Output, price, and employment are three key dimensions of macroeconomic activity. Output is a measure of the total quantity of goods and services produced in the economy. It is also a measure of the incomes generated by that production. Price or the price level in macroeconomics is the weighted average of the market prices of all final goods and services produced. The price level reflects the costs of production in the economy. Employment is a measure of the number of jobs involved in the production of goods and services, or, in more refined terms, the number of hours of labour input required to produce the economy's output. Economic performance is judged by how these measures change over time.
Output and its rate of growth are measured in terms of real gross domestic product (real GDP). It is the quantity of final goods and services produced in the economy in a specific time period, such as one year, measured in the market prices of a base year, 2007 for example. (It may also be called GDP in constant 2007 dollars). The production of goods and services generates incomes equal to the value of those goods and services. As a result, real GDP is also the real income in the economy and the quantity of goods and services the economy can afford to buy.
Real GDP: the quantity of final goods and services produced by the economy in a specified time period.
In an economy with a growing population and labour force, growth in real GDP is necessary to maintain standards of living. In the Canadian economy, real GDP changes from year to year. By measuring real GDP in the prices of a base year, the changes seen in real GDP are the result of changes in the quantities of goods and services produced, and not the result of changes in prices. This distinction is important: Increased quantities of goods and services provide for increased standards of living in the economy, increases in prices do not. As a result, economic growth is defined as an increase in real GDP, and the annual rate of economic growth is the annual percentage change in real GDP. This is the first key indicator of economic performance.
The rate of growth in real GDP is calculated as follows:
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(4.1) |
Economic growth: an increase in real GDP.
Rate of economic growth: the annual percentage change in real GDP.
Recent measures of real GDP in Canada provide an example of economic growth and the calculation of the rate of economic growth. In the year 2016, real GDP in Canada measured in 2007 dollars was $1,781 billion. One year earlier, in 2015, real GDP in 2007 dollars was $1,751 billion. Using these data:
The price level in the economy is a measure of the weighted average of prices of a wide variety of goods and services. The Consumer Price Index (CPI), for example, compares the cost of a fixed basket of goods and services bought by the typical household at a specific time with the cost of that same basket of goods and services in the base year. It is the most widely used indicator of prices in Canada and is often referred to as the "cost of living."
Price level: a measure of the average prices of all goods and services produced in the economy.
Price index: a measure of the price level in one year compared with prices in a base year.
Consumer Price Index (CPI): a measure of the cost of living in any one year compared to the cost of living in a base year.
The Consumer Price Index is a more comprehensive measure of the change in prices from one year to the next, but the simple example in Example Box 4.1 illustrates the how such an index is constructed and what it tells us.
Example Box 4.1 Constructing a price index
A simple example illustrates the construction of a price index. Suppose a survey of expenditures by university students in the year 2006 gives the information reported in the first three columns in the following table:
| University student weekly expenditure basket (Base year 2006) |
| |
Quantity |
2006 Price |
2006 Cost |
2011 Price |
2011 Cost |
| Pizza |
5 |
$7.50 |
$37.50 |
$8.50 |
$42.50 |
| Hamburger |
5 |
$2.50 |
$12.50 |
$2.25 |
$11.25 |
| Coffee |
10 |
$1.00 |
$10.00 |
$1.25 |
$12.50 |
| Movies |
1 |
$10.00 |
$10.00 |
$8.00 |
$8.00 |
| Bus fare |
7 |
$1.50 |
$10.50 |
$1.85 |
$12.95 |
| Total |
|
|
$80.50 |
|
$87.20 |
This table gives us the cost of weekly expenditures on a basket of five items and the weight of each item in the total expenditure. If we choose 2006 as our base year then the cost of the basket in 2006 prices, $80.50, has an index value of 100 
. In other words we have a Student Price Index:
Now we see in the last two columns of the table that this same basket of goods and services in the prices of 2011 would cost $87.20. Then our SPI in 2011 would be:
The index tells us that even though the prices of some things went up and others went down the Student Price Index increased by 8.3%. This was the weighted average increase in prices and the increase in the cost of student expenditures.
Today, the base year for the consumer price index is 2002 with a value of 100. Statistics Canada uses a fixed basket classified under eight consumer expenditure categories. The weight or importance of each category is its share of expenditure as determined by consumer expenditure surveys. By visiting the Statistics Canada website, www.statcan.gc.ca, and selecting Consumer Price Index in the Latest Indicators table on the right side of the home page, you can scroll down to a table showing the components of the CPI.
