INFLATION

&
UNEMPLOYMENT
INFLATION
Inflation is defined as an increase in the overall price level

Deflation - a decrease in the overall price level

Hyperinflation - a rise in the price level of a thousand or a

million percent a year.

Stagflation – when output is falling at the same time prices are

rising
- Stagnation + inflation
MEASURES OF INFLATION
•The
  inflation rate is the annual rate of change or the year-on-
year change of the price level.

Recall: GDP Deflator

CPI – Consumer Price Index

- The CPI is an indicator of the change in the average retail
prices of a fixed basket of goods and services commonly
purchased by households relative to a base year. (PSA)
- Most widely used in the calculation of the inflation rate and
purchasing power of the peso.
CPI (CONSUMER PRICE INDEX)
- is an indicator of the change in the average retail prices of
a fixed basket of goods and services commonly purchased
by households relative to a base year.

Components:
1. Base period - a reference date or simply a convenient
Benchmark period.

2. CPI market basket – shows how a typical consumer

divides his or her money among various goods and
services.
 Table 1. Monthly Consumer Price Index for All Income Households in the Philippines by Commodity Group
January 2020 - February 2021
(2012 = 100)

2021
Commodity Group
Jan   Feb   Mar   Apr   May   Jun   Jul   Aug   Sep   Oct   Nov   Dec   Ave 
ALL ITEMS 127.8  128.1                                         
Food and Non-Alcoholic Beverages 137.2r 137.3                                         
Alcoholic Beverages and Tobacco 263.7  267.3                                         
Clothing and Footwear 123.9  124.0                                         
Housing, Water, Electricity, Gas, and
115.3r 115.7                                         
Other Fuels

Furnishing, Household Equipment and

125.7  126.0                                         
Routine Maintenance of the House

Health 125.3r 126.0                                         

Transport 116.3r 116.9                                         
Communication 101.9  102.0                                         
Recreation and Culture 115.5  115.6                                         
Education 122.1  122.1                                         
Restaurant and Miscellaneous Goods
and Services 122.1  122.6                                         

r - revised

Source: PSA (Philippine Statistics Authority) https://psa.gov.ph/statistics/survey/price/summary-

inflation-report-consumer-price-index-2012100-february-2021
MEASURING CPI
•Using
  Laspeyres Formula

Where:
= Price of the observation year
= Price of the base year
= Quantity of the base year
 Example: Find the CPI of the following Market Baskets of goods for 2019
and 2020, using 2018 as the base year. Then, calculate the inflation rate
between 2019 and 2020.

  x 100 = 190 x 100

 

  x 100 = 280   x 100 = 47.37%

Therefore, the inflation rate between 2019 and 2020 is 47.37%.

CAUSES OF INFLATION

DEMAND-PULL INFLATION
- Inflation initiated by an increase in aggregate
demand

COST-PUSH INFLATION
- Inflation caused by an increase in costs
- Supply-side inflation
DEMAND-PULL INFLATION
The inflation begins with
a shift of the aggregate
demand schedule from
AD1 to AD2, which
causes the price level to
increase from P1 to P2.
COST-PUSH INFLATION
An increase in costs shifts
the AS curve to the left.

The supply shift will cause

the equilibrium price level
to rise (from P1 to P2) and
the level of aggregate
output to decline (from Y1
to Y2)
UNEMPLOYMENT
The unemployment rate is widely used as an overall indicator of the
current performance of a nation's economy.

It provide measures of labor supply, labor input, the structure of

employment, and the extent to which the available labor time and human
resources are actually utilized or not.

It is also an essential base for the design and evaluation of government

programs geared to employment creation, vocational training, income
maintenance, poverty reduction and similarbobjectives.
BASIC DEFINITIONS (as per PSA)
Labor Force - refers to the population 15 years old
and over who contribute to the production of goods
and services in the country. It comprises the employed
and unemployed.

LABOR FORCE = TOTAL # OF EMPLOYED + TOTAL # OF

UNEMPLOYED

Not in the Labor Force – Persons 15 years old and

over who are neither employed nor unemployed e.g.,
full‐time students, stay‐home housewives, retirees, etc.
BASIC DEFINITIONS (as per PSA)

Employed - consists of persons in the labor force who are

reported either as at work or with a job or business although not
at work. Persons at work are those who did some work, even for
an hour during the reference period.

Unemployed - consists of persons in the labor force who are

reported as (1) without work; and (2) currently available for work;
and (3) seeking work or not seeking work because of the belief that
no work is available, or awaiting results of previous job
application, or because of temporary illness or disability, bad
weather or waiting for rehire or job recall.
BASIC DEFINITIONS (as per PSA)

Underemployed - refers to the employed persons who express

the desire to have additional hours of work in their present job
or an additional job, or have a new job with longer working
hours.

Labor Force Participation Rate (LFPR) - proportion of total

labor force to the total household population 15 years and over.

LFPR = (Labor Force ÷ Household Population

15 years old and over) x 100
 BASIC DEFINITIONS (as per PSA)
Employment Rate - proportion of employed persons to the
total labor force.
EMPLOYMENT RATE = (Employed Persons ÷ Labor Force) x 100

Unemployment Rate - proportion of unemployed persons to

the total labor force.
UNEMPLOYMENT RATE (Unemployed Persons ÷ Labor Force) x 100

Underemployment Rate - proportion of underemployed

persons to total employed persons.
UNDEREMPLOYMENT RATE = (Underemployed Persons ÷ Employed) x 100
TYPES OF UNEMPLOYMENT
Cyclical Unemployment
- unemployment caused by the contraction phase of the business cycle.

Frictional Unemployment
- the unemployment that results from the normal job search
process

Structural Unemployment
- unemployment that persists due to labor market institutions
that cannot appropriately match workers with jobs.

Seasonal Unemployment
- unemployment exists because certain industries only produce or
PHILLIP’S CURVE
The Phillips Curve shows the
relationship between the inflation rate
and the unemployment rate.

The curve says that to lower the

inflation rate, we must accept a higher
unemployment rate, and to lower the
unemployment rate, we must accept a
higher rate of inflation.