jan 18_cpi, inflation, emplyment

7/29/2019 Jan 18_cpi, Inflation, Emplyment

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1

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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2

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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3

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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4

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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7

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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8

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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11

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

http://www.bank-banque-canada.ca/en/inflation_calc.htmhttp://www.bank-banque-canada.ca/en/inflation_calc.htm


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12

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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13

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.



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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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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. 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.

jan 18_cpi, inflation, emplyment

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