INFLATION AND UNEMPLOYMENT

INTRODUCTION INFLATION: The rate at which the general level of prices for goods and
services is rising, and, subsequently, purchasing power is falling. Central banks attempt to stop severe inflation, along with severe deflation, in an attempt to keep the excessive growth of prices to a minimum. Too much money in circulation causes the money to lose value.this is the true meaning of inflation.

UNEMPLOYMENT:
Occurs when people are without jobs and they have actively sought work within the past four weeks. The unemployment rate is a measure of the prevalence of unemployment and it is calculated as a percentage by dividing the number of unemployed individuals by all individuals currently in the labor force.

When economists look at inflation and unemployment in the short term, they see a rough inverse correlation between the two. When unemployment is high, inflation is low and when inflation is high, unemployment is low. This has presented a problem to regulators who want to limit both. This relationship between inflation and unemployment is the Phillips curve. The short term Phillips curve is a declining one.

This is a rough estimation of a short-term Phillips curve. As you can see, inflation is inversely related to unemployment. The long-term Phillips curve, however, is different. Economists have noted that in the long run, there seems to be no correlation between inflation and unemployment In the classical view of inflation, the only thing that causes inflation is, in reality, changes in the money supply. Remember the classical quantity theory of money: (money supply) x (velocity) = (price level) x (amount of output). And remember that the classics assume that velocity and output are independent and relatively constant. Thus, as money supply rises, that naturally ups the price level, too, and increase in price level is inflation. The classical economists believe that there is a natural rate of unemployment, the equilibrium level of unemployment of the economy. That is the long-term Phillips curve. Remember that the long-term Phillips curve is vertical because there inflation is not related to unemployment in the long-term. Unemployment, therefore, will just be at a given level, no matter at what point inflation is at. In the classical view, the point where the short-term Phillips curve intersects the longterm Phillips curve is the expected inflation. To the left side of that point, actual

inflation is higher than expected and to the right, actual inflation is lower than expected. Basically, unemployment below natural unemployment leads to inflation higher than expected and unemployment higher than natural unemployment leads to inflation lower than expected. When inflation is combined with slow economic growth, its called "stagflation" and that result in severe job loss. Inflation, to an extent, is good for economy but increasing inflation might have an impact on job losses if investors lose hopes and feel insecure about finances. Money is injected at a specific point when the money supply is increased, usually in banks, the inflation doesn't happen immediately. So the banks get a large influx of money at the pre-inflationary value and only as the money begins circulating into the rest of the economy does the value start dropping. This means that the rise in prices caused by inflation is not uniform and some areas see a relatively higher rise in price than others. Depending on which areas these are some businesses will see a rise in costs which may be incentive for layoffs. I'm not sure to what extent this contributes to unemployment but it almost certainly is a factor. There is no reason for fearing surpluses and unemployment because supply generates its own demand. And neither supply nor demand was thought of being capable of causing inflation or deflation. Inflation was attributed exclusively to coin debasement and paper money creation by government during periods of war and civil strife. Once peace was restored inflation was expected to come to an end. Market order for breeding mass unemployment, and appealed to government for creating conditions of full employment. Demand may fall below supply, which calls for increased government spending, to make up for the lack of demand, or for lower taxes or increases in the stock of money, or a combination of all three. Inflation is a possible cause of higher unemployment in the medium term if one country experiences a much higher rate of inflation than another, leading to a loss of international competitiveness and a subsequent worsening of their trade performance. Inflation's effects on an economy are various and can be simultaneously positive and Negative effects of inflation include a decrease in the real value of money and other monetary items over time, uncertainty over future inflation may discourage investment and savings, and high inflation may lead to shortages of goods if consumers begin hording out of concern that prices will increase in the future.

All types of unemployment are said to be subject to the trade-off depicted by the Phillips curve. Most Keynesians are quick to describe and illustrate it; a few try to explain it with vague generalities and references to inflationary forces. During periods of low unemployment when the demand for labor is high, we are told, wage rates are forced up causing goods prices to rise that is, generating inflation. Conversely, when unemployment rises, wage rates cannot be raised so easily, which causes production costs and goods prices to remain relatively stable.

