MacroeconomicsMacroeconomicsGDPGDP

Chapter 9Chapter 9

By the end of this chapter you By the end of this chapter you should be able to…should be able to…

Understand what is meant by macroeconomicsUnderstand what is meant by macroeconomics

Examine the components and weaknesses of the GDP Examine the components and weaknesses of the GDP as a measure of economic outputas a measure of economic output

Understand why unemployment occurs, how Understand why unemployment occurs, how unemployment rate is calculated and the impact of unemployment rate is calculated and the impact of unemployment on the economy and citizens of a countryunemployment on the economy and citizens of a country

Exployr the components of CPI and how the CPI is used Exployr the components of CPI and how the CPI is used to adjust for the effects of inflation.to adjust for the effects of inflation.

In this lesson you will…In this lesson you will…

Be introduced to macroeconomicsBe introduced to macroeconomics

Learn how to measure and calculate GDP Learn how to measure and calculate GDP and the pros and cons of this performance and the pros and cons of this performance indicatorindicator

Micro vs MarcroMicro vs Marcro

Microeconomics Microeconomics The study of individual parts of an economy The study of individual parts of an economy (pieces of the puzzle)(pieces of the puzzle)

MacroeconomicsMacroeconomicsThe study of the economy as a whole (the puzzle The study of the economy as a whole (the puzzle as a whole)as a whole)

MicroeconomimcsMicroeconomimcs vsvs Macroeconomics Macroeconomics

The 3 main indicators of economic The 3 main indicators of economic performanceperformance

1) Output – Gross Domestic Product (GDP)1) Output – Gross Domestic Product (GDP)Goal: High and Sustained GrowthGoal: High and Sustained Growth

2) Employment – Unemployment Rate (U)2) Employment – Unemployment Rate (U)Goal: Low unemploymentGoal: Low unemployment

3) Price Stability – Consumer Price Index (CPI)3) Price Stability – Consumer Price Index (CPI)Goal: Stable PricesGoal: Stable Prices

GDP News ClipGDP News Clip

GDP? Who cares?GDP? Who cares?

Why measure economics performance Why measure economics performance (GDP)?(GDP)?

If the GDP growth rate is positive that means If the GDP growth rate is positive that means employment, businesses and incomes are employment, businesses and incomes are generally growing.generally growing.

If the GDP growth rate is negative that means that If the GDP growth rate is negative that means that employment, businesses and incomes in general employment, businesses and incomes in general are fallingare falling

More SpecificallyMore Specifically

A measure for an economy’s economic A measure for an economy’s economic output…output…

Assists in government decision making for tax and Assists in government decision making for tax and spending policiesspending policies

Used as measure to see if policies implemented by Used as measure to see if policies implemented by the government have yielded economic growththe government have yielded economic growth

Allows the opportunity to compare output Allows the opportunity to compare output performance with other economiesperformance with other economies

Why measure economic performance Why measure economic performance continuedcontinued

allows us to look at the role and impact of specific allows us to look at the role and impact of specific industries on the economy as a wholeindustries on the economy as a whole

Measures can be used for contract negotiations Measures can be used for contract negotiations (ex. unions)(ex. unions)

Measures can be used to assist in investment Measures can be used to assist in investment decision making.decision making.

GDP ya you know me!GDP ya you know me!

What is GDP?What is GDP?Gross Domestic ProductGross Domestic Product

What does GDP measure?What does GDP measure?The total economic activity/growth across a The total economic activity/growth across a country by estimating annual outputcountry by estimating annual output

Measures market value of total annual output of Measures market value of total annual output of final goods and services produced in the nationfinal goods and services produced in the nation

GDP ya you know me…GDP ya you know me…BREAK IT DOWN!BREAK IT DOWN!

GDP is broken down into 4 subdivisionsGDP is broken down into 4 subdivisionsConsumptionConsumption ( c ): consumer goods and services ( c ): consumer goods and services

purchased by households (cars, purchased by households (cars, appliances etc.)appliances etc.)

