Inflation - Unemployment www.AssignmentPoint.com

INFLATION- Inflation refers to a situation in which the economy’s overall price level is rising. The inflation rate is the percentage change in the price level from the previous period. Not all prices rise at the same rate during inflation. Not everyone suffers equally from inflation. Although inflation makes some people worse off, it makes some people better off Hyperinflation is an extraordinarily high rate of inflation such as Germany experienced in the 1920s. Hyperinflation is inflation that exceeds 50% per month www.AssignmentPoint.com

Types of Inflation Demand-Pull Inflation Cost-Push Inflation Demand-pull inflation results from excessive pressure on the demand side of the economy. “Too much money chases too few goods” enabling producers to raise prices. Cost-Push Inflation The pressure on price could also originate on the supply side. Higher production costs put upward pressure on product prices www.AssignmentPoint.com

Effects of Inflations [on..] Consumers Producers Economy Zero inflation Not affected at all No incentive to produce more, Same production Stagnant for almost same level of production Mild Inflation Affected but not much, Demand may be same Have incentive to produce more, Higher production Economy expands as production increase High Inflation Affected much, Demand may be lower in many products Producers of inelastic products affected, Production lower for lower demand Economy squeezes as production falls www.AssignmentPoint.com

UNEMPLOYMENT A distribution of Total Population to Labor Force, Employment, and Unemployment Under 16 years (70.5 Million) Disable or Not in Labor Force (76.8 Million) Total Population (296.6 Million) Employed (141.7 Million) Labor Force (149.3 Million) Unemployed (7.6 Million) www.AssignmentPoint.com

Measuring Unemployment Labor force is the sum of the employed and unemployed people able to work. Unemployment rate is defined as the percentage of the labor force that is unemployed. Labor force participation rate is the percentage of the adult population who are in the labor force. Unemployment Rate = Number of Unemployed Labor Force  100 Labor-Force Participation Rate = Labor Force Adult Population  100 www.AssignmentPoint.com

Types of Unemployment Structural Unemployment: Unemployment caused as a result of the decline of industries. The economic structure is not adequately developed to provide jobs. Frictional Unemployment: Unemployment caused when people move from job to job. People can get a job but don’t work because they want to get a better job. Disguised Unemployment: People claim that they are working but they really are not needed in the job place. Which type of unemployment is the worst? www.AssignmentPoint.com

Unemployment from a Strict Wage Above Equilibrium Labor supply Surplus of labor = Unemployment Labor demand Minimum wage LD LS WE LE Labor www.AssignmentPoint.com

Impacts of unemployment [on…] Individuals Livings Health Education Physically Society Non-productive groups became burden for the society Illegal works and restlessness Violence by the non-working people Nation Lower level of production and hampers GDP growth (Okun’s law) Vicious cycle of underdevelopment Less infrastructural development because lower government tax www.AssignmentPoint.com

Okun's Law The negative relationship between unemployment and GDP is described in Okun’s Law, named after Arthur Okun, the economist who first studied it. It is defined as: Percent change in Real GDP = 3% - 2  Change in Unemployment rate If the unemployment rate remains the same, real GDP grows by about 3 percent. For every point of unemployment rate rises, real GDP growth typically falls by 2 percent. Hence, if the unemployment rate rises from 6 to 8 percent, then real GDP growth would be: Percentage Change in Real GDP = 3% - 2 (8% - 6%) = -1% www.AssignmentPoint.com

EXERCISE The BBS reported that the population of the country in 2004 was 142 million (142,000,000) of which 50% are adult. If the number of people unemployed in that year was 15,000,000, and the adults NOT in the labor force was 30,000,000, find out the unemployment rate in that year? 2. If other things remain same and your unemployment rate changes from 24% in 2007 to 27% in 2008, then what will be your GDP growth rate for 2008 as per Okun’s Law? www.AssignmentPoint.com