RELATION BETWEEN INFLATION AND UNEMPLOYMENT

The relation between inflation and unemployment has gone through two stages and are now entering the third. The first was the acceptance of stable trade off. The second was the introduction of inflation expectations as a variable shifting the short run Philips curve and of natural rate of unemployment, as determining the location of a vertical long run Phillips curve .the third is occasioned by empirical phenomenon of an apparent positive relation between inflation and unemployment. Unemployment, inflation and economic growth tend to change cyclically over time.

The four phases of the business cycle: 1. A peak is when business activity reaches a temporary maximum; unemployment is low, inflation high. 2. A recession is a decline in total output, unemployment rises and inflation falls. 3. The trough is the bottom of the recession period, unemployment is at its highest, and inflation is low. 4. Expansion (recovery) is when output is increasing, unemployment begins to fall and later inflation begins to rise. Unemployment increases during business cycle recessions and decreases during business cycle expansions (recoveries). Inflation decreases during recessions and increases during expansions (recoveries).

MAIN ISSUES OF INFLATION AND UNEMPLOYMENT

Causes behind unemployment:
Minimum wages: if there are unemployed workers who want jobs, the price of labor or the wage will simply drop until all of the labor force is employed. Therefore raising the minimum wage rate increases unemployment. Labor union: labor unions increase the wages and benefits of workers who are employed its causes unemployment.

Causes behind inflation:

Inflation is not a purely monetary phenomenon but is often linked with facial imbalances in sound internal economic policies. There are different schools of thought as to the causes of inflation. They are divided in to two broad areas.

y Quality theory of inflation y Quantity theory of inflation Excess of money:

Inflation can happen when government prints an excess of money to deal with crises. As a result, prices end up rising at an extremely high speed to keep up with currency surplus.

Rise in production cost:

Another common cause of inflation is in the rise in production costs, which leads to an increase in the price of the final product.

Government taxes:
Inflation can be caused by federal taxes put on consumer products such as cigarettes and fuel.

Effects of unemployment:

Unemployment financial costs:

The government and the nation suffer. In many countries the government has to pay the unemployed some benefits. The greater the number of the unemployed or the longer they are without work the more money the government has to shell out. Therefore, the nation not only has to deal with the lost income and decreased production but also with additional cost.

Spending power:
The spending power of an unemployed person and his/her family decreases drastically and they would rather save than spend their money, which in turn affects the economy adversely.

Reduced spending power of the employed:

Increased taxes and the insecurity about their own work may affect the spending power of the working people as well and they too may start to spend less than before thus affecting the economy and also the society in a negative manner.

Recession:
With the increase rates of unemployment other economy factors are significantly affected, such as: the income per person, health costs, quality of health-care, standard of leaving and poverty. All these affect not just the economy but the entire systems and the society in general. Here are some aspects of the impact of unemployment on our society: y Crime rates rise as people are unable to meet their needs through work. y Divorce rates often rise because people cannot solve their financial problems. y The rate of homelessness rises, as do the rates for mental and physical illness. y Homes are foreclosed upon or abandoned, and neighborhoods deteriorate as a result.

*When there is high unemployment, people pay less in income taxes and also pay
less in sales taxes because they purchase fewer goods and services.

*This leads to less in the way of public services, which includes everything from
police and fire protection to the staffing for the municipal swimming pool and rubbish pickup.

High inflation and high unemployment is called stagflation.

Effects of inflation:
General effect:
An increase in general price level of prices implies a decrease in purchasing power of the currency. That is when the general level of prices rises each monetary units buys fever goods and services. e.g. if one takes a loan where the stated interest rate is 6% and the inflation rate is at 3%.the real interest rate that one are paying for loan is 3%.it would also hold true that if one had a loan at a fixed interest rate of 6% and inflation rate jumped to 20% one would have a real interest rate of -14%.