Equals 60%-70% of country’s total GDPEquals 60%-70% of country’s total GDP

InvestmentInvestment (I): additions to society’s stock, (I): additions to society’s stock, business’s spending on equipment, business’s spending on equipment, inventory and inventory and buildings to increase production buildings to increase production

GovernmentGovernment (G): consumption of goods (wages and office (G): consumption of goods (wages and office supplies) and capital Investment (schools, hospitals, roads)supplies) and capital Investment (schools, hospitals, roads)

Net Exports (X-M)Net Exports (X-M)Exports (x): products produced in Canada and sold to foreign Exports (x): products produced in Canada and sold to foreign buyersbuyersImports (M): goods purchased in Canada, that were not made Imports (M): goods purchased in Canada, that were not made in Canadain Canada

GDP Calculations (2 ways)GDP Calculations (2 ways)

1) Expenditure Approach1) Expenditure ApproachThe sum of all final goods and servicesThe sum of all final goods and servicesGDP = C + I + G + (X-M) GDP = C + I + G + (X-M)

Incomes ApproachIncomes ApproachThe GDP can be calculated by adding all the incomes in a year The GDP can be calculated by adding all the incomes in a year (wages, rent, interest, profit) in producing the final goods and (wages, rent, interest, profit) in producing the final goods and servicesservices

Should both approaches give the same measure? Why Should both approaches give the same measure? Why or why not?or why not?

Expenditure for one person is another person’s incomeExpenditure for one person is another person’s income

HandoutHandout

Sit back and enjoy the showSit back and enjoy the show

GDP Expenditure ApproachGDP Expenditure Approach

ScenarioScenario

What do you think would happen with regards to What do you think would happen with regards to inflation if our economy were to expand/grow?inflation if our economy were to expand/grow?

We would see inflation unemployment levels drop and more We would see inflation unemployment levels drop and more people can fined work.people can fined work.

More workers employed = increased demand for consumer More workers employed = increased demand for consumer goods.goods.

As economic activity increases, both supply and demand As economic activity increases, both supply and demand increase.increase.

If production cannot keep pace with the demand inflation will If production cannot keep pace with the demand inflation will increase because there will be a shortage resulting in excess increase because there will be a shortage resulting in excess demand leading to higher pricesdemand leading to higher prices

ScenarioScenario

Would an economy experience inflation Would an economy experience inflation during a recession?during a recession?

Most likely not, because unemployment levels rise.Most likely not, because unemployment levels rise.

Less jobs means consumer spending decreasesLess jobs means consumer spending decreases

Therefore less demand for goods and servicesTherefore less demand for goods and services

Prices therefore stabilizePrices therefore stabilize

InflationInflation

What is inflation?What is inflation? a rise in the general level of pricesa rise in the general level of prices

Why does inflation occur?Why does inflation occur?increased cost of productionincreased cost of production

Increased consumer demandIncreased consumer demand

Nominal GDP vs Real GDPNominal GDP vs Real GDP

Nominal GDP Nominal GDP Does not take inflation into account Does not take inflation into account

Real GDP Real GDP GDP calculated with inflation (i.e. at current dollar GDP calculated with inflation (i.e. at current dollar value)value)

A more accurate and truer representation of a A more accurate and truer representation of a country’s outputcountry’s output

Real GDPReal GDP

Real GDP Growth RateReal GDP Growth Rate

(real GDP year 2 – Real GDP year (real GDP year 2 – Real GDP year 1)1)

Real GDP = Real GDP =

Growth rateGrowth rate real GDP year 1 real GDP year 1

X 100

HandoutHandout

Use your handout of Canada’s GDP to Use your handout of Canada’s GDP to answer the following questionsanswer the following questions

1) What is the percentage of Canada’s 1) What is the percentage of Canada’s Real GDP growth from 2010 to 2011 ?Real GDP growth from 2010 to 2011 ?

2) What is the percentage of Canada’s 2) What is the percentage of Canada’s Real GDP growth from 2007 to 2011?Real GDP growth from 2007 to 2011?

Canada's Real GDPCanada's Real GDP

(GDP year 2 – GDP year 1)(GDP year 2 – GDP year 1)Real GDP = Real GDP = Growth rateGrowth rate GDP year 1 GDP year 1

1) 1) 2010’s GDP = $1,624,608 (in millions) 2010’s GDP = $1,624,608 (in millions) 2011’s GDP = $1,718,685 (in millions)2011’s GDP = $1,718,685 (in millions)

GDP = 1,718,685 – 1,624,608GDP = 1,718,685 – 1,624,608Growth rate 1,624,608Growth rate 1,624,608

GDP growth from 2010 – 2011 = 5.7% GDP growth from 2010 – 2011 = 5.7% Real GDP is 3% growthReal GDP is 3% growth

X 100

X 100

( GDP year 2 – GDP year 1)( GDP year 2 – GDP year 1) GDP = GDP = Growth rateGrowth rate GDP year 1 GDP year 1

2007’s GDP = $1,529,589 (in millions)2007’s GDP = $1,529,589 (in millions) 2011’s GDP2011’s GDP == $1,718,685 (in millions)$1,718,685 (in millions)

GDP = $1,718,685 - $1,529,589GDP = $1,718,685 - $1,529,589 Growth Rate $1,529,589Growth Rate $1,529,589

The GDP growth rate from 2007 to 2011 is approximately 12.4%The GDP growth rate from 2007 to 2011 is approximately 12.4%

Real GDP growth rate is 12%Real GDP growth rate is 12%

X 100

X 100

How much GDP growth is idealHow much GDP growth is ideal

The ideal GDP growth rate is one that can be The ideal GDP growth rate is one that can be sustained year after year.sustained year after year.

