Copyright © 2008 Pearson Education Canada Chapter 5 Economic Indicators

Copyright © 2008 Pearson Education Canada Chapter Objectives 1. Define the participation rate and unemployment rate as they appear in the Labour Force Survey. 2. Understand what the unemployment rate measures and explain the five types of unemployment. 3. Describe the composition of the Consumer Price Index and explain the causes of inflation. 4. Relate the problems of inflation to the Canadian economy. 5. Calculate items in the National Accounts and explain why the GDP levels cannot be associated with welfare.

Copyright © 2008 Pearson Education Canada Definition of Macroeconomics The issues that will be important in this section include: Employment and unemployment, Inflation, and Level of economic activity. Macroeconomics is the area of economic analysis concerned with the overall view of an economy rather than with individual markets. (Cont.)

Copyright © 2008 Pearson Education Canada Definition of Macroeconomics (Continued) The most common statistic in National Accounts is gross domestic product (GDP). This is a measure of the market value of final goods and services produced in Canada in a given period of time. It is produced on a quarterly and annual basis. GDP gives an indication of standard of living but it is not a direct measure of it.

Copyright © 2008 Pearson Education Canada The Labour Force Survey The survey excludes residents of the three territories, persons living on Indian reserves, inmates of institutions and full-time members of the armed forces. The survey provides a monthly measure of the number of unemployed in Canada. It is an indication of the country’s economic condition. It includes each member of a selected household who is 15 years and older during a particular reference week. (Cont.)

Copyright © 2008 Pearson Education Canada The Labour Force Survey (Continued) Unemployed: Any person who was without work, during the reference week, but had been actively looking for work in the last four weeks and was available for work. Employed: Any person who did any work for pay or profit during the reference week. Not in the labour force: Any person who, during the reference week of the survey, was without work and was not looking for work.

Copyright © 2008 Pearson Education Canada The Labour Force Survey (Continued) Factors that influence participation rates: Changes in family size and income Increased educational opportunities Participation rate = Labour Force Population (15 yrs+) The participation rate is the percentage of the population that is employed or is actively seeking employment.

Copyright © 2008 Pearson Education Canada The Labour Force Survey (Continued) Other factors that influence participation rates: General economic conditions Aging population and early retirements Equal pay and affirmative action legislation, maternity leave provisions, and changes in employment insurance Subsidized daycare

Copyright © 2008 Pearson Education Canada The Labour Force Survey (Continued) In the past, the trend for male participation rate was downward, while that for women was upward.

Copyright © 2008 Pearson Education Canada The Labour Force Survey (Continued) Provincial participation rates change form 72.7 percent in Alberta to a low of 58.8 percent in Newfoundland/Labrador.

Copyright © 2008 Pearson Education Canada The Labour Force Survey (Continued) The employment rate is the employment-to-population ratio. In 2005 the employment rate was 62.7 percent but there was great variability among the provinces from a low of 49.8 percent in Newfoundland/Labrador to a high of 69.8 percent in Alberta. Employment in Canada has increased by 11 million since the Second World War, but employment rate has decreased from 3.6 percent in the 1970’s to 1 percent in the 1990’s.

Copyright © 2008 Pearson Education Canada The Labour Force Survey (Continued) Factors affecting employment rates: Increase in working age population Increase in employment of women Strong economic conditions

Copyright © 2008 Pearson Education Canada The Labour Force Survey (Continued) The composition of employment and occupational compositions has changed over the last 50 years: A shift away from goods to service producing industries 1/3 of workers in managerial or professional positions Only 4 percent of workers in primary occupations

Copyright © 2008 Pearson Education Canada The Labour Force Survey (Continued) The employment rates are highest in the age range.

Copyright © 2008 Pearson Education Canada The Labour Force Survey (Continued) Alberta has the highest employment rate.

