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INFLATION
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INFLATION
Inflation is a rise in the general level of prices of goods andservices over time.
"Inflation" is also sometimes used to refer to a rise in the
prices of some specific set of goods or services, as in"commodities inflation" or "core inflation". It is measuredas the percentage rate of change of a price index
“Inflation is nothing more than a sharp upward rise in pricelevel.”
Too much money chasing, too few goods.” Inflation is a state in which the value of money is falling i.e.
price are rising.”
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Types of inflation
• Demand pull Inflation .
• Cost push inflation.
• Pricing power inflation.
• Skew inflation .
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Demand pull inflation
• When demand grows faster thansupply it pushes general prices up. Thiscan be described as “too much money
chasing too few goods”. • India being a growing economy has
experienced this type of Inflation for
years. Almost all industries in India facedemand pull inflation especially when itcomes to the technology driven industrylike Automobile, Consumer Electronics.
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Cost push inflation
• Cost-push inflation is a typeof inflation caused by substantialincreases in the cost of
Important goods or services where nosuitable alternative is available.
• A situation that has been often cited
of this was the oil crisis of the 1970s,which some economists see as a majorcause of the inflation experienced inthe Western world in that decade.
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Measures of Inflation
Inflation is measured by calculating thepercentage rate of change of a price index, whichis called the inflation rate. This rate can becalculated for many different price indices,
including Consumer price index
Cost-of-living index
Producer price index
GDP deflator
Asset price inflation
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Factors affecting inflation•
Increase in money supply.
• Increase in exports.
• Black money.(fake currency).
• Increase in public expenditure
• Decrease in the aggregate supply of goods and services.
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How to control inflation??
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Problems due to inflation
When the balance between supply and demand
Goes out of control, consumers could change their
buying habits, forcing manufacturers to cut down
production.
Price increase can worsen the poverty affecting the
low income household
Producers will not be able to control the cost of raw
material and labor and hence the price of the final
product, which results in less profit or in some cases no
profit, forcing them out of business
Manufactures will not have an incentive to invest in
new equipment and technology
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INDIA INFLATION RATE
The inflation rate in India was last reported at
9.34 percent in November of 2011. From 1969until 2010, the average inflation rate in India
was 7.99 percent reaching an historical high of
34.68 percent in September of 1974 and arecord low of -11.31 percent in May of 1976.
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Country 2011
INDIA 9.34
CHINA 4.20
AUSTRALIA 3.50
PAKISTAN 10.20
RUSSIA 7.00
SINGAPORE 5.70
UNITED KINGDOM 4.80
UNITED STATES 3.40
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Inflation in Food and
Non-food
Commodities during
1994-95 to January
2010
(Based on WPI with
base 1993-94) and
Growth Rate in Food
Output (%)
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UNEMPLOYMENT
• In economics a person he is able and willing to work yet isunable to find a paying job is considered unemployment.
• the unemployment rate is the number of unemployedworkers divided by the total civilian labourforce whichincludes both the unemployed those with job( all thosewilling and able to work for pay).
• in practice measuring the number of unemployed workersactually seeking work is notoriously difficult there are severaldifferent method for measuring the number of unemployedworkers each method has its own biases and the differentsystem make comparing unemployment statics between
countries especially those with different systems difficult.
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Measuring Unemployment
• A Working Definition of Unemployment
– People able, available and willing to find work andactively seeking work – but not employed
–
The unemployed are included in the labour force• The Claimant Count Measure
– The number of people claiming the Jobseekers’Allowance
– Monthly count of unemployed – Currently under 950,000 – about 3.0% of the
labour force
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Measuring Unemployment
• The Labour Force Survey (ILO measure)
– An internationally agreed standard measure of unemployment
–
Must have actively sought work in the previous fourweeks and be available to start work immediately
– Higher figure than the claimant count – approximatelyhalf a million higher
– Higher because there are limits on who can claimunemployment benefit – so the true level of unemployment is higher than the official figuressuggest
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Employment and Unemployment
Scenario in the World Almost all countries in the world have
employment and unemployment problem.
