Lecturer: Pn. Azizah Isa 1
Chapter 6Chapter 6Inflation &
Unemployment
Lecturer: Pn. Azizah Isa 2
BUSINESS CYCLEBUSINESS CYCLE
Aggregate Econ. Activity
Boom/Inflation
Trough/Depression/Slump/Unemployment
Potential Growth Path
Actual Growth Path
years
(% in real GDP)
Lecturer: Pn. Azizah Isa 3
NATIONAL INCOME NATIONAL INCOME EQUILIBRIUMEQUILIBRIUM
Real Output (National Income)
Expenditure(RM)
Y0 = C+I+G+(X-M)
Y1=C+I+G+(X-M)Y=E
45°
Yfe=C+I+G+(X-M)
Y0 Yfe Y1
Inflationary Gap
Deflationary Gape0
e1
ef
Lecturer: Pn. Azizah Isa 4
KEYNESIAN EQUILIBRIUM KEYNESIAN EQUILIBRIUM NATIONAL INCOMENATIONAL INCOME
Keynesian assume that equilibrium output can be reached not necessarily at the full-employment.
The equilibrium can be less or more than the full-employment equilibrium, causing the economy with the inflationary or deflationary-gap.
Lecturer: Pn. Azizah Isa 5
RELATIONSHIP OF RELATIONSHIP OF INFLATION AND BOOMING INFLATION AND BOOMING
ECONOMYECONOMYThe higher the growth of an economy,
the higher is the inflation rate.Inflation is related to the development
of an economy.
Lecturer: Pn. Azizah Isa 6
Definition of InflationDefinition of Inflation
as a criteria of a continuous increase in the general price level of all goods in an economy for a specific time period.
as measured by the increased in CPI.
Lecturer: Pn. Azizah Isa 7
Measurement Of Measurement Of InflationInflationThe Rate Of Inflation: is measured by the rate of increase of
price index, CPI.
Inflation Rate = (CPI1 CPI0) X 100
CPI0
Negative Inflation is Deflation
Lecturer: Pn. Azizah Isa 8
INFLATION IN MALAYSIAINFLATION IN MALAYSIA
Table 8.1: The Consumer Price Index (2000 = 100) and Inflation Rate
Year Consumer Price Index (CPI)Consumer Price Index (CPI) Annual Change Annual Change (%)(%)
1998 95.8 5.3
1999 98.5 2.8
2000 100.0 1.5
2001 101.4 1.4
2002 103.2 1.8
2003 104.4 1.2
2004 105.9 1.4
2005 108.9 2.8
Lecturer: Pn. Azizah Isa 9
Inflation as shown by the Inflation as shown by the % change in CPI% change in CPI
Lecturer: Pn. Azizah Isa 10
TYPES/ CAUSES OF TYPES/ CAUSES OF INFLATIONINFLATION
1. DEMAND-PULL INFLATION2. COST-PUSH INFLATION
Lecturer: Pn. Azizah Isa 11
1. Demand-Pull Inflation1. Demand-Pull Inflation
‘TOO MUCH MONEY CHASING FOR TOO FEW GOODS’ Fisher
AD AD > AS AS at full-employment,
causes to shortage of goods and
price hike.
Lecturer: Pn. Azizah Isa 12
Fisher’s Equation:Fisher’s Equation:MV = PTMV = PT
where, M = money supply V = velocity of money in circulation P = general price level T = total transaction of outputs V and T are assumed constant; therefore, Money Supply, Prices (inflation)
Lecturer: Pn. Azizah Isa 13
Demand-pull InflationDemand-pull Inflation General AS Price P1 AD1 P0 AD0
real output YFE
Diagram: Demand– Pull Inflation as shown by the change in the General Prices caused by an increase in The Aggregate Demand.
Lecturer: Pn. Azizah Isa 14
2. Cost-Push Inflation2. Cost-Push Inflation• is caused by the high rise in the cost of
production. • The cost increases can be caused by various
factors: higher higher wage wage rate. larger profit larger profit markmark-up. expensive raw materials domestically or from imported sources. increase prices of intermediate intermediate (capital) (capital) goods. goods. higher taxes. taxes.