Think of GDP growth rate like our bodies. Our bodily Think of GDP growth rate like our bodies. Our bodily temperature is 98.6 degrees F. And we want to keep it temperature is 98.6 degrees F. And we want to keep it there. That is the ideal temperature for us to maintain there. That is the ideal temperature for us to maintain healthy growth.healthy growth.

However, if your temperature is lower than the ideal, you However, if your temperature is lower than the ideal, you know you’re sick. If it’s too low, you’re near death. But a know you’re sick. If it’s too low, you’re near death. But a higher temperature can also mean you’re sick. If it’s over higher temperature can also mean you’re sick. If it’s over 100, you have a fever. If it’s above 104 degrees for any 100, you have a fever. If it’s above 104 degrees for any period of time you’re deathly ill. period of time you’re deathly ill.

If the economy grows too slowly it’s not healthy. If the economy grows too slowly it’s not healthy. But, if it grows too fast, that’s not ideal, either. But, if it grows too fast, that’s not ideal, either.

Why is this the case? The economy overheats Why is this the case? The economy overheats (so to speak)(so to speak)

Too much money chasing too few real growth Too much money chasing too few real growth opportunities. Eventually, good money is invested in opportunities. Eventually, good money is invested in poor business growth opportunities. Investments start poor business growth opportunities. Investments start losing money and as a result confidence is lost. Panic losing money and as a result confidence is lost. Panic then occurs and results in selling of many more then occurs and results in selling of many more investments due to fear. Panic doesn’t stop until prices investments due to fear. Panic doesn’t stop until prices are low enough to attract investorsare low enough to attract investors

2008-2009 Recession2008-2009 Recession

Why do you think the 2008-2009 recession Why do you think the 2008-2009 recession occurred? occurred?

2008-2009 Recession2008-2009 Recession

This is what happened during the 2008- This is what happened during the 2008- 2009 recession. GDP was above 4% for 2009 recession. GDP was above 4% for many quarters. Housing alone peaked at many quarters. Housing alone peaked at over 7% growth. Once the housing bubble over 7% growth. Once the housing bubble burst then everything else went with it. burst then everything else went with it. GDP fell sharply (contraction phase)GDP fell sharply (contraction phase)

GDP the good, the bad and the GDP the good, the bad and the uglyugly

We’ve talked about the positives of We’ve talked about the positives of measuring economic output? Can you measuring economic output? Can you think of any negatives?think of any negatives?

GDP DrawbacksGDP Drawbacks

A number of economists have criticized A number of economists have criticized the GDP as a measure of economic outputthe GDP as a measure of economic output

1) Population Size 1) Population Size A GDP growth of 3% can be misleading if the A GDP growth of 3% can be misleading if the population of a country grows by 5%. In this case we population of a country grows by 5%. In this case we need to divide the GDP by the number of people need to divide the GDP by the number of people ((per capita GDPper capita GDP))

2) Non-market production is not measured2) Non-market production is not measuredGDP does not measure everythingGDP does not measure everything

Examples: people who renovate homes, Examples: people who renovate homes, homemakers, voluntary serviceshomemakers, voluntary services

3) GDP does not measure output of underground 3) GDP does not measure output of underground economies (hidden economies)economies (hidden economies)

When a paper trail is not present GDP cannot be When a paper trail is not present GDP cannot be measured – under-the-table transactions that occur measured – under-the-table transactions that occur so people can avoid paying taxes.so people can avoid paying taxes.

Economists believe this could add anywhere from Economists believe this could add anywhere from 3%-20% of the total GDP3%-20% of the total GDP

4) Types of goods produced4) Types of goods producedMany believe that goods and services that take away from Many believe that goods and services that take away from a country’s well being (decrease in GDP) should not be a country’s well being (decrease in GDP) should not be included included

Examples; policing riots and gunsExamples; policing riots and guns

5) Leisure 5) Leisure GDP does not take into account leisure time. GDP does not take into account leisure time.