Negative effect:
High or unpredictable inflation rate are regarded as harmful to an overall economy. They add inefficiencies in the market, and make it difficult other companies to budget or plan long term. it causes unemployment. y Hoarding (people will try to get rid of cash before it is devalued, by hoarding food and other commodities creating shortages of the hoarded objects).

y Distortion of relative prices (usually the prices of goods go higher, especially the prices of commodities). y Increased risk - Higher uncertainties (uncertainties in business always exist, but with inflation risks are very high, because of the instability of prices). y Income diffusion effect (which is basically an operation of income redistribution). y Existing creditors will be hurt (because the value of the money they will receive from their borrowers later will be lower than the money they gave before). y Fixed income recipients will be hurt (because while inflation increases, their income doesnt increase, and therefore their income will have less value over time). y Increased consumption ratio at the early stages of inflation (people will be consuming more because money is more abundant and its value is not lowered yet). y Lowers national saving (when there is a high inflation, saving money would mean watching your cash decrease in value day after day, so people tend to spend the cash on something else). y Illusions of making profits (companies will think they were making profits while in reality theyre losing money if they dont take into consideration the inflation rate when calculating profits). y Causes an increase in tax bracket (people will be taxed a higher percentage if their income increases following an inflation increase). y Causes mal-investment (in inflation times, the data given about an investment is often deceptive and unreliable, therefore causing losses in investments). y Causes business cycles (many companies will have to go out of business because of the losses they incurred from inflation and its effects).

y Currency debasement (which lowers the value of a currency, and sometimes cause a new currency to be born) y Rising prices of imports (if the currency is debased, then its purchasing power in the international market is lower).

"Positive" effects of inflation are:

y It can benefit the inflators (those responsible for the inflation) y It is benefit early and first recipients of the inflated money (because the negative effects of inflation are not there yet). y It can benefit the cartels (it benefits big cartels, destroys small sellers, and can cause price control set by the cartels for their own benefits).

SIGNIFICANCE OF INFLATION
In the long terms, inflation will create an unfavorable economic environment of low business confidence and generate consumer pessimism. Inflation can also cause higher levels of inequity in income distribution, because lower income earners need to spend a higher portion of their income to purchase goods and services, leading to low income households having reduced levels of discretionary income. Inflation contributes to businesses COP (cost of production), making exports less competitive because they become relatively more expensive. This negatively impacts upon the Balance on Goods and Services, and thus causes the CAD to deteriorate. Inflation represents inefficiency in resource allocation because it adds to the COP, and reduces the ability of businesses to invest in capital works which will improve aggregate supply and efficiency in the long run.

Due to dampened levels of demand, production levels and employment levels should fall (see the economic activity cycle), because businesses do not want to produce goods or provide services which will not be purchased by the consumer

SIGNIFICANCE OF UNEMPLOYMENT
* Frictional unemployment occurs when a worker quits in search of a job more in line with his or her talents. For example, I complete my MBA and my firm fails to recognize it with a raise in pay. i depart and begin looking for an employer more appreciative of i newly acquired credential. Research seems to show that job search under this condition is more efficient if i quit rather than continue working while you are looking. * Seasonal unemployment occurs when golf course employees or farm hands are laid off when winter weather sets in. The Canadian economy is saturated with this type of unemployment. *Structural unemployment occurs when a job is eliminated. As restructuring occurs in the American economy, this type of unemployment dominates the statistics. Many of the structurally unemployed are on the higher end of the compensation structure and had been earning six figures. They will not be called back; the job is gone. This is the major reason why in the current recovery and expansion, the unemployment rate is rising. *The last category of unemployment is cyclical. As the economy weakens, workers are laid off. When the recovery occurs, they are called back. For the last several years in the auto industry, an increasing amount of layoffs is structural and not cyclical.

OBJECTIVE OF RESEARCH
Primary objective:
The main objective of study is to know how the factors of macroeconomics work.