Copyright © 2008 Pearson Education Canada The Labour Force Survey (Continued) Unemployment Rate = Unemployed Labour Force The unemployment rate is the percentage of the labour force that is not working, yet is looking for work. The factors affecting unemployment rates are: Changes in the labour force Changes in employment insurance program Changes in the pattern of world trade

Copyright © 2008 Pearson Education Canada The Labour Force Survey (Continued) The highest unemployment rates are in the age range.

Copyright © 2008 Pearson Education Canada The Labour Force Survey (Continued) Alberta has the lowest unemployment rate.

Copyright © 2008 Pearson Education Canada The Labour Force Survey (Continued) The trend for unemployment rates over the past 39 years has been increasing.

Copyright © 2008 Pearson Education Canada The Labour Force Survey (Continued) The participation, employment, and unemployment rates for 2005 for selected metropolitan areas.

Copyright © 2008 Pearson Education Canada The Labour Force Survey (Continued) When job vacancies increase unemployment decreases. To properly assess the unemployment situation, the survey needs to include the number of available job vacancies. Further, the survey needs to recognize underemployment, a situation in which individuals are employed, but not at jobs that fully utilize their skills.

Copyright © 2008 Pearson Education Canada The Labour Force Survey (Continued) Finally, the survey needs to differentiate between the degree of effort a person makes looking for a job when assessing the unemployment situation. These are included in the labour force rather than being tabulated with the unemployed. A criticism of the survey is its inability to identify the hidden unemployment, those who are not actively seeking a job because they do not believe there are suitable jobs available.

Copyright © 2008 Pearson Education Canada The Labour Force Survey (Continued) The number of discouraged workers has been decreasing because they are retiring early or going back to school. Finally, there are seasonal affects that impact unemployment rates, higher in the winter months, that the survey takes into consideration. Another measure of hidden employment includes those that are working part-time but would like to work full-time.

Copyright © 2008 Pearson Education Canada Types of Unemployment Frictional unemployment is a short-term unemployment on the part of individuals who have voluntarily left one job and are in the process of looking for another job. Demand-deficient unemployment results from an overall lack of spending in the economy. Seasonal unemployment results from the seasonal nature of some industries, such as agriculture, construction, tourism, and recreation. (Cont.)

Copyright © 2008 Pearson Education Canada Types of Unemployment (Continued) Insurance-induced unemployment is caused by the level of employment-insurance benefits, which makes looking for work unattractive. Structural unemployment results from a mismatching of the demand for, and the supply of, workers on an occupational or geographic basis. Natural rate of unemployment is the unemployment rate present when the economy is operating at full capacity.

Copyright © 2008 Pearson Education Canada Consumer Price Index The Consumer Price Index lists the ratio of current prices of consumer products to the prices of those products in the base year. Inflation is defined as a general increase in the price level. It is a monthly survey consisting of 600 consumer items. (Cont.) The rate of inflation is measured by the percentage change in the price level.

Copyright © 2008 Pearson Education Canada Consumer Price Index (Continued) CPI current year = It is a monthly survey consisting of 600 consumer items. Price level in current year Price level in the base year Inflation rate = CPI new – CPI old CPI old In 1995 a new grouping of goods and services was introduced based on a 1992 family expenditure survey.

Copyright © 2008 Pearson Education Canada Consumer Price Index (Continued) Shelter is weighed the heaviest because it is most important.

Copyright © 2008 Pearson Education Canada Consumer Price Index (Continued) Since 1992, prices increased most in Regina.

Copyright © 2008 Pearson Education Canada Consumer Price Index (Continued) Inflation rates were in double digits from mid – 1970s to early 1980s. Since the 1990s inflation has been relatively low.

