A Guide to the BC Economy and Labour Market
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  What do you mean when you say...  

Economists use a lot of jargon: terms like GDP, production, output, productivity, and unemployment, to name just a few. It's important to understand what's meant when these terms are used, so we've included some definitions and examples in this section:

Capital

Capital is just another name for machinery, equipment, factories, institutions, airports, railroad tracks, dams, and other structures or facilities used in production. Investment in new capital or more efficient use of existing equipment is one way of increasing an industry's output.

Chained (2002) Data

It's easy to adjust for inflation when you are looking at a single good or service. All you need to know is how prices have changed over time in order to remove the price effect.

However, the situation is a little more complex when more than one good or service is involved.

That's because it's sometimes possible to substitute between different types of goods and services. If the price of a commodity increases, you might decide to reduce your consumption of that commodity and switch to using something else instead (we call this the substitution effect). In our example, the driver who had to pay $48.52 for a tank of gas in 2008 might have decided to save money by using the bus more often, or riding a bike or walking instead of driving. The total amount of fuel consumed by that driver might decline as a result.

Industries produce, and use, many different types of goods and services. In order to find out how much an industry's value added has changed over time, it is important to allow for changes in both the price and quantity of goods and services produced (or consumed) by the industry.

All of the GDP figures used in this document have been calculated using a somewhat complicated formula, which does this, which is called the Fisher index formula1. This formula adjusts for both price and substitution effects over time. The GDP figures calculated using this method are reported in chained 2002 dollars.

Constant (real) dollar estimates

Economic data is often reported in constant or real dollars. This means the numbers have been adjusted to remove the effects of price changes over time. An increase or decrease in constant dollar output indicates there has actually been a change in the quantity of a good or service produced. All of the price effects have been removed.

Adjusting for inflation (price changes): calculating constant dollar estimates

How do we remove the effects of price changes? Let's look at a simple example: The average cost of one litre of regular gasoline sold in Vancouver was 61.5 cents in 1990. By 2002, the price had increased to 70.4 cents per litre. It cost Vancouver residents 121.3 cents for a litre of regular gas in 2008.

Suppose the gas tank in your car holds 40 litres of gas. If you lived in Vancouver, the cost of a fill-up in 1990 would have been $24.60. You would have spent $28.16 for the same amount of gas in 2002, and it would have cost you $48.52 in 2008. In other words, the cost of filling up your tank doubled between 1990 and 2008.

Self-service, regular gas purchased in Vancouver

 
1990
2002
2008
Average price per litre in dollars
0.615
0.704
1.213
Litres of fuel purchased
40
40
40
Cost in current dollars
24.60
28.16
48.52
Cost in constant (2002) dollars
28.16
28.16
28.16
Implicit price index
87.4
100.0
172.3

Table 1

Does this mean that the gas retailer's business also doubled? The answer is no. In this example, the amount of gas required to fill the tank of a car was unchanged. The only thing that changed was the price of the gas. The increase in the retailer's revenue and the cost to the consumer was entirely due to a change in price.

You can take out the effect of the price increase by expressing the value of gas sales in constant (2002) dollars. This is done by multiplying the base year (2002) price of 70.4 cents per litre by the number of litres of gas sold in 2008 to get the constant dollar cost of a 40 litre tank of gas, which is $28.16 in 2002 dollars. Note that in this example, the constant dollar value of a tank of gas is unchanged from 2002, because the same amount of gas is purchased in each year.

Economic growth

Economic growth is just another term for the percentage change in the size of the economy, as measured by GDP, over time (usually from year to year). Economic growth can be the result of increased use of labour and capital, or may be due to productivity improvements.

The economy regularly experiences ups and downs. This pattern of GDP growth and decline is often called the business or economic cycle. When the economy stalls, we usually describe it as being in a slowdown; when it's in a recession, the economy has been shrinking for a period of at least six months.

