Unemployment rates ……….

Macro Economics

Inflation &
Unemployment
 Inflation
• Inflation is a rise in the general level of
prices of goods and services in an economy
over a period of time.

• When the price level rises, each unit of

currency buys fewer goods and services.
Value of Money falls.

• A chief measure of price inflation is the

inflation rate.
 Inflation

• To quantify the amount of inflation in the

economy, indicators such as the Wholesale
Price Index (WPI), the Consumer Price
Index (CPI) are used.

• It measures the changes in prices that have

occurred between the base year and the
current year.
Wholesale Price Index
• The Wholesale Price Index or WPI is "the price of a
representative basket of wholesale goods".

• The Wholesale Price Index focuses on the price of

goods traded between traders, rather than goods
bought by consumers.
WPI Components (Primary
article)
WPI Components (Fuel , Manufacturing)
Wholesale price Index (WPI)
Consumer price index (CPI)
• A consumer price index (CPI) measures
changes in the price level of market basket
of consumer goods and services purchased by
households. ...
• It is one of several price indices calculated by
most national statistical agencies.
CPI – Components
Inflation rates …. In India
Why CPI ?
• Services account for nearly 60 percent of GDP
WPI didn’t serve to the services such as
healthcare, education, transportation, and tourism
etc. whereas CPI does.
• Consumer Price Index (CPI) used to calculate
for rural and urban part of the country
simultaneously so that specific measures can be
taken for rural and urban benefits.
• CPI gives the general idea of retail inflation and
prices driven by the consumer demand and
supply.
 Rate of Inflation
While inflation means a rise in the general
price level, the rate of inflation is the rate of
change of the general price level. It is
measured by a simple formula :

Where, Pt is the price level in year t, Pt - 1

is the price level in year t-1, the base year.
Rate of Inflation ……. Indian snapshot
TYPES OF INFLATION
• 1. CREEPING INFLATION (0%-3%)

• 2. WALKING INFLATION ( 3% - 7%)

• 3. RUNNING INFLATION (10% - 20 %)

• 4. HYPER INFLATION ( 20% and abv)

1. Creeping Inflation

Creeping or mild inflation is when prices rise 3% a year or

less. When prices rise 2% or less, it's actually beneficial to
economic growth. That's because this mild inflation sets
expectations that prices will continue to rise. As a result, it
sparks increased demand as consumers decide to buy now
before prices rise in the future. By increasing demand, mild
inflation drives economic expansion.
2. Walking Inflation

This type of strong, or pernicious, inflation is between 3-

10% a year. It is harmful to the economy because it heats
up economic growth too fast. People start to buy more than
they need, just to avoid tomorrow's much higher prices.
This drives demand even further, so that suppliers can't
keep up. As a result, common goods and services are
priced out of the reach of most people.
3. Galloping Inflation

Prices rise at double or treble digit rates per annum (20-

100%). It tends to distort relative prices and results in
disquieting changes in distribution of purchasing power
of different groups of income earners.
4. Hyperinflation

Hyperinflation is when the prices skyrocket more than 50%

-- a month. It is fortunately very rare. In fact, most
examples of hyperinflation have occurred when the
government printed money recklessly to pay for war.
Examples of hyperinflation include Germany in the 1920s,
Zimbabwe in the 2000s, and during the American Civil War.
CAUSES OF INFLATION
1. Demand Pull Inflation

2. Cost Push Inflation

3. Combination of both
 Demand pull :

Increase in AD
can be due to a
fiscal or monetary
policy, thus
increasing prices
Causes of Inflation
1. Demand pull Inflation

Causes for Increase in Demand :-

a) Increase in Money Supply

b) Increase in Black Marketing
c) Increase in Hoarding
d) Repayment of Past Internal Debt
e) Increase in Exports
f) Deficit Financing
 Cost push:

Upward shift of the

AS will be due to
increase in costs of
inputs.
 2) Cost Push Inflation
Causes for Increase in Cost :-
a)Increase in cost of raw materials
b)Shortage of Supplies
c)Natural calamities
d)Industrial Disputes
e)Increase in Exports
f) Increase in Wages
g)Increase in Transportation Cost
h)Huge Expenditure on Advertisement
Combination of both:
Effects of Inflation on economic system
Redistribution effects of Inflation
1. Redistributes income from wage earners and
fixed income groups to profit recipients, and
from creditors to debtors

