Inflation & unemployment in vietnam

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INFLATION & UNEMPLOYMENT IN VIETNAM WHAT IS THE CONNECTION? Tut2-TR08 : Pham Que Duong Hoang Thi My Bui Thu Trang Doan Thi Thoa

Transcript of Inflation & unemployment in vietnam

Page 1: Inflation & unemployment in vietnam

INFLATION & UNEMPLOYMENT IN VIETNAM

WHAT IS THE CONNECTION?

Tut2-TR08 : Pham Que DuongHoang Thi MyBui Thu TrangDoan Thi Thoa

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Outline

VIETNAM STATISTICS 1996-2010

HOW DO INFLATION & UNEMPLOYMENT RELATE?

SHORT-RUN RELATIONSHIP

LONG-RUN RELATIONSHIP

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VIETNAM STATISTICS 1996-2010

Year Inflation rate(%) Unemployment rate(%)1996 4.5 5.881997 3.6 6.011998 9.2 6.851999 0.1 6.742000 -0.6 6.422001 0.8 6.282002 4 6.012003 3 5.782004 9.5 5.62005 8.4 5.312006 6.6 4.822007 12.6 4.642008 4.5 4.652009 7 4.662010 4.5 4.65

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( Cont’d)

-2

0

2

4

6

8

10

12

14

1998 2000 2002 2004 2006 2008 2010

UNEMPLOYMENT INFLATION

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HOW DO INFLATION & UNEMPLOYMENT RELATE?

Short-run relationship The Phillips phaseThe stagflation phaseThe recovery phase

Long-run relationship

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THE PHILLIPS CURVE

Suggests a negative relationship between inflation and unemployment

Expansionary monetary or Fiscal policyAggregate demand increasesReal GDP and price level are higherUnemployment is lower

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Quantityof Output

0

Short-runaggregate

supply

(a) The Model of Aggregate Demand and Aggregate Supply

Unemployment

Rate (percent)

0

Inflation

Rate

(percent

per year)

PriceLevel

(b) The Phillips Curve

Phillips curveLow aggregate

demand

Highaggregate demand

(output is8,000)

B

4

6

(output is7,500)

A

7

2

8,000(unemployment

is 4%)

106 B

(unemploymentis 7%)

7,500

102 A

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However, in Vietnam…

The Phillips curve only accounts for: 1996-1997 2000-2002 2003-2004 2006-2007

=> The Phillips Phase

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CHANGES IN EXPECTATION & THE STAGFLATION PHASE

Higher price level ( higher inflation rate)Adjusted expectations of Firms & WorkersHigher nominal wagesA left-ward shift of the short-run AS curveHigher unemployment and inflation

=> Stagflation phase: high inflation & increasing unemployment

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Stagflation periods in Vietnam

1997-1998: Inflation rate increases by 5.6%

Unemployment rate is 0.84% higher

2008-2009: Inflation rate increases by 2.5%

Unemployment rate is 0.01% higher

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THE RECOVERY PHASE

Happens when Government attempts to stop the recession created in the stagflation phase.

Results in lower unemployment and higher prices, but the price rise is less than before, so the inflation rate is lower.

For Vietnam: 1998-2000 2009-2010

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LONG-RUN RELATIONSHIPIn the 1960s, Friedman and Phelps

concluded that inflation and unemployment are unrelated in the long run

The long-run Phillips curve is vertical at the natural rate of unemployment

Natural rate of unemployment recognizes that there’ss always be some level of unemployment in an economy

At this level, all unemployment will be voluntary

=> Monetary policy could be effective in the short run but not in the long run

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UnemploymentRate

0 Natural rate ofunemployment

InflationRate Long-run

Phillips curve

BHighinflation

Lowinflation

A

2. . . . but unemploymentremains at its natural ratein the long run.

1. When the Fed increases the growth rate of the money supply, the rate of inflation increases . . .

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THANK YOU

Q & A