INFLATION

INFLATION
Inflation is a rise in the general level of prices of goods and services 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 measured as the percentage rate of change of a price index Inflation is nothing more than a sharp upward rise in price level. Too much money chasing, too few goods. Inflation is a state in which the value of money is falling i.e. price are rising.

Types of inflation
Demand pull Inflation . Cost push inflation. Pricing power inflation. Skew inflation .

Demand pull inflation

When demand grows faster than supply it pushes general prices up. This can 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 face demand pull inflation especially when it comes to the technology driven industry like Automobile, Consumer Electronics.

Cost push inflation

Cost-push inflation is a type of inflation caused by substantial increases in the cost of Important goods or services where no suitable 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 major cause of the inflation experienced in the Western world in that decade.

Pricing power inflation

This type of inflation is caused by business houses who tend to increase prices to increase their profit margins. It is more common in oligopolistic economies.

skew inflation
This term has been coined observing the unusual inflation where in there was huge inflation in the food sector with the non-food sector remaining more or less constant.

Measures of Inflation
Inflation is measured by calculating the percentage rate of change of a price index, which is called the inflation rate. This rate can be calculated for many different price indices, including Consumer price index Cost-of-living index Producer price index GDP deflator Asset price inflation

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.

How to control inflation??

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

INDIA INFLATION RATE

The inflation rate in India was last reported at 9.34 percent in November of 2011. From 1969 until 2010, the average inflation rate in India was 7.99 percent reaching an historical high of 34.68 percent in September of 1974 and a record low of -11.31 percent in May of 1976.

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

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 (%)

UNEMPLOYMENT
In economics a person he is able and willing to work yet is unable to find a paying job is considered unemployment. the unemployment rate is the number of unemployed workers divided by the total civilian labourforce which includes both the unemployed those with job( all those willing and able to work for pay). in practice measuring the number of unemployed workers actually seeking work is notoriously difficult there are several different method for measuring the number of unemployed workers each method has its own biases and the different system make comparing unemployment statics between countries especially those with different systems difficult.

Measuring Unemployment
A Working Definition of Unemployment People able, available and willing to find work and actively 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

Measuring Unemployment
The Labour Force Survey (ILO measure)
An internationally agreed standard measure of unemployment Must have actively sought work in the previous four weeks and be available to start work immediately Higher figure than the claimant count approximately half a million higher Higher because there are limits on who can claim unemployment benefit so the true level of unemployment is higher than the official figures suggest

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 were unemployed in the year 2005 in the world.The unemployment rate was around 6.3% of the labour force 1.37 billion people though employed were earning less than US$2 a day. 520.1 million people though employed were earning less than US$ 1 a day. The problem therefore is of the order of 711.9 million if at least one dollar a day is considered.

TYPES OF UNEMPLOYMENT
(1)Frictional Unemployment: Unemployment caused when people move from job to job and claim benefit in the meantime The quality of the information available for job seekers is crucial to the extent of the seriousness of frictional unemployment

CONTD.........
(2) Structural Unemployment: Unemployment caused as a result of the decline of industries and the inability of former employees to move into jobs being created in new industries (3) Seasonal Unemployment: Unemployment caused because of the seasonal nature of employment tourism, skiing, cricketers, beach lifeguards, etc.

CONTD.
(4)Demand Deficient: Caused by a general lack of demand in the economy this type of unemployment may be widespread across a range of industries and sectors Keynes saw unemployment as primarily a lack of demand in the economy which could be influenced by the government

CONTD..
(5) Technological Unemployment: Unemployment caused when developments in technology replace human effort e.g in manufacturing, administration etc.

(6) Voluntary Unemployment: Voluntary unemployment occurs when a working persons willingly withdraws himself from work. This type of unemployment may be caused due to a number of reasons. For example, one may quarrel with the employer and resign or one may have permanent source of unearned income, absentee workers, and strikers and so on. In voluntary unemployment, a person is out of job of his own desire. She does not work on the prevalent or prescribed wages. Either he wants higher wages or does not want to work at all.

