Final Inflation Darshan and Amit

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INFLATION



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.”



Types of inflation

• Demand pull Inflation .

• Cost push inflation.

• Pricing power inflation.

• Skew inflation .



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.



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.





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



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 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.



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 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.









http://www.daylife.com/topic/China



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



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



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.



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



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.



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





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.



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.



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



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



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



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.



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



Phillips Curve



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….



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…



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!!

.



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??

.



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%



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



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



Final Inflation Darshan and Amit

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