Phillips in the late sass’s that explains the inverse relation exists between unemployment and inflation. Alongside was low unemployment were correlated with periods of high inflation, and vice versa, there was a stable inverse relationship tenet the unemployment rate and the level of inflation. The Phillips curve is based on the model of aggregate demand and aggregate supply. As inflation can be summarized as a result of increased aggregate demand for goods and services, it makes sense that higher levels of inflation would be linked to higher levels of output and therefore lower unemployment.
The aggregate demand and aggregate supply curves are to explain the existing business cycles in an economy I. E. Booms and recessions. Boom is when where real output or GAP is above its normal level and recessions is when the output or GAP decreases below this normal level. These cycles can be driven by changes in either aggregate demand or short run aggregate supply. In the short run, the economy will move to the equilibrium defined by the intersection of the aggregate demand curve and the short run aggregate supply curve.
If the short-run aggregate supply curve is upward sloping (as opposed to being completely horizontal or vertical),
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An increase in short-run aggregate supply, on the other hand, will move the economy to a higher level of real output and a lower price level in the short run. Such a movement of the short-run supply curve is referred to as a positive supply shock. This inverse relation between inflation and unemployment are caused due to Leverage on wages Production bottlenecks Normal shift in aggregate demand and supply The price of a commodity is in relation to the cost the producer has incurred in of profit by increasing the prices of the commodity.
During this phase the economy is expanding as there is an increase in the capita income of the worker leading to higher price index and GAP. So the pressure of increased wages is passed onto the consumer by increasing the prices, resulting in low unemployment concluding to upwards pressure on wages and price. Unemployment reduces when inflation increases. Apparently, if the workers could have been easily replaced and producers would have more leverage than worker. The sales and profit would be low, resulting in a possibility of a Job loss which would gradually increase the unemployment level.
Higher the Unemployment rate results in low inflation rate. Production bottlenecks When the production or the output is low and unemployment is high, then there is surplus available; in the market. So the scope of price increase would be limited and the capacity of profit would be stagnant. As aggregate demand picks up, output increases and unemployment decreases. The excess capacity decreases. As the output level gets regulated the producers reach a limit of how much they can produce in the short run.
As a result of increased demand and production limits, prices will increase. The result of this situation is that unemployment decreases while inflation increases. Normal shift in Aggregate demand and Supply The aggregate demand and supply curves plot a nation’s price level against the level of real output. The increase in price would be comparable to inflation and the output would be to unemployment. This trade-off between inflation and unemployment would be associated with a shift in aggregate demand and supply.
With a rightward shift in both curves would notify an increase in money supply as the household and government would have higher spending and the producer’s cost of labor and capital would increase. So, an output increase would reflect a decrease in unemployment. This shift in equilibrium is only possible in short run as the Phillip curve is a straight line in the long run leading to no change in the unemployment level. Inflation is not merely an increase in price, Increase in price is caused by inflation and that is by the inflation in the supply of money.
Government is responsible for excess supply of money in the economy, however due to inflation the GAP, unemployment are affected drastically. Directly or indirectly increasing the supply on money in the market is generally occurred due to government policies, taxes, subsidies and other monetary regulations. Government has also designed macroeconomics management policies to minimize the fluctuations through influencing demand. The government uses fiscal and monetary policies to regulate cost- push inflation so that the general public is not massively affected by it.
Fiscal Policy This includes the utilization of government’s plan to impact the inflation impact by shifting the measure of spending and revenue. If the economy is in the state of inflation then the main aim is to withdraw the purchasing power from the public so that they spend less, relieving the upward pressure on prices. This is generally done y raising taxes and borrowing from the public without spending the proceeds. A decrease in spending made by the government will decrease the aggregate demand money to consume and invest.
