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.

MEASURES INFLATION
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 index

Measures of Inflation
Inflation 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
1. 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.

Demand-Pull Inflation, cont..

Associated with a booming economy or an
economy which is near the peak of its
business cycle.
General Price Level

Real Output

CAUSES OF INFLATION, cont..

2. 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
activities
Inflation 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 inflation
-Increase in wage level
-Labor 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 Level

Real 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 Employment
The 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 society
-Loss of income and self respect
-Loss of job skills
-Social 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 rates
Lowering interest rates

Measures to Control
Unemployment, cont..
Fiscal Policy
-Decrease in taxes
-Increase in gov expenditure
Direct Control Measures
-Provide training and technical education
-Development of new land
-Job creation in various sectors in economy