A total number of 191.8 million persons wereunemployed in the year 2005 in the world.The
unemployment rate was around 6.3% of the labourforce
1.37 billion people though employed were earningless than US$2 a day.
520.1 million people though employed wereearning less than US$ 1 a day.
The problem therefore is of the order of 711.9million if at least one dollar a day is considered.
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TYPES OF UNEMPLOYMENT
(1)Frictional Unemployment:
• Unemployment caused
when people move from job to joband claim benefit in the meantime
• The quality of the information available for job
seekers is crucial to the extent of theseriousnessof frictional unemployment
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CONTD.........
(2) Structural Unemployment:
Unemployment causedas a result of the decline of industries and the
inability of former employees to moveinto jobs being createdin new industries
(3) Seasonal Unemployment:
Unemployment caused because of the seasonalnature of employment – tourism, skiing,cricketers, beach lifeguards, etc.
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CONTD…….
(4)Demand Deficient:
• Caused by a general lack of demand in theeconomy – this type
of unemploymentmay be widespread across a rangeof industries and sectors
•
Keynes saw unemployment as primarily a lackof demand in the economy which could be
influenced by the government
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CONTD……
(7) Open Unemployment: Open unemployment is a condition in which people haveno work to do. They are able to work and are also willing towork but there is no work for them. They are found partlyin villages, but very largely in cities. Most of them comeform villages in search of jobs, many originate in citiesthemselves. Such employment can be seen and counted interms of the number of such persons.
Hence it is called upon unemployment. Openunemployment is to be distinguished from disguisedunemployment and underemployment in that while in thecase of former unemployment workers are totally idle, butin the latter two types of unemployment they appear to beworking and do not seem to be away their time.
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CONTD……
(8) Involuntary unemployment:
Involuntary unemployment occurs when at a
particular time the number of worker is more
than the number of jobs. Obviously this state
of affairs arises because of the insufficiency or
non availability of work. It is customary to
characterise involuntary unemployment, notvoluntary as unemployment proper.
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Country 2011
INDIA 9.40
CHINA 4.10
JAPAN 4.50
AUSTRALIA 5.30PAKISTAN 5.95
RUSSIA 6.40
SINGAPORE 2.00UNITED KINGDOM 8.30
UNITED STATES 8.50
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Phillips Curve
Born:18 November 1914
Died :4 March 1975 (aged 60)
Nationality : New Zealand
Institution :Australian National University University of Auckland
Field: Macroeconomics
Alma mater :London School of Economics
Influences: Irving Fisher John Maynard Keynes
Influenced: Paul Samuelson Robert Solow EdmundPhelps
Contributions: Phillips curve
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INTRODUCTION
In economics, the Phillips curve is a historicalinverse relationship between the rateof unemployment and the rate of inflation in
an observed in the long run economy Statedsimply, the lower the unemployment in aneconomy, the higher the rate of inflation.While it has been observed that there is a
stable short run tradeoff betweenunemployment and inflation, this has notbeen
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Phillips Curve
Inflation
Unemployment
...
A
B
C
Real GDP
PriceLevel
SRASLRAS
FE R D P 2
R G D P *
R G D P 1
AD
PL*AD1
PL1
AD
PL2
SRPC
The Short-Run Phillips Curve illustrates the Trade-off between Inflation
and Unemployment (derived from what is happening to RGDP) that occurs
as the AD curve traverses (either up or down) the UPWARD sloping
(Intermediate) range of SRAS.
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Phillips Curve
Inflation
Unemployment
...