For 2015 Statistics Canada reported a CPI of 126.8 compared to a CPI of 100.0 in 2002. That meant the cost of the basket of goods in 2015 was 26.8 per cent higher than it was in 2002. Prices and the cost of living increased over the 13-year period. At the end of 2016 the CPI was 128.7. Prices had increased again. Inflation is defined as a persistent rise in the general price level as indicated by these increases taking the change, as a percentage, in the price level the previous year.
Inflation: a persistent rise in the general price level.
The inflation rate is calculated using the same method used for calculating the growth rate in real GDP. For example, using CPI values for 2015 and 2016:
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(4.2) |
Statistics Canada also collects and publishes information on the Canadian labour market. It uses a monthly Labour Force Survey of approximately 50,000 Canadian individuals 15 years of age or over living in the provinces of Canada, excluding full-time members of the armed forces, those persons living on Indian reserves, and those in institutions such as penal institutions, hospitals, and nursing homes. The survey provides the data used to estimate the size of the labour force, employment, and unemployment.
Employment is defined as the number of adults (15 years of age and older) employed full-time and part-time and self-employed. Unemployment covers those not working but available for and seeking work. The civilian labour force is those adults who are employed plus those not employed but actively looking for jobs. Based on these concepts, and data on the surveyed population, Statistics Canada reports three key labour market indicators, namely: The participation rate, the unemployment rate, and the employment rate. Employment and unemployment receive most of the media attention and have become familiar indicators of economic conditions. There are, however, two other underlying labour market measures that deserve attention when interpreting the employment and unemployment rates.
Labour force: adults employed plus those not employed but actively looking for work.
Employment: number of adults employed full-time and part-time and self-employed.
Unemployment: number of adults not working but actively looking for work.
The participation rate is the proportion of the surveyed population that is either working or unemployed. It measures the size of the labour force relative to the surveyed population. The participation rate changes as people become more optimistic about finding employment, or discouraged by periods without employment. Discouraged workers want to work but are no longer looking for work because they believe suitable work is not available. As a result they are excluded from the measurement of the labour force and reduce the participation rate. Changes in the participation rate change the size of the labour force and the unemployment rate even if employment and the population are constant.
Participation rate: percent of the population that is either working or unemployed.
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(4.3) |
The unemployment rate is the number of unemployed persons expressed as a percentage of the labour force. The size of the labour force depends on the participation rate, which reflects the choices people make about looking for work. The unemployment rate will rise if people become more optimistic about job prospects and begin to look for work, increasing the participation rate and the labour force. On the other hand, the unemployment rate will decline if some people become discouraged and give up looking for work, reducing the participation rate and the labour force.
Unemployment rate: the number of unemployed persons as a percentage of the labour force.
The unemployment rate is calculated as follows:
 |
(4.4) |
Unemployment as measured by the broad unemployment rate has three important components. Cyclical unemployment is unemployment that would be eliminated by a higher level of economic activity without putting increased pressure on wage rates and inflation. Frictional unemployment comes from the dynamics of the labour market as changing labour force participation and employment opportunities mean that it takes time to match job openings with job candidates. Structural unemployment reflects differences in labour force characteristics and employment opportunities as the structure of the economy changes. In combination, frictional and structural unemployment make up the "full employment" level of unemployment. The corresponding unemployment rate is defined as the natural unemployment rate. In recent years in Canada, estimates of frictional and structural unemployment suggest a natural unemployment rate of about 6.0 percent. An unemployment rate persistently below 6.0 percent would create inflationary pressure in the labour market and the economy.
Cyclical unemployment: would be eliminated by higher levels of economic activity.
Frictional unemployment: a result of the time involved in adjusting to changing labour force and employment opportunities.
Structural unemployment: caused by changes in economic structure relative to labour characteristics.
Natural unemployment rate: the unemployment rate at "full employment".
Employment rate: percent of the population 15 years of age and over that is employed.
Employment rates provide a different perspective on labour market conditions because they are not affected by changes in the participation rate, which can change unemployment rates. If some people become discouraged and stop looking for work the participation rate, the labour force and the unemployment rate decline, but the employment rate is unchanged. The employment rate is calculated as:
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(4.5) |
Table 4.1 gives recent data on the Canadian labour force and labour market conditions in terms of the Participation, Employment and Unemployment rate concepts.
Table 4.1 The Canadian Labour Market, February 2017 (thousands of persons and percent)
Source: Statistics Canada, CANSIM Table 282-0087
Almost every day the media discuss some aspects of economic growth, inflation, and employment. Often these discussions ignore the requirement that employment must grow faster than the growth in the labour force if unemployment is to decline. Good news about 'job creation' needs to be tempered by news on labour force growth. These issues often play large roles in elections and discussions of economic policy. In the chapters that follow, we will study causes of changes in output, income, prices and inflation, and employment and unemployment. As a background to that work, consider recent Canadian economic performance.
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