Inflation and

Unemployment

12th Meeting

Inflationthe process by which the price level rises and money loses value.

Demand pull

• Increase in money supply

• Increase in government purchases

• Increase in exports

Cost push

• Increase in money wage rates

• Increase in money prices of raw materials

Inflation

Demand Pull Inflation Cost Push Inflation

Hyperinflation in Germany

Hyperinflation in Germany

Hyperinflation in Germany

Hyperinflation in Hungaria

Hyperinflation in Zimbabwe

Hyperinflation in Zimbabwe

Hyperinflation in Zimbabwe

List of countries which experienced hyperinflation

Angola 1991-1995Argentina 1975-1991Austria 1921-1922Belarus 1994-2002Bolivia 1984-1986Bosnia-Herzegovina 1992-1993Brazil 1986-1994Bulgaria 1996Chile 1971-1973China 1948-1949Free City of Danzig 1922-1923

Georgia 1993-1995Germany 1922-1923Greece 1942-1944Hungary 1945-1946Israel 1970-1971Japan 1948-1951Krajina 1992-1993Madagascar 2004-2005Mozambique 1977-1992Nicaragua 1987-1990Peru 1988-1990

Philippines 1942-1944Poland 1989-1991Romania 1998-2005Russia 1921-1922 and 1992-1999Turkey 1990-1995Ukraine 1993-1995United States 1861-1865Yugoslavia 1989-1994Zaire 1989-1996Zimbabwe 2004-2009

Unemployment

Unemployment based on BPS’ Definition

Unemployment: a person wants to work and is capable of working but is unable to obtain employment.

Unemployed: a person in the labour force, who at the reference period, did not have a job but was actively looking for one.

Labour Force is the total number of persons, aged 10 years and over, who are genuinely in the labour market at a given time. This includes those who work, including temporary work, employment in the government sector and those actively looking for work. Excluded are those individuals who are able to work but are currently not working and are not attempting to find employment.

Unemployment

Frictional, arises from normal labour turnover, ie people entering

and leaving the labour force.

Structural, arises due to changes in technology,

international competition

Seasonal, fluctuates with the business

cycle

The Phillips CurveWage growth % (Inflation)

Unemployment (%)

The Phillips Curve shows an inverse relationship between inflation and unemployment. It suggested that if governments wanted to reduce unemployment it had to accept higher inflation as a trade-off.

Money illusion – wage rates rising but individuals not factoring in inflation on real wage rates.

1.5%

6%4%

2.5%

PC1

References

• http://www.bized.co.uk• http://moneytipcentral.com/inflation-in-ameri

ca-what-will-hyperinflation-look-like• http://theinvestmentinsight.wordpress.com/c

ategory/inflationdeflation/• http://www.investopedia.com