Lecturer: Pn. Azizah Isa 15
Cost-Push InflationCost-Push Inflation General Price Level AS1 AS0 P1 P0 AD Q1 Q0 real output Diagram: Cost-push Inflation
Lecturer: Pn. Azizah Isa 16
Effects of InflationEffects of Inflation
1. On the individuals as gainers and losers:
Gainers are: Debtors: pay back loan, with less value of
money. Shareholders: higher dividend Property owners: higher prices of assets
owned. Businessmen: making larger profit as prices
for their goods produced and sold is higher.
Lecturer: Pn. Azizah Isa 17
Effects of InflationEffects of Inflation
Losers are: Creditors: received less value for loans
given out earlier.Savers: lower value of money saved.Fixed income earners: lower purchasing
value of money. Pensioners: value of money falls.
Lecturer: Pn. Azizah Isa 18
Other Effects of InflationOther Effects of Inflation
may cause also to:
2. Production of goods increases
3. Savings depreciated in value (lower purchasing power of money)
4. Deficit in Balance of Trade (domestic price increases and become less competitive in the international market)
Lecturer: Pn. Azizah Isa 19
To curb the problem of To curb the problem of inflationinflation
Using:
1) Monetary PolicyMonetary Policy
2) Fiscal PolicyFiscal Policy
Lecturer: Pn. Azizah Isa 20
To To reducereduce InflationInflation:: with with Surplus Surplus BudgetBudget oror Tight Tight Monetary PolicyMonetary Policy Since inflation is related to the booming of an
economy, therefore to reduce inflation, economic growth has to be slowed down.
Thus, reduces the aggregate demand and closed-down the inflationary-gap while the real output (Y) falls.
Lecturer: Pn. Azizah Isa 21
Keynesian AD-AS Diagram
General Prices AS
AD1
AD2
Real GDP
P2
P1
G or I
Effect of Surplus Budget (G falls) or Tight Monetary (increased interest rate) policies to reduce inflation
NATIONAL INCOME EQUILIBRIUM
Real Output (National Income)
Expenditure(RM)
Y0 = C+I+G+(X-M)
Y1=C+I+G+(X-M)Y=E
45°
Yfe=C+I+G+(X-M)
Y0 Yfe Y1
Inflationary Gap
Deflationary Gape0
e1
ef
-GDPGap
Lecturer: Pn. Azizah Isa 23
UnemploymentUnemployment in in MalaysiaMalaysia
“The unemployment rate is lowest in the year 1997 but increase again in 1998 that is from 2.7% to 3.2% due the slowdown of the economy caused by the Asian Financial Crisis whereby our economy is hit by the large depreciation of Ringgit Malaysia (RM) relative to American Dollar (US$)[1] “
[1 ] Economic Report 1999/2000. Ministry of Finance Malaysia, 1999.
Lecturer: Pn. Azizah Isa 24
UNEMPLOYMENT IN MALAYSIAUNEMPLOYMENT IN MALAYSIA
YEAR UNEMPLOYMENT RATE (%)
1997 2.7
1998 3.2
1999 3.4
2000 3.1
2001 3.6
2002
2003
3.5
3.6
2004
2005
3.5
3.5Source: Economic Planning Unit and Ministry of Human Resources.
Lecturer: Pn. Azizah Isa 25
Unemployment Unemployment with Business Cycle with Business Cycle
Unemployment rateUnemployment rate is high during recession.recession.
The negative impact negative impact of the slowdown of the economic growth during recession may: less job opportunities. bankruptcies, closing down factories, delay of constructing new plants etc.
thus, may reduced the number of economic activities in the economy.
Lecturer: Pn. Azizah Isa 26
Natural Rate Natural Rate of of UnemploymentUnemployment The natural rate of unemployment is the level of
voluntary unemployment when the labour market is in equilibrium.
Natural rate of unemployment is normally rated as 4% .
Full-employment is related to this natural rate of unemployment, which includes(+) the frictional and seasonal unemployment.