Reduction in the aggregate demand would also reduce the real GAP and in return reduce the unemployment rate. Monetary policy This includes activity by the Reserve Bank of Australia (ARAB) to influence the expense and accessibility of cash and credit inside the economy. Customarily, policy’s goal is to attain balance by influencing the level of premium rates utilizing household market operations including the transactions of government securities, creating a heritage or surplus of funds. Putting downward pressure on interest rates and gradually lowers unemployment. ) Using your home country as a case study outline and analyze inflation, India is the world’s tenth largest economy and the second most populous. The growth rate in GAP measures the change in the seasonally adjusted value of the goods and services produced by the Indian economy during the quarter. The economic activities which registered significant growth in Quarter 1 of 2014-15 over Quarter of 2013-14 are ‘electricity, gas & water supply at 10. 2 per cent , financing, insurance, ell estate and business services’ at 10. 4 per cent and ‘community, social and personal services’ at 9. Per cent. The estimated growth rates in other economic activities are: 4. 8 per cent in ‘construction’, 3. 5 per cent in ‘manufacturing, 2. 8 per cent in trade, hotels, transport and communication’, 3. 8 per cent in ‘agriculture, forestry & fishing, and 2. 1 per cent in ‘mining & quarrying during this period. GAP at factor cost at current prices in IQ of 2014-15, is estimated at ‘ 26. 97 lack core, as against ‘ 24. 11 lack core in IQ, 2013-14, showing an increase of 11. 9 per cent. GAP Growth Rate in India averaged 1. 62 Percent from 1996 until 2014, reaching an all-time high of 5. 0 Percent in the fourth quarter of 2003 and a record low of -1. 90 Percent in the first quarter of 2009 as per the Ministry of statistics and programmer implementation(Moses. Nice. In). Unemployment Rate in India averaged 7. 58 Percent from 1983 until 2012, reaching an all-time high of 9. 40 Percent and a record low of 3. 40 Percent in 2012. Unemployment Rate in India is reported by the Ministry of Labor and Employment, India. The unemployment rate measures the number of people actively looking for a Job as a argental of the labor force.
Indian’s economic growth has slowed since 2010 in the aftermath of the global crisis, but growth is expected to pick up according to the May 2014 projections of the COED Economic Outlook. The unemployment rate was 3. 4% in 2012 in India, lower than in 2006 (4. 4%) before the onset of the global financial crisis. The decline was larger in urban areas than in rural areas. For the first time, employment in agriculture has fallen despite strong population growth by 18 million since 2006. Its share of total employment has also fallen by 8 percentage points down ND marginally in manufacturing.
In particular, the construction sector absorbed a large number of male workers leaving low productivity farming Jobs. The construction sector benefited from large public and private sector investments in infrastructure (airports, national highways), real estate, and housing and development projects. Employment was also promoted by direct Job creation programs. However, despite a job growth of 1. 2% per year since 2006, the overall employment rate of the working age population fell by more than 4 percentage points to 53. 5% in 2012 due to a decline in labor force participation (55. In 2012), in particular in rural areas. Classically the wholesale price index (WHIP) was the main measure of inflation in India. However, in 2013, the governor of The Reserve Bank of India Aerogram Raja had announced that the consumer price index is a better measure of inflation. The maximum ratio in the consumer price index is of Food, beverages and tobacco (49. 7 percent of total weight). Fuel and light accounts for 9. 5 percent; Housing for 9. 8 percent; Transport and communication for 7. 6 percent; Medical care for 5. 7 percent; Clothing, bedding and footwear for 4. Percent and education for 3. Percent as per COED National Accounts Statistics, World Bank and World Development Indicators (WAD) (Database). Inflation is a real problem for the Indian economy. It has proved stubbornly high. Inflation reached 11. 24% in November 2013 – the highest for years. Inflation did fall back to 9. 92% in Deck, but there is concern about the stubbornness of high inflation, despite the relatively slow-moving growth. Indian economy is subject to excess supply. Inflation in India may be high due to negative supply availability or because of the residual stock.
These negative stocks come from two main sources – he failure of monsoon and high volatility in global crude oil prices. The New Keynesian Phillips curve is based on the assumption that the aggregate demand curve is sloping downward and the aggregate supply curve is moving up. The demand pull situation, two positive demand curves have been assumed, which result in the demand curve shifting outwards to the right. One negative factor has also been assumed with the demand curve shifting inwards. The positive demand curve raises the price level. The negative demand curve results in a decline in the price level.