2. Adds to inequalities of income and wealth.

3. Discourages saving activity. It makes

consumption more attractive than saving.
Inflation & Economic growth
Inflation and economic growth are
incompatible because the former affects all
sectors
1.Investment
2.Interest rates
3.Exchange rates
4.Unemployment
Tradeoff between inflation & Economic
growth
Deflation & Disinflation
• “Deflation” is often confused with “disinflation.”

• Deflation represents a decrease in the prices of

goods and services throughout the economy

• Disinflation represents a situation where inflation

increases at a slower rate.
Deflation
• Deflation is the reduction of prices
of goods & Services

• Deflation is an indication that

economic conditions are
deteriorating.
Impact of Deflation
• Significant unemployment
• Wages drop considerably
• Businesses’ profits drop
• Difficult to raise additional capital
• Difficult to develop new technologies.
 Stagflation
• A situation of stagnation in the midst of
inflation
•During inflation real income of people shrink.
•Planned output becomes lower than potential
output – excess capacity
•High cost of inputs – industrial production
starts shrinking
•The economy slides down
Methods to check Inflation

• Monetary Policy
• Fiscal Policy
What is Unemployment?

• A person who is not gainfully employed in any

productive activity is called as unemployed and
collectively it is called as Unemployment.
 Rate of Unemployment
Unemployment rate =
(Unemployed Workers / Total labor force) X 100

The three broad Activity Status

i) Working (engaged in an economic activity)
i.e. ‘Employed’
ii) Seeking or available for work i.e. ‘Unemployed’
iii) Neither seeking nor available for work.

All those individuals having a broad activity status as i)

or ii) above are classified as being in the Labour Force
and those having activity status iii) are classified as
outside the Labour Force. Thus labour force
constitutes of both employed and unemployed.
Unemployment rate - measurement
• The National Sample Survey Organization (NSSO),since
its inception in 1950, does the measurement of
employment / unemployment in India.
• The National Sample Survey Organization (NSSO)
provides three different estimates of employment and
unemployment based on different approaches / reference
periods used to classify an individual’s activity status.
1.Usual status approach with a reference period of 365
days preceding the date of survey
2.Current weekly status approach with a reference period
of seven days preceding the date of survey
3.Current daily status approach with each day of the seven
days preceding date of survey as the reference period.
 Voluntary Unemployment

• There are some people who are unwilling work at the

prevailing wage rate,or

• There are some people who get a continuous flow

income from their property or other sources and need
not work.

Voluntary Unemployment is a National waste of human

energy.
 Frictional Unemployment

• Temporary phenomenon.

• Results when some workers are temporarily out of

work while changing jobs.

• Also result when the work is suspended due to strikes

or lockouts.

• Frictional unemployment is caused by imperfect

mobility of labour.
 Casual Unemployment

• Here workers are employed on a day to day basis.

• In generally exist in Construction, catering or

agriculture industries.

• It occurs due to short-term contracts, which are

terminable any time.
 Chronic Unemployment

• When unemployment tends to be a long- term feature

of a country it is called chronic unemployment.

• Underdeveloped countries suffer from chronic

unemployment on account of :-
• vicious circle of poverty
• lack of developed resources and their under
utilization
• high population growth
• backward & even primitive state of technology
• low capital formation, etc.
 Seasonal Unemployment

• Industries such as agriculture, the catering trade, trade

in holiday resorts, some agro-based activities like
sugar mills and rice mills, provide jobs of seasonal
nature which are for certain period.

• People engaged in such type of work or activities may

remain unemployed during the off-season.

• So it is Seasonal Unemployment.
 Disguised Unemployment

• When some workers have zero marginal productivity

so that their removal will not affect the volume of total
output.

• Disguised unemployment implies underemployment of

labour.

• This kind of unemployment is a common feature of

under developed economies especially of their rural
sector.