Leisure time = greater well being = positive GDP growthLeisure time = greater well being = positive GDP growth

A country could have people work 18 hour days 7 days a A country could have people work 18 hour days 7 days a week and they most likely would generate a higher GDP week and they most likely would generate a higher GDP growth rate. However, there would be less leisure time and growth rate. However, there would be less leisure time and thus lower well beingthus lower well being

Environmental DegradationEnvironmental DegradationGDP does not take into effect the negative effect industry GDP does not take into effect the negative effect industry has on our environmenthas on our environment

Environmental degradation is actually rewarded Environmental degradation is actually rewarded

Example: Oil spill of the cost of Florida, has to be cleaned Example: Oil spill of the cost of Florida, has to be cleaned up. That contributes to our GDPup. That contributes to our GDP

Distribution of incomeDistribution of incomeGDP does not take how evenly income is distributed GDP does not take how evenly income is distributed among it’s citizens.among it’s citizens.

Even though you have positive GDP growth you can have Even though you have positive GDP growth you can have only a small portion of the population the benefits from that only a small portion of the population the benefits from that growth. The wealthy becoming wealthier and the poorer growth. The wealthy becoming wealthier and the poorer becoming poorer.becoming poorer.

AgendaAgenda

Review what we learned (GDP)Review what we learned (GDP)

Introduction to UnemploymentIntroduction to Unemployment

Four Walls ActivityFour Walls Activity

Discussion/LectureDiscussion/Lecture

Group WorkGroup Work

What have we already learned What have we already learned about GDPabout GDP

What are 3 economic indicators of What are 3 economic indicators of economic performance? economic performance?

What is GDP and what does it measure?What is GDP and what does it measure?

Is GDP an accurate measure?Is GDP an accurate measure?

UnemploymentUnemployment

Today’s LessonToday’s Lesson

Labour ForceLabour ForceWhat is it?What is it?Who Qualifies?Who Qualifies?What role does it play? What role does it play? Labour Force Surveys (LFS)Labour Force Surveys (LFS)

UnemploymentUnemploymentWhat is it?What is it?Who qualifies?Who qualifies?Is it an accurate measure of true unemploymentIs it an accurate measure of true unemployment

The 4 types of unemploymentThe 4 types of unemployment

Let’s BrainstormLet’s Brainstorm

UnemploymentUnemployment

4 Walls 4 Walls

There is a sign in each corner of the There is a sign in each corner of the classroom. classroom.

I will read the statement on the board and I will read the statement on the board and you are to think about the statement and you are to think about the statement and walk to the wall that agrees with your point walk to the wall that agrees with your point of view. of view.

Let’s walk through the first one togetherLet’s walk through the first one together

Joe works a 20 hour/wk minimum wage Joe works a 20 hour/wk minimum wage job, but would like to work full time. job, but would like to work full time. Despite not being able to find a full-time Despite not being able to find a full-time job and having difficulty making ends job and having difficulty making ends meet, he is still considered employed.meet, he is still considered employed.

A homemaker (stay at home parent), A homemaker (stay at home parent), should be considered as an employed should be considered as an employed individual.individual.

Canada’s national unemployment rate is Canada’s national unemployment rate is 7.2%. This number greatly underestimates 7.2%. This number greatly underestimates the percentage of people unemployed in the percentage of people unemployed in the country.the country.

Lack of education is the greatest Lack of education is the greatest contributor to high unemployment levels.contributor to high unemployment levels.

Seasonal unemployment – where people Seasonal unemployment – where people choose to only work during specific choose to only work during specific seasons of the year (ie. resorts, camps, seasons of the year (ie. resorts, camps, construction etc.), should not be allowed to construction etc.), should not be allowed to collect unemployment benefits during the collect unemployment benefits during the off-season.off-season.

Labour ForceLabour Force

Before we can truly understand unemployment, Before we can truly understand unemployment, we must define labour forcewe must define labour force

Labour ForceLabour Force - - all people who either have a all people who either have a job (employed) or are job (employed) or are activelyactively seeking seeking employment (unemployed).employment (unemployed).

UnemploymentUnemployment

Unemployment?Unemployment?Anyone in the labour force that is not working and is Anyone in the labour force that is not working and is actively actively seeking workseeking work

Do you believe these definitions provide an Do you believe these definitions provide an accurate representation of our economy’s true accurate representation of our economy’s true labour force? labour force?

