1. Measuring the Economy: Unemployment and Inflation CHAPTER 4 4-1© 2012 McGraw-Hill Ryerson Limited

2. Inflation A persistent rise in the general level of prices Measured using a price index Most widely used: – Consumer Price Index (CPI) – GDP Deflator © 2012 McGraw-Hill Ryerson Limited4- 2 LO3

3. Measuring Inflation Consumer Price Index (CPI) a measurement of the average level of prices of the goods and services that a typical Canadian family consumes © 2012 McGraw-Hill Ryerson Limited4- 3 LO3 CPI = cost of basket in a given year x 100 cost of basket in a base year Inflation rate = index Year 2 – index Year 1 x 100 index Year 1

4. Weighting Diagram for Canada of Goods and Services Aggregation for the 2011 Basket at 2011 and January 2013 Prices Table summary This table displays the results of weighting diagram for canada of goods and services aggregation for the 2011 basket at 2011 and january 2013 prices 2011 basket at 2011 prices and 2011 basket at january 2013 prices (appearing as column headers). 2011 Basket at 2011 Prices2011 Basket at January 2013 Prices Goods48.9148.18 Non-durable goods27.8427.74 Fresh or frozen beef0.540.58 Fresh or frozen pork0.220.23 Other fresh or frozen meat (excluding poultry)0.06 Fresh or frozen chicken0.400.43 Other fresh or frozen poultry meat0.08 Ham and bacon0.120.11 Other processed meat0.660.69 Fresh or frozen fish (including portions and fish sticks)0.22 Canned and other preserved fish0.070.08 Seafood and other marine products0.150.14 Fresh milk0.47 Butter0.08 Cheese0.580.56 Ice cream and related products0.11 Other dairy products0.380.37 Eggs0.140.16 Bread (including rolls and buns)0.550.57 Biscuits0.24 Other bakery products0.33 Rice (including rice-based mixes)0.090.08 Breakfast cereal and other grain products (excluding infant food)0.430.45 Pasta products0.11 Flour and flour based mixes0.06 Apples0.120.13 Oranges0.100.09 Bananas0.10 Other fresh fruit0.500.52

5. Fruit juices0.22 Other preserved fruit and fruit preparations0.14 Nuts0.130.15 Potatoes0.10 Tomatoes0.110.12 Lettuce0.08 Other fresh vegetables0.670.63 Frozen and dried vegetables0.080.09 Canned vegetables and other vegetable preparations0.250.24 Sugar and syrup0.08 Confectionery0.41 Margarine0.05 Other edible fats and oils0.09 Coffee0.210.22 Tea0.05 Condiments, spices and vinegars0.38 Soup0.13 Infant and baby foods0.08 Pre-cooked frozen food preparations0.27 All other food preparations0.510.52 Non-alcoholic beverages0.500.47 Electricity2.402.48 Natural gas1.060.99 Fuel oil and other fuels0.350.36 Detergents and soaps (other than personal care)0.17 Other household cleaning products0.26 Paper supplies0.480.49 Plastic and foil supplies0.11 Pet food and supplies0.70 Seeds, plants and cut flowers0.370.36 Other horticultural goods0.11 Other household supplies0.190.20 Gasoline4.854.62 Prescribed medicines0.880.83 Non-prescribed medicines0.590.58 Other health care goods0.08 Personal soap0.09 Toiletry items and cosmetics0.640.63

6. Oral-hygiene products0.10 Other personal care supplies and equipment0.450.46 Fuel, parts and accessories for recreational vehicles0.11 Beer purchased from stores0.540.55 Wine purchased from stores0.38 Liquor purchased from stores0.28 Other alcoholic beverages purchased in stores0.01 Cigarettes1.101.12 Other tobacco products and smokers' supplies0.06 Semi-durable goods7.757.35 Window coverings0.10 Bedding and other household textiles0.13 Women's clothing2.091.88 Men's clothing1.371.31 Children's clothing (including infants)0.520.47 Women's footwear (excluding athletic)0.430.40 Men's footwear (excluding athletic)0.220.21 Children's footwear (excluding athletic)0.110.10 Athletic footwear0.490.47 Leather clothing accessories0.11 Other clothing accessories0.170.15 Clothing material and notions0.05 Passenger vehicle parts, accessories and supplies0.680.70 Eye care goods0.30 Toys, games (excluding video games) and hobby supplies0.280.27 School textbooks and supplies0.310.32 Newspapers0.06 Magazines and periodicals0.07 Books and other printed matter (excluding textbooks)0.260.25 Durable goods13.3313.09 Telephone equipment (201104=100)0.07 Upholstered furniture0.460.47 Wooden furniture0.300.28 Other furniture0.410.39 Area rugs and mats0.07 Cooking appliances0.17 Refrigerators and freezers0.17 Laundry and dishwashing appliances0.240.23

