\ Index overstates inflation2. Introduction of new goods
\Index overstates inflation
3. Unmeasured quality change.\Index overstates inflation
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1. Tool for deflating current dollar estimatesto obtain constant dollar estimates thateliminate the effects of price change
The CPI Used in Four Specific Ways
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Constant $ Estimates:Using the CPI to compare $ values over
time
e.g. price of a tin of butterscotch
candies was $.45 in 1978 and $1.00 in2008.
How much money in 1978 has the
same purchasing power as $1.00 in2008?
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10Candy was more in 1978.
$1.37
$0.4537.6
114.5
Suppose
CPIbaseyr.02 in 1978= 37.6
CPI 2002=100 in 2008 = 114.5
Value in
2008 $s of1978 Price
Price19781978
2008
2002__
2002__
yearBase
yearBase
CPI
CPI
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Bank of Canada Inflation Calculator
http://www.bankofcanada.ca/en/inflation_calc.htm
2. Escalate a given dollar value over time topreserve the purchasing power of that value
Adjust contracted payments such as wages, rents,
leases, child support: private and public pensionprograms, personal income tax deductions
The CPI Used in Four Specific Ways
http://www.bank-banque-canada.ca/en/inflation_calc.htmhttp://www.bank-banque-canada.ca/en/inflation_calc.htm -
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Using the CPI to Compare $ Values OverTime
Annual family expenses
100yearcurrent""forCPI
$Currents$'2002,constant
Current $
CPI
2002 = 100 Constant 2002, $s1997 $20,000 90.5 $22,099
2000 $25,000 96.6 $25,879
2004 $30,000 105.6 $28,409
2007 $35,000 111.9 $31,278
Nominal Real
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Using the CPI to adjust payments e.g. Divorce Agreement
The basic child support payment is$600/month effective May 1, 2003. EveryMay 1 thereafter, payments will be adjustedby the percentage change over 12 months in
the March CPI for Canada.Suppose the CPI increased 2.2% in the first year,
1.4% in the second.
On May 1, 2004, payment increases by2.2% x $600 = $13.20
On May 1, 2005, payment increases by
1.4% x $613.20 = $8.58
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3. Real & Nominal Interest Rates
Interest: payment of money income in the future for atransfer of money in the past.
Interest rate paid by the bank
nominalrate of interest. Interest rate corrected for inflation
realrate of interest.
real interest rate =nominal interest rate inflation rate.
The CPI Used in Four Specific Ways
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The CPI Used in Four Specific Ways
4. Setting and evaluating economic policies
Bank of Canada uses the CPI toevaluate its policies
Economic analysis and research
Costs of Inflation
Inflation is a process of rising prices.
We measure the inflation rateas thepercentage change in the average
level of prices or the price level.
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Costs of Inflation
A fall in purchasing power of money?
The inflation fallacy.
Inflation of prices goes handin hand with inflation of
incomes.
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Costs of Inflation
1. Tax: shoe leather costs
Inflation is like a tax imposed oneveryone who holds money.
Avoidance of this tax uses up resources.
2. Menu costs
Updating price lists & posted prices;eg., printing new menus, catalogues, etc.
3. Increased variability of
relative prices Reduced efficiency of the price system.
Confusion & inconvenience discouraging
investment and economic growth
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Costs of Inflation
5.Special costs associated withunexpected inflationrandom redistribution of income.(nothing to do with merit or need)
for debtors who gain at the expense of
creditors for people on fixed incomes
for those workers whose wages dontkeep up with inflation.
4. Hyperinflation and economic
breakdown
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Statistics Canada
Statistics Canada: Dailyhttp://www.statcan.ca/english/dai-quo/
Find the latest CPI and Unemployment Rate
Macro Economic Aggregate:Unemployment
http://www.statcan.ca/english/dai-quo/http://www.statcan.ca/english/dai-quo/http://www.statcan.ca/english/dai-quo/http://www.statcan.ca/english/dai-quo/ -
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Jobs and Unemployment
The Unemployment Ratein Canada since 1926.
During the 1930s, theunemployment rate hit
20 percent The lowest rate
occurred during WorldWar II at 1.2 percent
The unemployment ratehas averaged 6.7percent since World WarII
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Unemployment: Basic Definitions
labour force: total number of adults15 and over who are either employedor are unemployed and seeking work
employed: number of people who holdjobs.
unemployed: number of people who do nothave jobs but are available and looking forwork.