Employment (work force)

Employment is often measured in terms of the number of people working in a particular industry. In the following chapters, the terms workforce, jobs and employment are all used to describe the number of people who work in a particular industry or sector.

Establishment

A business establishment is the smallest operating entity for which financial records are reported. Usually, that is the same as the physical location where a company operates. Some companies (like hair salons, clothing stores, or fish farms) might have only one establishment. Others, however, have many establishments in different parts of the province. For example, Sears® is a single retail company that has many different business locations, or establishments, in BC and other parts of Canada.

Establishment size is often measured in terms of the number of people who work at a particular job site. Those with fewer than 20 employees are considered to be small businesses. Establishments with 20-99 employees are mid-size, and large establishments have 100 or more workers on staff. In industries such as health care, or education, many of the jobs are in large establishments. In others, such as personal services, people are more likely to be working in smaller establishments.

Statistics on employment by establishment size do not include the self-employed. Self-employed people are most likely to be operating a small business.

Full-time and part-time employment

Full-time workers are people whose jobs involve at least 30 hours of work each week. Those who are employed part-time spend less than 30 hours a week on the job.

It's important to distinguish between full-time and part-time workers when comparing employment over time and across industries.

Two part-time workers count as two employees, but they don't do twice as much work as one full-time employee. The amount of labour they provide depends on how much time they spend on the job. If you're comparing employment in an industry that has a lot of part-time workers with the number of jobs in an industry where most people work full time, it is important to keep that in mind.

Goods sector

An industry that harvests, extracts, or transforms raw materials into a product that can be handled or stored is a goods-producing industry. The goods sector includes all primary and secondary industries.

Gross domestic product (GDP), or value added

Gross domestic product (usually referred to as GDP) is a measure of the value added to the economy by an industry. It is usually expressed in billions of dollars. The terms value added and GDP are sometimes used interchangeably. GDP is the standard measure of the size and performance of the economy.

Imputed rental income

Imputed rental income is an estimate of how much rent a homeowner would have to pay for the house or condo he or she lives in. A more complete explanation of imputed rental income and why it's included in GDP can be found in the section of Chapter 4 that describes the finance, insurance, real estate and leasing industry.

Indices

Indices are often used to show how the value of something changes over time. They are calculated by taking the ratio of the value of a given series in the current period to its value in the base year, which is the year being used as the basis for the comparison. The series is then multiplied by 100.

In our example, the price of one litre of gas increased from 61.5 cents in 1990 to 121.3 cents in 2008. A price index can be calculated by dividing the price per litre in 1990, 2002 and 2008 by 70.4 cents, the cost of the gas in our base year of 2002, and then multiplying by 100. The implicit price index calculated this way is shown in Table 1. Indices aren't just used to show price changes.

Many of the charts on this website use indices to compare GDP and employment growth over time. In this case, the indices are calculated by dividing annual GDP or employment data by the level in the base year chosen for comparison, and then multiplying by 100.

Industries

Businesses that produce similar types of goods or services are usually grouped together into industries.

The North American Industry Classification System (NAICS) is used to classify business establishments to specific industries based on the main product that is produced or sold by each establishment.

NAICS is hierarchical. There are many small industries that have been defined within each of the main industry groups. In the example used earlier in this chapter, the millworking factory would be classified as part of the "other wood product" manufacturing industry, which in turn is part of the "wood product" industry, a sub-group of manufacturing.

You can find more details on how industries are defined in Appendix 1.

Inputs

Goods and services (labour, capital and materials) used in the production process are called inputs. In our millworking example, the inputs include:

  • labour;
  • capital (such as the millworking factory, a table saw or a power sander);
  • raw materials (wood);
  • materials produced by other companies (such as nails and glue);
  • fuel and energy (electricity, oil or gas); and
  • purchased services (such as transportation from the factory to the building supply store or the services of the company's accountant).

  1. You can find out more about how this index is calculated at http://www.statcan.gc.ca/concepts/cf/8102792-eng.htm. 

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