Chapter 9:

Inflation and Unemployment

What is inflation? Deflation? Hyperinflation?
Inflation: is a sustained increase in the average price level of goods and services produced in the
economy
◦ Note: it doesn’t apply to ALL goods and services
◦ If inflation rises at a faster rate than income levels, then purchasing power for individuals falls.

Deflation: is a decline in the prices of goods, generally related to the decline in monetary supply. In
excess, it can lead to a depression, for example: The Great Depression.
Hyperinflation: in general, it’s out of control inflation. Typically a result of a complete lack of
confidence in a currency, and can often be associated with wars or political unrest. It also is related to an
oversupply of money. Consider what is happening in Venezuela right NOW!

Canada’s inflation rate?

From March 2017 to March 2018: 2.3%
BC’s inflation rate?
From March 2017 to March 2018: 2.6%
Inflation Simulation
Year Price of Item 1 Price of Item 2 Average Price

Year 1

Year 2
What causes inflation?
THREE common ones (but there can be more):
1. “Demand-pull Inflation” – Too much demand for goods and not enough supply
“too much money chasing too few goods”
2. ”Cost-push Inflation” - Rising costs of raw materials, wages, and other production
costs
3. “Monetary Inflation” - Increase in money supply (without the increase in real
output)

When is inflation good? When is it bad?

◦ Anticipated (Good) – 1-3% change/year, healthy and planned
◦ Unanticipated (Bad) – unpredictable and can change day to day, month to month
Consumer Price Index (CPI)
What is it?
◦ CPI is an index used to measure the changes in prices for a market basket of goods and services (approx
600)

How is it used?
◦ As an economic indicator leading to decisions for monetary policy, it also helps with understanding the
cost of living averages

How is it weighted?
◦ Based on relative importance (usually known through price) of the expenditure. For example rent vs.
milk, a 10% increase in rent would have a greater impact than a 10% increase in milk

Target population?
◦ Families and individuals living in urban and rural households
CPI Weights (2011)
Some of inflation’s effects…
Incomes:
◦ Cost-of-living adjustments (COLA) – some people may have fully indexed incomes and some may have
partially indexed.
◦ If your income does not increase at the same rate of inflation, what happens to your purchasing
power?

Cost of doing business:

◦ As in “cost-push inflation” if your resource costs go up, then it makes it more expensive to do business

Lower unemployment:
◦ Higher prices, typically lower unemployment (demonstrating an inverse relationship)

Borrowing and lending:

◦ If rates do not adjust for inflation, then there may be more/less interest paid
 Inflation Exercise
1. Pick five goods or services
2. Research and find their prices from 1960s/early 70s
3. Then write down their prices for today (2018)
4. What $$ change overall did they have? What % change?
• Current Year Price – 1960s/70s price X 100 = ???
1960s/70s price
5. Dividing by how many years ago, what would their yearly inflation rate be?
6. Final step: look at the average salary for the years you chose! Can you tell if purchasing power has
decreased, stayed the same, or increased? Best way to calculate this is finding the “GDP per capita” for
1960s/70s and also for 2018.
• Current Year GDP per capita – 1960s/70s GDP per capita X 100 = ???
1960s/70s GDP per capita
Note: If the average % change in salary is greater than average % change in inflation of a good, then
purchasing power has increased! And vice versa..
Nominal vs. Real Income
Purchasing Power is a very important topic when understanding inflation!
Therefore, it is important to understand nominal income vs. real income
Nominal Income: income valued in current year dollars
Real Income: income valued in constant base-year dollars

To understand through a comparison of one year to the next…let’s say your monthly income
increases from $2,000 to $2050 during a year when CPI rises from 100 to 105.
Real Income = Nominal Income / CPI (in hundredths)
1,952 = 2,050 / 1.05
Unemployment
What we’ll cover…
1. Unemployment: what it is…Canada’s? BCs? Vancouver’s?
2. Labour Force Survey: what it is, population, participation rate
3. Drawbacks of the unemployment rate
4. Types of unemployment
5. The costs of unemployment
What is unemployment?
Put simply, it’s the number of unemployed people in the labour force

What is Canada’s unemployment rate?

5.8% (as of March 2018)
BC’s unemployment rate?
4.7% (as of March 2018)
Vancouver’s unemployment rate?
4.1 %
*according to StatsCan.
Canada Unemployment since 2013
What has contributed to the lower
unemployment rate?
◦ General recovery from the 2008-2010 post recession high unemployment
rate
◦ Cheaper commodities (i.e. oil)
◦ Greater mobility between provinces in the labour force
◦ Technological shifts that have allowed for different types of employment
◦ Wage growth
◦ Increase in construction
Calculations with Unemployment:
Labour Force Survey
Three important concepts here:
1. Labour Force Population: all residents of Canada 15 years of age or older, with
some exclusions:
◦ residents living on First Nations reserves in provinces (but not ones in the three northern territories).
◦ Residents living in institutions (jails, psychiatric wards).
◦ Full time members of the armed forces
◦ Canada’s current Labour Force Population: 29.9 Million

2. Labour Force: are the people who have jobs or actively looking for one in the labour
force population.
◦ Canada’s current Labour Force: 19.5 million
3. Participation rate: % of labour force population that makes up the labour force.
◦ Canada’s current Participation rate: 65%
Calculations with Unemployment:
Finding the values…
Labour Force, Labour Force Population, and Participation Rate,
Unemployment Rate:
*Labour Force is the sum of all workers who have jobs (full time or part-time) or are
unemployed and are actively seeking jobs
*Labour Force Population is anyone over 15 years of age with some exceptions (previous slide)
*Participation Rate: (Labour Force / Labour Force Population) x 100 = _____ %
*Unemployment Rate: (Total Number of Unemployed Workers / Labour Force) x 100 = ____%
Problems with the Unemployment Rate
In general, critics argue that the rate is either over or understated, due to the
following:

1. Underemployment: people who are working part-time but wish to work full-
time, or people who have accepted a job that they’re overskilled for.
2. Discouraged workers: unemployed people who have given up looking for
work.
3. Dishonesty: people who say they are looking for work but in fact are not.
Types of Unemployment
Frictional: people who are between jobs or looking for their first one.
Structural: people who have lost their job due to mismatched skills and jobs.
This happens when there is a shift in the way work is done, for example:
manufacturing to automation.
Cyclical: unemployment due to changes in output and spending. Can be related
to budget cuts, factories closing.
Seasonal: unemployment due to seasonal changes in jobs and industries.
Finally, the costs of unemployment
For individuals and families:
Decreased income
Lower quality of life for time of unemployment
Stress and depression

For country:
Lower potential output, and essentially lower GDP
1. The information below applies to a hypothetical
economy.
Unemployed members of the labour force 2.3 million
Total population 15 years of age and over 58.9 million
Participation rate 64 percent
Workers with full-time jobs 21.4 million
Part-time workers who do not wish to have full-time jobs 4.2 million
Part-time workers who wish to have full-time jobs 3.5 million
Total population less than 15 years of age 14.6 million

Use the information to find the following:

a. the size of the labour force

b. the size of the labour force population
c. the official unemployment rate
d. an estimate of the unemployment rate that includes
underemployment