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Lecture 7
Lecture 7
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.
Real Output
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.
Real Output
Effects of Inflation
Distribution of Income
Savings
Production
Balance of Trade
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