CONTD
(7) Open Unemployment: Open unemployment is a condition in which people have no work to do. They are able to work and are also willing to work but there is no work for them. They are found partly in villages, but very largely in cities. Most of them come form villages in search of jobs, many originate in cities themselves. Such employment can be seen and counted in terms of the number of such persons. Hence it is called upon unemployment. Open unemployment is to be distinguished from disguised unemployment and underemployment in that while in the case of former unemployment workers are totally idle, but in the latter two types of unemployment they appear to be working and do not seem to be away their time.

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, not voluntary as unemployment proper.

Country

2011

INDIA 9.40 CHINA 4.10 JAPAN 4.50 AUSTRALIA 5.30 PAKISTAN 5.95 RUSSIA 6.40 SINGAPORE 2.00 UNITED KINGDOM 8.30 UNITED STATES 8.50

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 Edmund Phelps Contributions: Phillips curve

INTRODUCTION
In economics, the Phillips curve is a historical inverse relationship between the rate of unemployment and the rate of inflation in an observed in the long run economy Stated simply, the lower the unemployment in an economy, the higher the rate of inflation. While it has been observed that there is a stable short run tradeoff between unemployment and inflation, this has not been

Phillips Curve
Inflation

LRAS

SRAS

.. .
B
A

Price Level PL1 PL* PL2 SRPC

RDP2

AD1 AD Real GDP

RGDP* RGDP1

AD

Unemployment

FE

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.

Phillips Curve
Inflation

LRAS

SRAS

.. .
B
A

Price Level PL1 PL* PL2 SRPC

RDP2

AD1 AD Real GDP

RGDP* RGDP1

AD

Unemployment

FE

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 timepost WWIIFiscal Policy (FP) and Monetary Policy (MP)was driven by this relationship between inflation and unemployment

Phillips Curve

Phillips Curve
Inflation

LRAS

SRAS

.. .
B
A

Price Level PL1 PL* PL2 SRPC

RDP2

AD1 AD Real GDP

RGDP* RGDP1

AD

Unemployment

FE

If Unemployment was the problem then policy makers (FP and MP) INCREASED AD to DECREASE unemployment, but this tended to create INFLATION.

Phillips Curve
Inflation

LRAS

SRAS

.. .
B
A

Price Level PL1 PL* PL2 SRPC

RDP2

AD1 AD Real GDP

RGDP* RGDP1

AD

Unemployment

FE

OrIf 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

Phillips Curve
Inflation

LRAS

SRAS

.. .
B
A

Price Level PL1 PL* PL2 SRPC

.
AD
RDP2

AD1 AD

Real GDP

Lets look at Point A on the SRPC---Notice it corresponds with the PL* and FE GDP* Which also represents the economy at is normal Long Run Equilibrium StateRemember-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!!

RGDP*

Unemployment

RGDP1

FE

Phillips Curve
Inflation

LRAS

SRAS

.. .
B
A

Price Level PL1 PL* PL2 SRPC

.
AD
RDP2

AD1 AD

Real GDP

Soif in the LONG RUN the Unemployment Rate stays at the Natural Rate of Unemployment REGARDLESS of the PRICE LEVEL, what to you think the LONG RUN PHILLIPS CURVE is going To look like??

RGDP*

Unemployment

RGDP1

FE

Phillips Curve
10% Inflation

.. .
B
A

LRPC

C SRPC

0%

NRU (5%) Unemployment

10%

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..

Phillips Curve
LRPC Inflation

LRAS

SRAS

.. .
B

Price Level

C SRPC Real GDP

PL*

.
RGDP*

B
AD

NRU Unemployment

FE

IMPORTANT: Point A on the Phillips Curve represents the LONG RUN situation where INFLATION Is 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 its Natural Rate (roughly 5%).

Phillips Curve
LRPC Inflation

LRAS

SRAS

.. .
B

Price Level

A A

C SRPC Real GDP

RGDP*

PL*

B
AD FE

NRU Unemployment

IMPORTANT: The Long Run Phillips Curve is NOT the same thing as the LRAS!!! The ONLY thing They 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?