Part time workers looking for full time workPart time workers looking for full time workAnyAny amount of work that you get paid for is considered amount of work that you get paid for is considered employedemployedWeren’t really looking for a job but said they wereWeren’t really looking for a job but said they werePeople can eventually give up trying to find a jobPeople can eventually give up trying to find a job

Unemployment Video ClipUnemployment Video Clip

PopulationPopulation

The population is grouped into 3 categoriesThe population is grouped into 3 categories

1)1) Those not eligible to workThose not eligible to work Institutionalized individualsInstitutionalized individuals Under 15 years of ageUnder 15 years of age

2)2) Those who are eligible to be in the workforce but choose not Those who are eligible to be in the workforce but choose not to participateto participate

RetireesRetirees Students 15 and over who don’t need to have a jobStudents 15 and over who don’t need to have a job Homemakers – stay at home parentHomemakers – stay at home parent MilitaryMilitary

3)3) The labour forceThe labour force – – all the people who either have a job or are all the people who either have a job or are actively seeking employment (unemployed).actively seeking employment (unemployed).

HandoutHandout

Labour Survey Flow ChartLabour Survey Flow Chart

CTV Video ClipCTV Video Clip

4 Types of Unemployment4 Types of Unemployment

Structural UnemploymentStructural Unemployment

Frictional UnemploymentFrictional Unemployment

Cyclical UnemploymentCyclical Unemployment

Seasonal UnemploymentSeasonal Unemployment

4 Types of Unemployment4 Types of Unemployment

1) 1) Structural UnemploymentStructural UnemploymentOccurs when workers are unable to fill available Occurs when workers are unable to fill available jobs because they lack the necessary skill set jobs because they lack the necessary skill set and/or are unwilling to move for work (fish plant and/or are unwilling to move for work (fish plant workers in New Brunswick). workers in New Brunswick).

Is the most serious and long lasting type of Is the most serious and long lasting type of unemploymentunemployment

Structural Unemployment is divided into Structural Unemployment is divided into two subdivisionstwo subdivisions

Breakdown of Structural Breakdown of Structural UnemploymentUnemployment

Technological UnemploymentTechnological UnemploymentOccurs as a result of more industries advancing technology Occurs as a result of more industries advancing technology in the production process, thereby reducing the need for in the production process, thereby reducing the need for workers.workers.

Example?Example?

Replacement UnemploymentReplacement UnemploymentOutsourcing labour to other countries in order to save Outsourcing labour to other countries in order to save production costs has resulted in a number of lost jobs.production costs has resulted in a number of lost jobs.

Example?Example?

4 Types of Unemployment4 Types of Unemployment

2) 2) Frictional UnemploymentFrictional UnemploymentOccurs when people move from one job to another Occurs when people move from one job to another

Naturally occursNaturally occurs

Example?Example?

3) 3) Cyclical UnemploymentCyclical UnemploymentA significant decrease in consumer A significant decrease in consumer consumption/spending results in the loss of jobsconsumption/spending results in the loss of jobs

Example?Example?

4 Types of Unemployment4 Types of Unemployment

4) 4) Seasonal UnemploymentSeasonal UnemploymentEmployment that only occurs during certain Employment that only occurs during certain seasons seasons

Statistics Canada adjusts for this when calculating Statistics Canada adjusts for this when calculating employmentemployment

Example?Example?

Group Activity Group Activity

Topic: Unemployment and PolicyTopic: Unemployment and Policy

Homework Homework

Read pg. 203-206 Read pg. 203-206

Answer Questions on pg. 206 #1-4Answer Questions on pg. 206 #1-4

When in the last 10 years do you think When in the last 10 years do you think unemployment was it’s lowest? Why?unemployment was it’s lowest? Why?

Question Question

Which province do you think has the Which province do you think has the lowest unemployment rate?lowest unemployment rate?

Guess right and get a prize! OOOOOhhhGuess right and get a prize! OOOOOhhh

Unemployment Rate ComparisonUnemployment Rate Comparison

Province Unemployment rate

Newfoundland and Labrador 13.0

Prince Edward Island 11.3

Nova Scotia 8.3

New Brunswick 10.2

Quebec 7.9

Ontario 7.4

Manitoba 5.3

Saskatchewan 4.8

Alberta 5.3

British Columbia 7.0

Canada (national) 7.23

Taken From Statistics Canada

SaskatchewanSaskatchewan

What is the unemployment rate and how is What is the unemployment rate and how is it calculated?it calculated?

Unemployment RateUnemployment Rate

Unemployment rate Unemployment rate the percentage of the labour force that is not the percentage of the labour force that is not workingworking

What do you think the calculation for the What do you think the calculation for the unemployment rate looks like?unemployment rate looks like?

Unemployment rate (U) = Unemployment rate (U) = # unemployed# unemployed X 100 X 100 labour force labour force

You do the MathYou do the Math

Unemployment rate (U) =Unemployment rate (U) = # unemployed# unemployed X 100 X 100 labour forcelabour force

If Canada has an unemployment rate of 7.2% and a labour force of If Canada has an unemployment rate of 7.2% and a labour force of 18,590,000. How many people are unemployed in Canada? 18,590,000. How many people are unemployed in Canada?

