Macro.Week2.2008

# Macro.Week2.2008 - Missing page from first weeks notes II...

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Missing page from first week’s notes II - 1/6 Note that u.r. is never zero normal frictions i industries i regions i normal movements, esp in secondary labour market we think of “full employment” as u.r. about 6 or 7% (maybe lower??) Note - when u.r. rises, it understates the problem: 1. Underemployment 2. Discouraged workers eg. 1000 people CASE 1 - 600 in L.F., 36 unemployed, 100 part time, full time = CASE 2 - 550 in L.F., 55 unemployed, 150 part time, full time =

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Macro Week 2 2008 Professor Michael Krashinsky II-2/1 Review: There are two price indexes that we are going to consider. The first is the Consumer Price Index (C.P.I.) The C.P.I. uses the bundle of goods purchased by the average Canadian consumer, and basically uses the “initial bundle” The second is the GDP deflator The deflator uses a bundle of goods that represents all the things that Canadians produce, and uses the “final bundle”. How do the two differ ? 1. CPI uses initial bundle and GDP deflator uses the final bundle. Hence GDP deflator tends to understate a bit, CPI tends to overstate a bit (but the recent modifications, which we are not going to discuss, try to compensate). 2. The CPI uses a bundle representing what household consume. The GDP deflator uses bundle representing what country produces. Note the difference: CPI includes imports (not produced in Canada, so not in GDP deflator) GDP deflator includes exports, investment government sector (but excludes imports)
II-2/2 Another example: Initial Period Final Period Food Q=4 P = \$3 Q=6 P = \$5 Housing Q=2 P = \$10 Q=1.5 P = \$30 CPI-type: Index = \$80/\$32 = 2.5 prices up 150% GDP-deflator-type: Index = \$75/\$33 = 2.27 prices up 127% Notice: The first-period bundle is worth \$32 at first-period prices; the second-period bundle is worth \$75 at second-period prices So, are you better off in the first period or the second period? \$75/\$32 = 2.34375 So value of bundle has risen by 134% Prices have risen by between 127% and 150% So we are not sure!

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II - 2/3 How do we get price index? We form a series given by P 1 • B P 2 • B P 3 • B P 4 • B etc Then we multiply each number by 100 / P 1 • B eg. P 1 • B P 2 • B P 3 • B P 4 • B \$250 \$300 \$320 \$400 price index is: period 1 2 3 4 price index 100 120 128 160 The most common price index is the Consumer Price Index How do we actually compute the C.P.I. StatCan chooses a
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Macro.Week2.2008 - Missing page from first weeks notes II...

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