• In short, overcrowding in an occupation leads to

disguised unemployment.
 Cont:-

• Suppose, a family farm is properly organized

and 4 persons are working on it. If, however,

2 more workers are employed on it and there

is no change in output, we may say that

these 2 workers are Disguisedly

Unemployed.
 Structural Unemployment

• Due to structural changes in the economy, Structural

Unemployment may result.

• Caused by:-
1)decline in demand,
2)disinvestment,
3)reduction in its manpower requirement.

• In fact, structural unemployment is a natural

concomitant of economic progress and innovation in a
complex industrial economy of modern times.
 Cyclical Unemployment
• Capitalist biased, advanced countries are subject to trade
cycles.

• Trade cycles are especially recessionary and depressionary

phases causing cyclical unemployment in these countries.

• During the contraction phase of a trade cycle in an

economy, aggregate demand falls and this leads to
disinvestment, decline in production and rise in
unemployment.

The solution for cyclical unemployment lies in measures for

increasing total expenditure in the economy, thereby pushing up
the level of effective demand. Easy policy and fiscal measures
such as Deficit Financing may help.
 Technological Unemployment

 Due to the introduction of new machinery,

improvement in methods of production, labour-saving
devices, etc., some workers tend to be replaced by
machines.
 Their unemployment is termed as technological
unemployment.
 Cont:-
 Most of the unemployment in India is definitely structural,
that is, the structure of the economy is such that it does not
absorb an increasing number of people coming to labour
market in search of jobs.
 IndustrialUnemployment results when industrial sector fails
to absorb the increasing labour force.
 Also,Cyclical Unemployment is the result of Industrial
Recession in urban areas.
 Educated Unemployment results when a large number of
educated people remain unabsorbed.

 Itis estimated that over 1/3rd of India's work force is

Disguisedly Unemployed.
 Causes of Unemployment
Causes of Unemployment

• Jobless Growth.

• Increase in Labour Force.

• Inappropriate Technology.

• Inappropriate Educational System.

Inflation & Phillips curve:
• The inflation rate is the percentage
change in the price level.

• Phillips Curve shows the relationship

between the inflation rate and the
unemployment rate.
Philips Curve:
• Itis a statistical relationship between
unemployment and money wage inflation.

• Rate of inflation = rate of wage growth less rate

of productivity growth.
Phillips Curve:
• 1958 – Professor A.W. Phillips

• Expressed a statistical relationship between the

rate of growth of money wages and
unemployment from 1861 – 1957

• Rate of growth of money wages linked to

inflationary pressure

• Led to a theory expressing a trade-off between

inflation and unemployment
 Phillips Curve shows an
Philips Curve inverse relationship
Wage growth %
(Inflation)
between inflation and
unemployment.
It suggests that if
2.5% governments wanted to
reduce unemployment it
had to accept higher
1.5%
inflation as a trade-off.

4% 6% Unemployment (%)
PC1
• Concave shape implies that lower the level of
unemployment higher the rate of inflation.

• Govt. should be able to use demand management

policies to take the economy to acceptable levels of
inflation and unemployment.

• In order to achieve full employment, some inflation

is unavoidable.

• However, this relationship broke down at the end of

1960s when Britain began to experience rising
inflation and unemployment.
 Philips Curve ..... The long run
• inflation Long Run PC

3.0%

2.0%

1.0%
PC1
7% PC2 Unemployment
PC3
Philips Curve ..... The long run
• To counter the rise in unemployment, government
injects resources into the economy – the result is
a short-term fall in unemployment but higher
inflation.

• This higher inflation fuels further expectation of

higher inflation and so the process continues.

• The long run Phillips Curve is vertical at the

natural rate of unemployment.
Natural rate of unemployment

• In the long run Philips curve will be vertical at

the rate of unemployment where real aggregate
demand equals real aggregate supply.

• This rate is called the natural rate of

unemployment. It is also called NAIRU or Lowest
sustainable unemployment rate (LSUR).

• 7% becomes the natural rate in this case.

Okun`s Law
• Different factors affect gross domestic product (GDP)
and unemployment.

• A 1 percent decrease in GDP has been associated with a

slightly less than 2-percentage-point increase in
the unemployment rate. This relationship is usually
referred to as Okun's law.