Copyright © 2008 Pearson Education Canada Consumer Price Index (Continued) The CPI is a retail price index not a cost-of-living index. It is impossible to calculate a cost-of-living index because each individual has a different pattern of spending. CPI is not a good measure of cost-of-living because of measurement biases. For example: Price increases may be due to quality improvements Weights used in the index are out-of date

Copyright © 2008 Pearson Education Canada Causes of Inflation In order for a price to increase, either demand has to increase or supply has to increase. Demand-pull inflation describes the increase in the general level of prices that occurs when the aggregate demand for goods and services exceeds supply. Cost-push inflation describes increases in the general price levels resulting from firms passing on their cost increases to consumers in the form of higher prices. Hyperinflation leads to a lack of public confidence in currency.

Copyright © 2008 Pearson Education Canada The National Accounts The National Accounts are data compiled by Statistics Canada that measure the overall level of business activity in Canada. National Accounts can be visualized in terms of the circular flow of money. (Cont.) This a directional flow of money in the economy from the business sector to households and back.

Copyright © 2008 Pearson Education Canada The National Accounts (Continued)

Copyright © 2008 Pearson Education Canada The National Accounts (Continued) The circular flow diagram can be used to measure the level of economic activity, GDP, in two ways. The expenditure approach which involves determining the amount of money that households spend on goods and services. The income approach which involves determining the amount of money businesses pay out for the services they require.

Copyright © 2008 Pearson Education Canada Expenditure Approach to GDP GDP = C + Ig + G + X - IM C = consumption spending by households on goods and services Ig = gross investment by business and government, purchase of machines and equipment, new housing constructed, and any change in inventories G = government purchases of goods and services X = exports (foreign purchases of Canadian goods and services) IM = imports (Canadian purchases of foreign goods and services) (Cont.)

Copyright © 2008 Pearson Education Canada Expenditure Approach to GDP (Continued)

Copyright © 2008 Pearson Education Canada Expenditure Approach to GDP (Continued) Gross investment includes capital consumption allowance, the amount of money spent to replace equipment. The government component of GDP excludes transfer payments because these expenditures are not used to produce any goods or services. Gross national expenditure (GNE) is the value of all goods and services produced by residents in Canada, as compared to GDP which is the value of output produced in Canada.

Copyright © 2008 Pearson Education Canada Expenditure Approach to GDP (Continued)

Copyright © 2008 Pearson Education Canada Income Approach to GDP (Cont.) GDP = wages + salaries + interest + rent + corporation profits before taxes (dividends, income taxes, undistributed profits) + income from unincorporated enterprises + indirect taxes + capital consumption allowance

Copyright © 2008 Pearson Education Canada Income Approach to GDP (Continued) The dollar value of GDP is the same whether it is arrived at through the income approach or the expenditure approach.

Copyright © 2008 Pearson Education Canada Income Approach to GDP (Continued) Net domestic product (NDP) = GDP - capital consumption allowance - indirect business taxes The value of the GDP provides a broad indication of the level of economic activity in Canada.

Copyright © 2008 Pearson Education Canada Income Approach to GDP (Continued) Personal income (PI) = NDP - corporation income tax - undistributed corporate profits + government transfer payments Personal disposable income = PI – personal income tax

Copyright © 2008 Pearson Education Canada Income Approach to GDP (Continued) The annual percentage changes in GDP have been as high as 19.4 percent (1974) and as low as 0.8 percent (1991).

Copyright © 2008 Pearson Education Canada Relationship of GDP to Social and Economic Welfare Increases in GDP do not always represent economic growth or improvements in welfare or standard of living. GDP increase may not indicate improvement in welfare: If it increases due to price changes; If population grows faster than GDP; Because it excludes production at home; (Cont.)

Copyright © 2008 Pearson Education Canada Relationship of GDP to Social and Economic Welfare (Continued) GDP increase may not indicate improvement in welfare because: It excludes the underground economy and illegal items; It does not differentiate between the types of goods and services that are produced and the quality of those goods and services produced; It excludes pollution (an economic bad) and leisure (an economic good); and It does not take account of income distribution.

Copyright © 2008 Pearson Education Canada Relationship of GDP to Social and Economic Welfare (Continued)

Copyright © 2008 Pearson Education Canada