INFLATION AND UNEMPLOYMENT

INFLATION Definition: Inflation can be defined as a continuous increase in the general price level of goods and services in the economy. Too much money chasing too few goods For example, if the inflation rate is 4 percent, it does not mean that all prices are increasing by 4 percent. It is only the average increase.

INFLATION, cont.. Deflation: decrease in the general price level of goods and services in the economy.

Stagflation: Condition in the economy when there is high unemployment and rapid inflation simultaneously.

The consumer price index (CPI) is used to measure the rate of inflation.

Consumer Price Index (CPI) : Index that measures changes in the average price of consumer goods and services

Also called cost of living indexMEASURES INFLATION

Measures of InflationInflation rate = CPI this year CPI previous year X 100 CPI previous year

For example, given the CPI for year 2000 was 121 and year 2001 was 110, the inflation rate using the above formula would be:

Inflation rate = 121 110 X 100 = 10% 110

CAUSES OF INFLATION Demand-Pull Inflation (AD > AS)It is caused by the rise in AD. So AD curve will shift to the right. According to Keynes, he assumed the AD exceeds AS at full employment. If all available resources are already fully employed, the economy is attempting to produce beyond its capacity; whereby the spending pulls the price level upward.

Associated with a booming economy or an economy which is near the peak of its business cycle.Demand-Pull Inflation, cont..General Price LevelReal Output

CAUSES OF INFLATION, cont..Cost-push Inflation (AS shift to the left)Increase in the general price level associated with an increase in the cost of production; the result of the sellers activitiesInflation occurs due to an increase in the costs or supply prices of goods which caused by the increase in the cost of inputs.

Cost-Push Inflation Wage-push inflationIncrease in wage levelLabor unions seek further wage increases through their collective bargaining strength @ gov increase wages to avoid migration of workers to other firms. Profit-push inflation -Producers or monopolists stock up on goods and create shortage which will increase the price on these goods, giving them higher profits.

Cost-Push Inflation, cont.. Import-push inflation-prices of imported raw materials or finished goods increase-occur due to fluctuation of foreign exchange rate lead to increase in production costs increase in the price of outputs

Cost-Push Inflation, cont..General Price LevelReal Output

Effects of Inflation Distribution of Income Savings Production Balance of Trade

Measures to Control Inflation Monetary Policy-Open Market Operations selling of securities or short-term bonds-Raising the reserve requirement-Raising the discount rate/bank rate-Raising interest rate

Measures to Control Inflation, cont.. Fiscal Policy-Increase in taxes-Decrease in government spending Direct Control Measures-Price control and rationing-Anti-hoarding campaign-Compulsory savings

UNEMPLOYMENT Definition: A situation where labor force participants are available and willing to work but are unable to find jobs.

Labor Force: People from the total population above 16 years of age , who are not in any institution and who are either employed or unemployed but actively seeking employment.

Unemployment, cont.. Discouraged workers: Individuals who wants to work but who has been unsuccessful for a long period of time in finding a job and given up on seeking for jobs. (excluded from labor force) Underemployment: A term used to describe those who take on part-time jobs below their capability but are seeking full-time employment

Calculations of Unemployment Rate

Unemployment Rate (%) = Number of Unemployed X 100% Labor Force

Full EmploymentThe situation which all available resources in the economy are employed to produce goods and services.

There are always some people who are voluntarily unemployed because dissatisfied with their current jobs and resigning to find another job.

Types of Unemployment Frictional Cyclical Structural Seasonal

Effects of Unemployment Effects on Individuals and societyLoss of income and self respectLoss of job skillsSocial and political problems

Effects on the Economy

Measures to Control Unemployment Monetary Policy-Open Market Operations purchase of securities or short-term bonds-Lowering reserves requirements-Lowering discount ratesLowering interest rates

Measures to Control Unemployment, cont.. Fiscal Policy-Decrease in taxes-Increase in gov expenditure

Direct Control MeasuresProvide training and technical educationDevelopment of new landJob creation in various sectors in economy