ANSWER: 1,338,480 people are unemployedANSWER: 1,338,480 people are unemployed

If Canada’s current population is 34,100,000, what percentage of the If Canada’s current population is 34,100,000, what percentage of the Country’s population are part of the labour force?Country’s population are part of the labour force?

Answer: 54.5% of the country’s population is part of the labour forceAnswer: 54.5% of the country’s population is part of the labour force

Unemployment RateUnemployment Rate58,000-59,000 Labour Force Surveys are 58,000-59,000 Labour Force Surveys are randomly distributed throughout Canadarandomly distributed throughout Canada

Calculated once a month by Statistics CanadaCalculated once a month by Statistics Canada

It is mandatory to fill out It is mandatory to fill out

Northern Provinces and Aboriginal people are Northern Provinces and Aboriginal people are not included in the nations average not included in the nations average unemployment rate.unemployment rate.

Does full employment exist?Does full employment exist?

In Practice Yes…but theoretically No.In Practice Yes…but theoretically No.

Full employment = 6% - 7% unemploymentFull employment = 6% - 7% unemployment

In a free market there will always be structural and In a free market there will always be structural and frictional unemploymentfrictional unemployment

When would frictional unemployment be at its When would frictional unemployment be at its maximum? maximum?

When the economy is showing strong growth. That’s when When the economy is showing strong growth. That’s when people feel comfortable leaving one job to find another. people feel comfortable leaving one job to find another.

Unemployment aint cheap?Unemployment aint cheap?

Social costs increase as (U) increasesSocial costs increase as (U) increases loss of taxes collected by the governmentloss of taxes collected by the government

decreased spending on goods and servicesdecreased spending on goods and services

social welfare programs increase social welfare programs increase

social unrest and crimesocial unrest and crime

family tensionfamily tension

Poor healthPoor health

Economic Costs of UnemploymentEconomic Costs of Unemployment

Loss of money in taxation Loss of money in taxation Unemployed don’t pay income taxUnemployed don’t pay income tax

Unemployed buy less, so they pay less on goods Unemployed buy less, so they pay less on goods and servicesand services

Reduces government expendituresReduces government expenditures

De-valued skillsDe-valued skillsSkills can become dated and de-valued for people Skills can become dated and de-valued for people unemployed for long periods of timeunemployed for long periods of time

Economic Costs of UnemploymentEconomic Costs of Unemployment

Waste of scarce Waste of scarce resourcesresources Opportunity Cost

0

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10000

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14000

16000

0 1 2 3 4 5 6

Ploughs

Bre

ad

Consumer Price Index (CPI)Consumer Price Index (CPI)

The 3The 3rdrd Economic Goal Economic Goal

Goal of CPI: Maintain Stable PricesGoal of CPI: Maintain Stable Prices

If prices of goods and services rise and incomes stay the If prices of goods and services rise and incomes stay the same. People will have less income. same. People will have less income.

Consumer Price Index (CPI)Consumer Price Index (CPI) Is an indicator of a change of prices for consumer goods over time. Is an indicator of a change of prices for consumer goods over time. Measures inflation and deflationMeasures inflation and deflation

How Does the CPI account for measuring the change in How Does the CPI account for measuring the change in price for all goods?price for all goods?

Magnum Magnum CCPIPI

CPI doesn’t just measure the increase in pricesCPI doesn’t just measure the increase in prices

CPI also weights consumer spending habitsCPI also weights consumer spending habits

Which Categories do you think Which Categories do you think

Canadians spend most of their income on ? Canadians spend most of their income on ?

Measuring CPIMeasuring CPI

CPI Takes a General Representation of our CPI Takes a General Representation of our spending habitsspending habits

It monitors over 600 goods from services from various cities It monitors over 600 goods from services from various cities across Canada. across Canada.

The CPI includes such goods as The CPI includes such goods as TransportationTransportationFoodFoodShelterShelterClothingClothingHealth and personal careHealth and personal careAlcoholic beverages and tobaccoAlcoholic beverages and tobaccoRecreation, education and readingRecreation, education and readingHousehold operations and home furnishingsHousehold operations and home furnishings

Health and Personal Care

4.9%

Rec. Educ. and Reading – 11.2%

Alc. and Tobacco 3.9%

Food – 16%

Shelter 27.5%

House Hld. Oper. Furnishings and equipment – 11.6%

Clths. and footwear – 5.3%

Transportation

20.6%

How CPI WorksHow CPI Works

CPI plays a vital role in calculating the inflation rate. CPI plays a vital role in calculating the inflation rate.