Secondary objective:
y y y y To know about inflation and unemployment. What are the causes of inflation and unemployment? How inflation and unemployment affects the society. Relationships among inflation and unemployment.

LITERATURE REVIEW OF PREVIOUS STUDIES:

Inflation and unemployment are the major factors of macro economics. Losing the purchasing power and increasing the cost of production indicates the high rate of inflation. Unemployment occurs when people are without jobs and they have actively looked for work within the past four weeks. Inflation and unemployment have a negative relationship. There is no reason for fearing surpluses and unemployment because supply generates its own demand. And neither supply nor demand was thought of being capable of causing inflation or deflation. All the factors are interrelated and at the time of analyzing one must consider each and every factor with consideration. If we analyze the economical condition it is clear that inflation is higher in resent years comparing with past decades. Unemployment rate is inverse all the time with inflation maintaining contractionary and expansionary policy. Inflation fluctuates all the time because of fluctuation of money supply. But in resent years we came to know that international affairs and influencing to increase the inflation rate. People are able to make accurate predictions of inflation; they can take steps to protect themselves from its effects. The intension of study is to know how to work with digital information system the major findings of the overall study are:

y Importance of unemployment and inflation. y How they are interrelated with each other. y Reasons behind the factors. When inflation is volatile from year to year, it becomes difficult for individuals and businesses to correctly predict the rate of inflation in the near future. Unanticipated inflation occurs when economic agents (i.e. people, businesses and governments) make errors in their inflation forecasts. When economists look at inflation and unemployment in the short term, they see a rough inverse correlation between the two. When unemployment is high, inflation is low and when inflation is high, unemployment is low. This has presented a problem to regulators who want to limit both. This relationship between inflation and unemployment is the Phillips curve. The short term Phillips curve is a declining one. Inflation is a possible cause of higher unemployment in the medium term if one country experiences a much higher rate of inflation than another, leading to a loss of international competitiveness and a subsequent worsening of their trade performance. Inflation's effects on an economy are various and can be simultaneously positive and Negative effects of inflation include a decrease in the real value of money and other monetary items over time, uncertainty over future inflation may discourage investment and savings, and high inflation may lead to shortages of goods if consumers begin hording out of concern that prices will increase in the future. Inflation is a possible cause of higher unemployment in the medium term if one country experiences a much higher rate of inflation than another, leading to a loss of international competitiveness and a subsequent worsening of their trade performance. High or unpredictable inflation rate are regarded as harmful to an overall economy. They add inefficiencies in the market, and make it difficult other companies to budget or plan long term. it causes unemployment. The spending power of an unemployed person and his/her family decreases drastically and they would rather save than spend their money, which in turn affects the economy adversely. With the increase rates of unemployment other economy factors are significantly affected, such as: the income per person, health costs, quality of health-care, standard of leaving and poverty. All these affect not just the economy but the entire systems and the society in general.

Unemployment and inflation are two intricately linked economic concepts. Over the years there have been a number of economists trying to interpret the relationship between the concepts of inflation and unemployment. Inflation is caused by the alterations in the supply of money. When the money supply goes up the price level of various commodities goes up as well. The increase in the level of prices is known as inflation. According to the classical economists there is a natural rate of unemployment, which may also be called the equilibrium level of unemployment in a particular economy. This is known as the long term Phillips curve. The long term Phillips curve is basically vertical as inflation is not meant to have any relationship with unemployment in the long term.

Methodology:
We have used the concept of course. This is obtained from government statistics agencies and other sources. A lot of data is also being collected on the Internet. Both quantitative and/or qualitative methodologies have been used in unemployment and inflation research. During the last 15 years however, quantitative methods have dominated. It is argued that strictly quantitative studies on their own may no longer advance knowledge in this field. Therefore, to deepen the understanding in this important research area, qualitative techniques need to be reintegrated into unemployment and inflation research.

Source of data:
Secondary sources are: y Books y Wikipedia