A
B
C
Real GDP
PriceLevel
SRASLRAS
FE R D P 2
R G D P *
R G D P 1
AD
PL*AD1
PL1
AD
PL2
SRPC
IMPORTANT---Movement ALONG the SRPC corresponds with AD movement ALONG the Upward
Sloping (Intermediate Range) of the SRAS Curve. The Phillips Curve is important because for
A long time—post WWII—Fiscal Policy (FP) and Monetary Policy (MP)was driven by this
relationship between inflation and unemployment
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Phillips Curve
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Phillips Curve
Inflation
Unemployment
...
A
B
C
Real GDP
PriceLevel
SRASLRAS
FE R D P 2
R G D P *
R G D P 1
AD
PL*AD1
PL1
AD
PL2
SRPC
If Unemployment was the problem then policy makers (FP and MP) INCREASED AD to
DECREASE unemployment, but this tended to create INFLATION….
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Phillips Curve
Inflation
Unemployment
...
A
B
C
Real GDP
PriceLevel
SRASLRAS
FE R D P 2
R G D P *
R G D P 1
AD
PL*AD1
PL1
AD
PL2
SRPC
Or…If Inflation was the problem then policy makers (FP and MP) DECREASED AD to
DECREASE Inflation, but this tended to create Unemployment….tackling the “evil” of the
Day tended to make the other “evil” worse…
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Phillips Curve
Inflation
Unemployment
...
A
B
C
Real GDP
PriceLevel
SRASLRAS
FE R D P 2
R G D P *
R G D P 1
AD
PL*AD1
PL1
AD
PL2
SRPC
Let’s look at Point “A” on the SRPC---Notice it corresponds with the PL* and FE GDP* Which alsorepresents the economy at is normal Long Run Equilibrium State…Remember-LRAS represents
POTENTIAL, LONG TERM RGDP. At FE RGDP the unemployment rate is the Natural Rate of
Unemployment. In the LONG RUN no matter how much AD increases will ALWAYS Come up
against the “wall of LRAS” —NO MATTER WHAT THE PRICE LEVEL IS!!
.
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Phillips Curve
Inflation
Unemployment
...
A
B
C
Real GDP
PriceLevel
SRASLRAS
FE R D P 2
R G D P *
R G D P 1
AD
PL*AD1
PL1
AD
PL2
SRPC
So…if in the LONG RUN the Unemployment Rate stays at the Natural Rate of UnemploymentREGARDLESS of the PRICE LEVEL, what to you think the LONG RUN PHILLIPS CURVE is going
To look like??
.
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Phillips Curve
Inflation
Unemployment
...
A
B
C
SRPC
LRPC
NRU
The LONG RUN PHILLIPS CURVE (LRPC) is VERTICAL at the Natural Rate of Unemployment!!
NO MATTER WHAT THE INFLATION RATE IS THE NRU STAYS THE SAME..
(5%)
0%10%
10%
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Phillips Curve
Inflation
Unemployment
...
AB
C
Real GDP
PriceLevel
SRASLRAS
FE R G D P *
AD
PL*
SRPC
IMPORTANT: Point “A” on the Phillips Curve represents the LONG RUN situation where INFLATIOIs going to be stable at NRU (roughly 5%) AND Point “B” on the AD/AS graph represents the LONG
RUN situation where AD = SRAS = LRAS (Long Run Equilibrium). Embedded in the concept of FE
RGDP is the Unemployment rate is at it’s Natural Rate (roughly 5%).
NRU
π*
LRPC
.B
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Phillips Curve
Inflation
Unemployment
...
A
B
C
Real GDP
PriceLevel
SRASLRAS
FE R G D P *
AD
PL*
SRPC
IMPORTANT: The Long Run Phillips Curve is NOT the same thing as the LRAS!!! The ONLY thingThey have in common is (LRPC Explicitly and LRAS Implicitly) is the Natural Rate of
Unemployment. The LRAS can shift without causing the NRU to change AND/OR the LRPC can
shift without the LRAS curve shifting….GOT THAT…?
NRU
π*
LRPC
A B
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