Inflation rateInflation rate – the annual percentage that CPI has – the annual percentage that CPI has increasedincreased

Inflation rate = (CPI year 2 – CPI year 1)Inflation rate = (CPI year 2 – CPI year 1)

CPI year 1CPI year 1X 100

Why is it helpful for govenement, business Why is it helpful for govenement, business and everyday people to understand CPI and everyday people to understand CPI and inflation?and inflation?

Allows us to make adjustments regarding wages Allows us to make adjustments regarding wages (minimum wage) and pensions on a year to year (minimum wage) and pensions on a year to year basis as price increases or decreases. This is basis as price increases or decreases. This is called called indexingindexing

Magnum Magnum CCPI Isn’t PerfectPI Isn’t Perfect

What do you think some limitations of CPI are?What do you think some limitations of CPI are?

Not every household spending patterns reflect those of the CPI Not every household spending patterns reflect those of the CPI (ex. smokers vs non-smokers)(ex. smokers vs non-smokers)

Not every household is made up of 4 people, therefore spending Not every household is made up of 4 people, therefore spending will be greater than smaller householdswill be greater than smaller households

People may switch their purchasing trends (VHS toPeople may switch their purchasing trends (VHS to

DVD) DVD)

consumption patterns vary greatly in culturallyconsumption patterns vary greatly in culturally

diverse areas. Therefore CPI may not be an accuratediverse areas. Therefore CPI may not be an accurate

measure of the impact that price changes have measure of the impact that price changes have

on householdson households

HWHW

Start work in classStart work in class

Read Pages 207-212Read Pages 207-212

Do question 1 on page 209Do question 1 on page 209

Do Questions 1 and 2 on page 211Do Questions 1 and 2 on page 211

QUIZ on TUESDAY, MAY 15QUIZ on TUESDAY, MAY 15thth..

HWHW

Pg. 209Pg. 209

Price index = price of basket in current year Price index = price of basket in current year

price of basket in base year price of basket in base year

Base year index always = 100 Base year index always = 100

X 100

Base year 1999 – Basket of goods = $144.50Base year 1999 – Basket of goods = $144.50

Year 2001 – Basket of goods = $173.25Year 2001 – Basket of goods = $173.25

CPI = CPI = 173.25173.25

144.50144.50

CPI for 2001 = 119CPI for 2001 = 119

ItemItem WeightWeight Price in Price in 19991999

Price in 2001Price in 2001

Purple Stuffed DinoPurple Stuffed Dino 44 $20$20 $24$24

Bag of Lemon Bag of Lemon dropsdrops

66 $4$4 $5$5

Bag of Gum DropsBag of Gum Drops 99 $4.50$4.50 $5.25$5.25

Total BasketTotal Basket

X 100

What would be the inflation rate?What would be the inflation rate?

Inflation rate = (CPI year 2 – CPI year 1)Inflation rate = (CPI year 2 – CPI year 1)

CPI year 1CPI year 1

Inflation rate = (119 – 100)Inflation rate = (119 – 100)

100100

Inflation rate of 19.9% Inflation rate of 19.9%

X100

X100

Page 211Page 211

Lets do this one togetherLets do this one together

Remember Remember CPI Year 1 wage or pension amount year 1CPI Year 1 wage or pension amount year 1

CPI Year 2 wage or pension amount year 2CPI Year 2 wage or pension amount year 2 =

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1) $26, 136.361) $26, 136.36

#2#2

CPI 153.3CPI 153.3

Homework Homework

Page 202 Questions #1-4Page 202 Questions #1-4

Page 212 Questions #2-4 Page 212 Questions #2-4

Questions to prep for quiz pg. 214-215Questions to prep for quiz pg. 214-215# 3,4, 5, 12, 14, 16# 3,4, 5, 12, 14, 16

Pg. 202 #1-4Pg. 202 #1-41) GDP quantifies the amount of economic activity in the economy by 1) GDP quantifies the amount of economic activity in the economy by measuring the value of finished goods and services. GDP can be measured measuring the value of finished goods and services. GDP can be measured by 2 approaches; income and expenditure approach. Both should give the by 2 approaches; income and expenditure approach. Both should give the same final valuesame final value

2)If you don’t count the final value of goods you will overstate the GDP, 2)If you don’t count the final value of goods you will overstate the GDP, because the inputs at each level of production would be counted multiple because the inputs at each level of production would be counted multiple times. Let’s use the example of a car. There are many components to a times. Let’s use the example of a car. There are many components to a car. If they counted in the GDP when they are sold parts of the car to the car. If they counted in the GDP when they are sold parts of the car to the manufacturer, they would be counted twice – once when they were sold to manufacturer, they would be counted twice – once when they were sold to the manufacturer and once when the car was sold to the consumer. Hence the manufacturer and once when the car was sold to the consumer. Hence the GDP would be overstated.the GDP would be overstated.