7. Other household appliances0.250.24 Non-electrical kitchen utensils, tableware and cookware0.240.22 Household tools (including lawn, garden and snow removal equipment) 0.44 Other household equipment0.430.42 Other household furnishings and equipment0.11 Watches0.100.09 Jewellery0.310.34 Purchase of passenger vehicles6.646.72 Sporting and athletic equipment0.170.16 Computer equipment, software and supplies (201104=100)0.550.49 Multipurpose digital devices (201104=100)0.110.10 Photographic equipment and supplies0.090.07 Other recreational equipment0.160.15 Purchase of recreational vehicles and outboard motors1.031.01 Audio equipment0.180.15 Video equipment0.460.36 Purchase of recorded and unrecorded electronic media0.180.17 Services51.0951.82 Food purchased from table-service restaurants2.882.94 Food purchased from fast food and take-out restaurants1.241.26 Food purchased from cafeterias and other restaurants0.760.78 Rent5.765.81 Tenants' insurance premiums0.090.08 Tenants' maintenance, repairs and other expenses0.070.08 Mortgage interest cost4.134.11 Homeowners' replacement cost4.254.34 Property taxes (including special charges)3.263.36 Homeowners' home and mortgage insurance1.211.23 Homeowners' maintenance and repairs1.201.25 Other owned accommodation expenses1.491.52 Water0.590.65 Telephone services2.372.39 Postal and other communications services0.080.09 Internet access services and subscriptions to online content providers (excluding online newspapers and periodicals) (200212=100) 0.780.81 Child care services0.810.83

8. Housekeeping services0.320.33 Other household services1.331.35 Financial services (200212=100)0.680.74 Services related to household furnishings and equipment0.230.22 Laundry services0.090.10 Dry cleaning services0.110.12 Other clothing services0.04 Leasing of passenger vehicles0.920.93 Rental of passenger vehicles0.09 Passenger vehicle maintenance and repair services1.081.10 Passenger vehicle insurance premiums2.922.91 Passenger vehicle registration fees0.260.27 Drivers' licences0.11 Parking fees0.350.36 All other passenger vehicle operating expenses0.180.17 City bus and subway transportation0.500.52 Taxi and other local and commuter transportation services0.14 Air transportation1.141.12 Rail, highway bus and other inter-city transportation0.08 Other public transportation0.13 Eye care services (200704=100)0.08 Dental care0.630.64 Other health care services0.38 Personal care services0.730.74 Recreational services0.160.17 Insurance, licences and other services for recreational vehicles0.26 Rental of video discs, tapes and videogames0.03 Other home entertainment equipment, parts and services0.02 Traveller accommodation1.331.26 Travel tours0.950.80 Spectator entertainment (excluding cablevision and satellite services) 0.30 Cablevision and satellite services (including pay per view television) 1.221.28 Use of recreational facilities and services0.63 All other cultural and recreational services0.120.13 Tuition fees1.851.95

9. Other lessons, courses and education services 0.360.37 Other reading material and other printed material (excluding textbooks) 0.02 Beer served in licensed establishments0.20 Wine served in licensed establishments0.08 Liquor served in licensed establishments0.11 Note: Figures may not add up to 100 due to rounding.

10. Measuring Inflation Core Inflation Excludes items with highly volatile prices: – Fruits and vegetables – Gas – Fuel oil – Mortgage interest – Tobacco Gives a better indication of underlying long-term inflation rate © 2012 McGraw-Hill Ryerson Limited4- 10 LO3

11. Measuring Inflation GDP Deflator a measure of the price level of goods and services included in the GDP © 2012 McGraw-Hill Ryerson Limited4- 11 LO3 GDP Deflator = nominal GDP x 100 real GDP

12. Measuring Inflation © 2012 McGraw-Hill Ryerson Limited4- 12 LO3 CPIGDP Deflator explicit index using a constructed bundle of goods implicit index measuring the ratio of nominal to real GDP bundle of goods remains constant bundle of goods changes each year does not include capital or government goods and services includes capital and government goods and services includes imported goodsexcludes imported goods

13. Nominal v Real Income Nominal Income the present dollar-value of a person’s income Real Income the purchasing power of income; that is, nominal income divided by the price level Can compare amounts over time using formula: © 2012 McGraw-Hill Ryerson Limited4- 13 LO3

14. Nominal Income – what you actually made in that current year. ie. Today, 10 years ago, 10 years from now. Real Value 2007 = Nom. Value 1987 x Price Index 2007 Price Index 1987 Real Value 2007 = $10,000 x 111.5 68.5 Real Value 2007 = $16,277.37 © 2012 McGraw-Hill Ryerson Limited4- 14

15. This means: *$10,000 in 1987 is equivalent to $16,277.37 in 2007. *($10,000/$16,277.37) x 100% = 61% *61% of purchasing power has been held. *39% of purchasing power lost due to inflation. © 2012 McGraw-Hill Ryerson Limited4- 15

16. Rule of 70 estimates the time it will take for a figure to double in value given a certain percentage growth rate © 2012 McGraw-Hill Ryerson Limited4- 16 LO3 # of years to double = 70 / % growth rate Example: $1000 invested at 10% will double in: 70 / 10 = 7 years

17. Costs of Inflation Redistributive Costs costs which are shifted from one group in society to another group Output Costs costs of loss of output resulting from inflation include menu costs, lower investment, and lower net exports © 2012 McGraw-Hill Ryerson Limited4- 17 LO4

18. 19942014 $2.00 $6.25 Inflation = 5.86% (2 / 6.25) x 100% = 32% of Purchasing Power Held 68% of Purchasing Power Lost

19. Costs of Inflation Real Interest Rate the rate of interest measured in constant dollars © 2012 McGraw-Hill Ryerson Limited4- 19 LO4 Real interest rate = nominal rate  the inflation rate

20. Types of Inflation Demand Pull Inflation inflation that occurs when total demand for goods and services exceeds the economy’s capacity to produce Cost Push Inflation inflation caused by an increase in the costs of production or in profit levels, with the effect being on the supply side Includes wage-push, profit-push, and import-push inflation © 2012 McGraw-Hill Ryerson Limited4- 20 LO4