MACROECONOMICS FIN201

INDIVIDUAL ASSIGNMENT
Student: Phm vn T Class: BA0603 Lecturer: H Qunh Hoa E-mail: Hoahq@fpt.edu.vn Roll number: BA00338

STUDY ON: Inflation and Unemployment in Vietnam

Sunday, June 3, 2012

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FIN 201 Individual assignment

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I.

Theory
This analysis basically aims to examine the relationship between inflation and unemployment in Vietnam in recent years. For that reason, this report just briefly notes some basic definitions. Inflation is simply understood as the increase of price level in an economy in a period of time. Generally, if Pt is the price level year t, Pt+1 is the price of year (t+1), the the inflation rate in this period is:

t 1

Pt 1 Pt .100 % Pt

P here is the price level, can be CPI or GDP deflator. In Vietnam, inflation rate is computed according to consumer price index CPI Unemployment rate is the percentage of the labor force that is unemployed.

Unemployme nt rate

Number of unemployed .100 % Labor force

Historically, for any economy, unemployment rate never fall to zero. Instead of that, it fluctuates around the natural rate of unemployment. In other words, there always unemployment in an economy, even in condition of full-employment.

The relationship between inflation and unemployment

In fact, unemployment and inflation are not totally dependent variable; instead, like other variables of macroeconomics, they fluctuate together. To examine the relationship between these two variables, we use the Phillips curve, both in the long run and short run. In this model, inflation is represented by vertical axis, and unemployment rate is represented by horizontal axis.

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In the long-run, as its said, there always unemployment the natural rate of unemployment. This natural rate does not depend on inflation. Therefore, in the long run, the Philips curve is vertical line that intersect horizontal axis at the natural of unemployment.

However, the short-run Phillips curve is different. As one of ten principles of economics states, in short-run, a country faces trade-off between inflation and unemployment. This principle indicates a negative relationship between inflation and unemployment. Thus, the short-run Phillips curve slopes downward.

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The short-run Phillips curves is also represented in form of equation:

e h(u u )
Where

is actual inflation rate, e is expected inflation rate

u is the actual unemployment rate, u is the natural unemployment rate h is a positive number This equation also shows the negative relationship between inflation and unemployment. Historically, many statistical studies have found out the results that follow the negative relationship as shown in the short-run Phillips curve. The economy of the United Stated in the 1960s is an example.

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However, we also need to note that the short-run Phillips curve will be observed only if expected inflation rate and the natural unemployment rate are constant. An increase in expected inflation rate or in the natural will shifts the Phillips curve up to the right. Adverse supply shocks also shifts the Phillips curve up and to the right, and it evens increase both inflation rate and unemployment rate that the short-run Phillips curve is not true. For example, look at year 1973 and 1974 or 1979 and 1980 of the United States economy in the following figures, the short-run Phillips curve failed to hold, both inflation and unemployment rise.

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II. Inflation and unemployment in Vietnam

In this second part, we will examine actual figures about the economy of Vietnam some recent years, applying theory in the first part. First of all, lets consider figures of inflation rate and unemployment in Vietnam

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((http://vi.wikipedia.org/wiki/T%E1%BA%ADp_tin:Vietnam_inflation_over_t he_years.jpg) Year Unemployment (%) 2008 2,38 2009 2,90 2010 2,88

(http://www.gso.gov.vn/default.aspx?tabid=387&idmid=3&ItemID=11897) Now, take the figure of the three year 2008, 2009 and 2010, and then graph them

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FIN 201 Individual assignment

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Graphically, Vietnamese economy in 2008, 2009 and 2010 follow exactly the short-run Phillips curve a trade-off between inflation and unemployment. Lets take a look, in 2008, the global economics recession led to the decline in economic growth of the whole world economy, including Vietnam. In limitation of this report, we just examine the effect of recession on inflation. Numerically, Vietnam witnessed a rapid increase in inflation rate. Inflation rate in 2008 reach to 23.1 percent, nearly 4 times much more than it was in 2007, 8,3%. In this situation, to quickly bring the economy out of recession, Vietnamese government practiced lots of monetary and fiscal policies in the next years that one of the main aims is to reduce inflation. Its obvious that Vietnamese government has succeeded in reducing inflation the rate of inflation, from 23.1 percent, felt to just 6.9 percent in 2009. We will not discuss in detail what policies government used or achievement of them, but just take a look in relationship between this reduction and unemployment. As its shown in the graph, the cost of inflation

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FIN 201 Individual assignment

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reduction is the increase in unemployment rate. Numerically, unemployment, from 2.38 percent in 2008, rapidly went up to 2.9 percent in 2009. The same situation occurred in 2009 and 2010, but in the opposite dimension inflation rise again while unemployment rate fall. However, as we studied, the short-run Phillips curve is not always held. Lets take an example about Vietnams economy in 1980s. Thiss period that Vietnam had to face a hyperinflation, with inflation rate of 453.3 percent in 1986. Its said that the Phillips curve fail to hold because despite of very high inflation rate, the unemployment rate didnt fall, but even rose and reach to 12.7 percent. If we graph inflation and unemployment in these years, its similar like the following one (relative figure of unemployment)

This failure of the short-run Phillips curve is due to the change in other factors affected the economy. In the 1980s, Vietnam has witnessed a fast growth of population. This growth is faster than economics growth that led to increase in natural unemployment and reduction in natural output. If we show in graph, the Phillips curve will shift up and to the right. Thats why unemployment rate is kept high regardless on increase in inflation rate.

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FIN 201 Individual assignment

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In conclusion, Vietnam economy, like many other economics, has been dealing with problem of inflation and unemployment as well. As we discuss in this analysis, relationship between inflation and unemployment in Vietnam is negative in some periods (like 2008, 2009 and 2010), fit with result of the short-run Phillips curve. However, the short-run Phillips curve sometime gets failure like situation in 1980s.

III. Macroeconomics policies in Vietnam

Historically, the government has been using various policies for the general aim of stable long run growth of economy. Nonetheless, the detail objectives have been change over periods and economic situations. For example, government may put highest goal for year is to increase productivity, or reduce inflation. In this small analysis, I will not go in detail in this aspect. Instead of that, I just briefly some policies that Vietnam government have been using or will might use. Increase export, control closely import price, reduce import Reduce loan interest rate to encourage investment, expand production Encourage consumption Manage foreign exchange market

REFERENCES
Andrew B. Abel, Ben S. Bernanke, Dean Croushore, Macroeconomics, Seventh edition, Pearson http://vi.wikipedia.org/wiki/T%E1%BA%ADp_tin:Vietnam_inflation_over_the_years .jpg http://www.gso.gov.vn/default.aspx?tabid=387&idmid=3&ItemID=11897