3) You tell me3) You tell me

4) standard of living takes more into account than that needs and wants that 4) standard of living takes more into account than that needs and wants that are accounted in the GDP. The GDP however, fails to take into account are accounted in the GDP. The GDP however, fails to take into account non-market production, types of goods produced, leisure time, underground non-market production, types of goods produced, leisure time, underground economic activity, environmental degradations, and distribution of income. economic activity, environmental degradations, and distribution of income.

Pg. 212 #2-4Pg. 212 #2-4

#2) Shelter, transportation and food#2) Shelter, transportation and food

#3) Indexing allows for the CPI to be used #3) Indexing allows for the CPI to be used to adjust people’s incomes and penson’s to adjust people’s incomes and penson’s to take into account increases in the to take into account increases in the general level of prices. general level of prices.

4) If a family’s spending patterns do not mathc those of 4) If a family’s spending patterns do not mathc those of the typical Canadian household, then the CPI will not the typical Canadian household, then the CPI will not accurately measure the impact of price increases for that accurately measure the impact of price increases for that family. family.

Furthermore the weightings for the basket do not Furthermore the weightings for the basket do not reflect the spending of individuals. For example, the reflect the spending of individuals. For example, the proportion of income spent on shelter for a small family proportion of income spent on shelter for a small family is likely to be lower than that of a larger family. Cultural is likely to be lower than that of a larger family. Cultural backgrounds will also have an impact on patterns of backgrounds will also have an impact on patterns of expenditure, which will differ form those of the country as expenditure, which will differ form those of the country as a wholea whole

Pg.214-215Pg.214-215#3) a) included –consumption#3) a) included –consumption

b) included consumptionb) included consumption c) included – consumptionc) included – consumptiond) Not included – unreported activityd) Not included – unreported activitye) Not included - importe) Not included - import

#4)#4)A) frictional unemployment A) frictional unemployment B) structural unemploymentB) structural unemploymentC) seasonal unemploymentC) seasonal unemploymentD) technological unemploymentD) technological unemploymentE) cyclical unemploymentE) cyclical unemploymentF) replacement unemploymentF) replacement unemployment

#5) Because the inflation rate is calculated based on a weighted basket of goods, #5) Because the inflation rate is calculated based on a weighted basket of goods, anyone whose purchasing habits are weighted differently than the basket will feel the anyone whose purchasing habits are weighted differently than the basket will feel the effects of inflation differently.effects of inflation differently.

Pg.214-215Pg.214-215

12)12) a) The GDP goes up as government expenditures increase a) The GDP goes up as government expenditures increase to meet the needs of the military. Involvement in the war to meet the needs of the military. Involvement in the war does little to improve the well being of Canadiansdoes little to improve the well being of Canadians

b) The GDP goes up through increased government b) The GDP goes up through increased government expenditures on border security. Canadians may feel safer, expenditures on border security. Canadians may feel safer, but this feeling does not necessarily improve their well-being.but this feeling does not necessarily improve their well-being.

c) The GDP may go up as long as producers are not also c) The GDP may go up as long as producers are not also laying off workers. Less leisure time likely means a decrease laying off workers. Less leisure time likely means a decrease in quality of life. in quality of life.

12)12)D) GDP increases through increased consumption as people D) GDP increases through increased consumption as people buy materials for their projects, although it does not go up by buy materials for their projects, although it does not go up by as much as it would if people hired contractors to do the as much as it would if people hired contractors to do the work. Presumably people are redecorating in a manner that work. Presumably people are redecorating in a manner that improves how they feel about their living space, so well-being improves how they feel about their living space, so well-being would likely improvewould likely improve

E) GDP increases as drivers now have to spend money on E) GDP increases as drivers now have to spend money on emissions test. If the emissions testing program actually emissions test. If the emissions testing program actually reduces pollution, the well being of Canadians is improved. reduces pollution, the well being of Canadians is improved.

#14#14The wage rate at the end of the third year of the The wage rate at the end of the third year of the contract at Koskins Inc. would be $15.13/hrcontract at Koskins Inc. would be $15.13/hr

#16#16Canada - 6.8%Canada - 6.8%Bangladesh – 35.3%Bangladesh – 35.3%United Kingdom – 5.5%United Kingdom – 5.5%Vietnam – 25%Vietnam – 25%Australia – 6.3% Australia – 6.3%