Basic Macroeconomic Concepts Continued

UNEMPLOYMENT (U):
-News publications will often toss around unemployment rates, but very few people actually know what the unemployment rate means, or what a 'good' rate for employment or unemployment is

Increases in output are either caused by
1) more works being utilized (aka an increase in employment) OR
2) each worker being more productive

In the SHORT RUN, changes in productivity usually don't happen (they take a longer time to come to be realized), so only changes in employment affect output

In the LONG RUN, changes in both productivity and employment can affect output (so the Canadian economy could raise it's GDP either by putting more people to work, or by implementing more efficient production processes [like switching to machine-centric production processes which allow each worker to produce more in a shorter amount of time])

Definitions and Terms Surrounding Employment and Unemployment:
LABOUR FORCE: The total number of people who wish to work at any given time (Unemployment + Employment) ***Note: The size of the labour force can grow and shrink depending on how motivated the general populace is to work. Often, higher wages motivate more people to work, so in times where wages are higher, the labour force is also larger
EMPLOYMENT: The total number of workers ages 15 and older who have any kind of job (including part time work, full time work, and self-employment)
UNEMPLOYMENT: The total number of workers ages 15 and older who are willing and able to work, but have NO job
UNEMPLOYMENT RATE (U): UNEMPLOYMENT/LABOUR FORCE
EMPLOYMENT RATE: EMPLOYMENT/POPULATION

NOTICE how unemployment rate and employment rates are calculated differently? Pretty tricky, huh?

TYPES OF UNEMPOYMENT:
Frictional- turnover unemployment (people who are unemployed because their still trying to find a job that works for them, like recent college graduates)
Structural- unemployment due to mismatching (like when there are 20 positions for teachers and 20 unemployed plumbers- there are enough jobs, but they are the wrong kind of jobs for those who are unemployed)
Cyclical- unemployment that results from recessionary gaps

NAIRU = Non-Accelerating-Inflationary-Rate of -Unemployment: The rate of unemployment that exists at full employment

THE HISTORY OF UNEMPLOYMENT:
-Employment tends to increase fairly constantly in line with growth in the labour force
-Unemployment rates peak during recessions. In Canada, they fluctuate from 12% to 4%, but usually average at around 7%

WHY DOES UNEMPLOYMENT MATTER? Unemployment causes stress and unhappiness on an individual level, and creates economic waste on a macro-level. Overall, it's a very bad sort of thing
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PRODUCTIVITY: Real output per unit of input (all five different kinds of inputs)
LABOUR PRODUCTIVITY: Real output per unit of labour input- this can be measured either per worker or per hour worked

HISTORY OF PRODUCTIVITY IN CANADA:
Real GDP per worker has increased at 1.3% per year
Real GDP per hour has increased at 1.1% per year
Per hour is probably the better measure because the number of hours worked per worker can contribute to per-worker productivity (in other words, we aren't necessarily becoming more productive in Canada as much as we are simply working more hours)

Why does productivity increase? Usually because of increases in human and physical capital.

The trend is that both per hour and per worker GDP have been rising gradually in Canada over time.
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INFLATION (P) OR GENERAL PRICE LEVEL: The average price of all goods in the economy (usually expressed at CPI)
Inflation is defined as an increase in P (an increase in the average cost of all products)

CPI is the consumer price index. This is weighted average of all goods and services in a representative basket of goods (where each good is weighted depending on what percentage of their income the average consumer would spend on it). This is used to measure the cost of living.

Problems with CPI:
-It doesn't adjust for quality changes (ie: situations where you would pay the same amount of money but for a much better product)
-It also doesn't adjust for changes in consumption patterns over time

4 steps to construct an index:
1) Determine the goods in the index
2) Find the base year quantity of goods times the base year price of goods
3) Find the current year quantity of goods times the current price of goods
4) The price index: the ratio of current year/base year

Purchasing power = the number of goods that can be purchased per dollar

HISTORICAL TREND: Inflation has caused the general price level to increase to over 6 times its 1960 level. The rate of inflation can fluctuate wildly

WHY INFLATION MATTERS: Inflation diminishes the purchasing power of money, it reduced the value of fixed assets. If inflation is unanticipated, it can have serious macro effects.
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INTEREST RATES (i): The cost of borrowing money
-"The" interest rate is the mean of all of the different interest rates
-The prime rate is the rate which chartered banks charge to preferred customers
-The bank rate is the rate which the bank of Canada charges to chartered banks

The nominal interest rate is the current rate of borrowing (the real interest rate + inflation)
The real interest rate is the nominal interest rate corrected for changes in purchasing power (so if the current interest rate is 5% and inflation is currently 5%, then the real interest rate is 0% [nominal minus inflation])
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EXCHANGE RATES (e): These are the same as they were in micro
Foreign Exchange = Actual Foreign currency
Foreign Exchange Market = The Market for Foreign Currency
External Value = The price of domestic currency
Exchange Rate = The price of foreign currency
Appreciation = rise in external value and fall in the exchange rate (when domestic currency becomes worth more relative to foreign currencies)
Depreciation = fall in external value and rise in exchange rate (when domestic currency becomes worth less relative to foreign currencies)

BALANCE OF PAYMENTS (BOP) = a measure of the money going in and out of any country
BALANCE OF TRADE = Exports minus Imports = net exports = NX

Historically, our imports and exports have both increased over time, but our net exports are positive (The US's net exports are negative right now).

Our exchange rate has fluctuated greatly over time. It's reached parity with the US a few times (like in 2008).

Growth and Fluctuations (Business cycles) are different!