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Unemployment Rate
100
unemployedemployed
unemployed
100
forcelabour
unemployedpeopleof#
force)(labour
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Not in Labour Force:8.608 million
Employed:16.867 million
Unemployed:1.079 millionLabour Force
17.946 Million
Adult Population (over 15 years), 2007Civilian, Non-Institutional Labour Force
Population (page 117 in text)
Labour Force Pop:26.554M
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Labour Force: Participation Rate
Percentage of the population (aged15 years and over) that is in thelabour force
labour force
labour force population
(total working age population: total # people 15 years or older: exceptthose living on a reservation, those in the military or in jail, or in a hospital or
institution for an extended period of time)
X 100
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Canadian Labour Force Survey
To be calledemployeda person must..
To be calledunemployeda person must be
available for work, (looking for work) and
must fall into one of the three followingcategories:
http://www.statcan.ca/english/Subjects/Labour/LFS/lfs-en.htm
http://www.statcan.ca/english/Subjects/Labour/LFS/lfs-en.htmhttp://www.statcan.ca/english/Subjects/Labour/LFS/lfs-en.htmhttp://www.statcan.ca/english/Subjects/Labour/LFS/lfs-en.htmhttp://www.statcan.ca/english/Subjects/Labour/LFS/lfs-en.htm -
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Unemployed
1) Not working, but making specificefforts within previous 4 weeks tofind a job
2) Laid off from a job within previous26 weeks and waiting for recall
3) Waiting to begin a new job withinthe next 4 weeks
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Employment and Unemployment
The Unemployed
Unemployment varies by region and
population segment. Tends to be higher among
teenagers, men, and residents of
Newfoundland and Labrador.
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Qualifications of the UnemploymentDataUnemployment rate as measured by the
Labour Force Survey can be misleading
for these reasons:1) Unrealistic wage expectations
2) Discouraged workers
3) Part time workers
4) Underground (illegal) workers not
counted in the statistics
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3 Different Types of Unemployment
1. Frictional Unemployment
Unemployment from normal
turnover in the economy. Short term, such as temporary
layoffs or changing jobs.
UE insurance can increase this typeof unemployment.
By-product of labour force mobility.
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3 Different Types of Unemployment
2. Structural Unemployment
Workers lack the necessary skills for jobsthat are available
Have skills that are no longer in demand.
Result of a changing, dynamic economy.
Tends to be longer term
Government training programs helpreduce structural unemployment.
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3 Different Types of Unemployment
3. Cyclical Unemployment
Due to short term cyclical
fluctuations in the economy. Occurs during a recession due to
inadequate demand.
Viewed as especially correctablethrough government policies.
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Full Employment, UnemploymentRate
\defined as the sum of frictional andstructural unemployment
Unemployment that is unavoidable
and to be expected in a growing
and changing economy.
The Full Employment Unemployment Rate has many names
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Full Employment
Potential GDP: The level of total output thatcan be sustained in the long run withoutinflation and at full employment.
Target rate of unemployment.Natural RateRate that is sustainable withoutcreating inflation
Rate associated with potential GDP.Currently between 6% and 7% in
Canada.
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The Figure shows therelationship betweenunemployment and realGDP.
As the unemploymentrate fluctuatesaround the naturalunemployment rate(part a), real GDPfluctuates aroundpotential GDP (part b).
LABOUR TRENDS AND FLUCTUATIONS
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What is this rate?What factors affect the choice of the target rateof unemployment?
1) sustainable without inflation.
Target Rate of Unemployment/
Full Employment/Natural Rate
2) demographics - affect frictionaland structural unemployment.
3) structural change.
4) social and institutional structure - eg.imperfect labour markets, changes in governmentEI affects frictional unemployment.
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Costs of Unemployment
Financial uncertainty.
Anxiety, tension, and despair.
Loss of potential output to society.
Potential consumption is reduced
Loss of human capital
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Seasonal Unemployment/Seasonal Adjustment
Seasonal unemployment: predictablechanges in the unemployment rate due toseasonal factors
Seasonal adjustment: attempts to removethe predictable seasonal unemploymentfrom the reported unemployment
left with a measure that moreaccurately reflects the changes in thestate of the economy.