INFLATION & UNEMPLOYMENT

(CHAPTER 11& 12)

Presented by Maria Bernadita Rivera

Department of Economics
Saint Louis University
INFLATION
- before: Monetary inflation
-sustained, relatively large and general increase in
the level of prices in all or nearly all of the markets
in the economy.
- No stable equilibrium is reached

- Benchmark: Developed countries 2-3%

- Developing countries 10-15%

- Runaway inflation – inflation feeds on inflation

- In Philippines: Japanese occupation: “ Mickey
Mouse money”
-
MEASURING PRICE CHANGES
-uses Price Index
3 Elements of Measuring price changes
1. Items in the market basket

2. Weigh the commodities

3. Base period

Inflation yardstick
1. Consumer Price Index (CPI)

2. Producer Price index (PPI)

3. Wholesaler Price index (WPI)

4. Cost of living index (COLI)

5. Commodity price index (CmPI)

SOURCES OF INFLATION
I. Internal
1. Change in the cost of raw materials
2. Demand for higher wages
3. Increase in the number of people
demanding the products
4. Desire for a higher profit
5. Increase in the supply of money
6. Natural calamities & manmade disasters
SOURCES OF INFLATION
II. External

1. Kind of exchange rate

2. Balance of trade condition
3. Financial transactions
4. General global economic conditions
TYPES OF INFLATION
I. ACCDG TO CAUSE

1. Demand pull inflation

- otherwise known as excess demand inflation
- AD > AS hence, prices are “pulled” upwards
- Fiscal inflation- if due to excess GS

2. Cost push inflation

- production cost rise hence, it pushes the prices
of commodities upwards
* Profit push
* Wage push
 * Commodity/ Sectoral inflation

3. Demand shift inflation

- shift of demand from old products to new products

4. Structural inflation
- combined effect of structural limitation in economic &
political system & cumulative inflationary pressures

II. ACCDG TO DEGREE OF INCREASE

1. Creeping/ Mild inflation – not more than 5%

2. Strato-inflation – 10- 100% or more

3. Hyperinflation – rapidly accelerate/ more than 100%

ADVERSE EFFECTS OF INFLATION
1. Decrease in the purchasing power of
currency
2. Burden of increasing opportunity cost of
holding cash balances
3. Possibility of holding consumer durables
as store of wealth to get rid of excess
cash before it is devalued
4. Increased rate of borrowing by business
5. Erosion of real value of nominally fixed
payments
POSITIVE EFFECTS
1. Increase in the nominal wages
2. Possibility of lower interest rates to
encourage borrowers to borrow more
(Liquidity Trap)
3. Lower returns to monetary assets
relative to real assets (Tobin Effect)
SOLUTIONS TO INFLATION
1. Demand Pull – Investments, exports, imports, gov’t
expenses, taxes & forex
2. Cost Push – government intervention on prices
3. Structural – “checks & balances” in monopolistic or
oligopolistic tendencies
4. Policies
a. Market policies – reduce power of monopolies
1. Manpower policy – enhancement of trainings
2. Incomes policy – efficient & productive
participation
b. Monetary & Fiscal Policies
UNEMPLOYMENT
- Avail & willing to work but does not have work.
- Labor force: ∑ UnE + Emp (15-64 y/o)

- * voluntary – not considered as part of labor force

- * involuntary – included in the concept of
Unemployment
- * Tolerable unemployment ≈ Underemployment
- Types 1. Visible – employed but working for less
- than 40 hours
- 2. Invisible – employed full-time but still
- wants additional work
- NB: UnE is natural part of business cycle but made
worsen by external & internal diseconomies.
 Formula:
UnE = % of LF not employed
= # of unemployed x 100%
labor force

MEASURES OF EMPLOYMENT

1. Employment rate= (# of employed / labor force) *

100%
2. Labor force participation = (LF / Popn) * 100%
3. Labor Turnover- change of employment of an
establishment during a reference period
4. Labor Turnover rate - % difference of accession (entry)
& separation (exit) in employment of every 100
workers
TYPES OF UNEMPLOYMENT
1. Frictional – due to people who left job &
searching for new employment opportunities
2. Structural – permanent shift in the pattern of
demand for goods or change in technology
3. Seasonal – seasonal patterns of production
4. Cyclical – operation of business cycle
5. Classical – due to legislative decisions by
government & economic choices made by labor
unions & political parties.
CAUSES OF UNEMPLOYMENT
I. SUPPLY FOR LABOR
1. Demographic characteristics
2. Quality of labor
3. Geographic distribution & Mobility

II. DEMAND FOR LABOR

1. Job opening
2. Job experience
3. International demand
4. Employment Generation
 EFFECTS OF UNEMPLOYMENT
I. DIRECT
1. Fall in the national output
2. Loss of personal income
3. Decrease in consumer welfare
II. INDIRECT
1. Negative multiplier
2. Loss of Tax revenue
3. Forced transfer payments
4. Failure to meet financial obligation
5. Adverse health & psychological effect
6. Wrong employment
7. Increased competition among workers
8. Xenophobia
9. Loss of Human Capital
10. Inequitable Distribution of Income
POSITIVE EFFECTS
1. Aversion of Runaway inflation
2. Better & Larger pool of applicants
3. Better Labor efficiency & Productivity

SOLUTIONS TO IMPROVE EMPLOYMENT

1. Improve skills

2. Business – identify means to minimize layoffs

3. Government – promote self-reliance

4. Monetary & Fiscal Policy