It is not easy to omit this natural rate of unemployment in an economy. Therefore an economy at this natural rate of unemployment is said to be at full-employment.
Lecturer: Pn. Azizah Isa 27
Actual Rate and Natural RateActual Rate and Natural Rateof Unemploymentof Unemployment
If the actual rate of unemployment is more than the natural rate of unemployment, than it is said that the economy is with the real problem of unemployment.
Lecturer: Pn. Azizah Isa 28
Who are Who are considered as considered as unemployed?unemployed?
Lecturer: Pn. Azizah Isa 29
DEFINITIONSDEFINITIONS
UNEMPLOYMENT:
are people who are considered under the labour force but being unemployed (jobless).
Lecturer: Pn. Azizah Isa 30
Who are included Who are included in the Labour in the Labour
Force?Force?
Lecturer: Pn. Azizah Isa 31
LABOUR FORCE:LABOUR FORCE:
are people of age group 15 – 64 years and are willing and able to work either has been holding a job or yet searching for a job.
Those that are not considered under the labour force includes:
School children and university students although aged more than 15.
Sick bed, old aged and housewives .
Lecturer: Pn. Azizah Isa 32
LABOUR FORCELABOUR FORCE
(willing and able to work of age (willing and able to work of age 15 - 64yrs. 15 - 64yrs. either either workingworking or or joblessjobless))
= no. of employed + no. of unemployed= no. of employed + no. of unemployed
Lecturer: Pn. Azizah Isa 33
Measurement of UnemploymentMeasurement of Unemployment
Unemployment Rate
= no. of unemployedunemployed X 100%
labourlabour force
Unemployed people are jobless labour force
Lecturer: Pn. Azizah Isa 34
LABOUR FORCE LABOUR FORCE PARTICIPATION PARTICIPATION
RATERATE
= Labour Force X 100% Adult Population
Lecturer: Pn. Azizah Isa 35
TOTAL POPULATION
CONSTITUTES ALL OF THE:
- CHILDREN
- ADULT
- OLD AGED
- HOUSEWIVES
(that are not considered under the labour force).
Therefore, for calculating the rate of participation make sure that only adult population is considered into the measurement.
Lecturer: Pn. Azizah Isa 36
For example:For example:Data collected from the year 1999 given as:
125.6 million employed people and 4.5 million
was unemployed and the adult population was 205.8 million.
Therefore: Labour Force = 125.6 + 4.5 = 130.1 million Unemployment rate = ( 4.5 / 130.1 ) x 100 = 3.6% Labour Force Participation rate = ( 130.1 /205.8) x 100 = 63.2%
Lecturer: Pn. Azizah Isa 37
EXERCISE 1:EXERCISE 1:. The table below shows the total labor force and
number of employed people for country Semasa.
Year Total labor
force (‘ 000)
Employed
(‘ 000) 2004
85,400 82,100
2005
96,750
86,500
A. Define labour force B. Calculate the unemployment rate for the year 2004 and 2005
Lecturer: Pn. Azizah Isa 38
TYPES OF TYPES OF UNEMPLOYMENTUNEMPLOYMENT
FRICTIONAL UNEMPLOYMENTSTRUCTURAL UNEMPLOYMENTCYCLICAL UNEMPLOYMENTDISGUISED UNEMPLOYMENT/
HIDDEN UNEMPLOYMENT.SEASONAL UNEMPLOYMENT
Lecturer: Pn. Azizah Isa 39
STRUCTURAL STRUCTURAL UNEMPLOYMENTUNEMPLOYMENT
Changes in the structure or technology of the economy may lead to reduction in the number of job opportunities.
i. Structural changes from labour intensive to capital intensive (furthermore with high technology – use of robotics and highly sophisticated machineries).
ii. Structural changes from agricultural base to industrial sectors – those lack of skills and less educated were ignored.
Lecturer: Pn. Azizah Isa 40
CYCLICAL CYCLICAL UNEMPLOYMENTUNEMPLOYMENT
Caused by the downturn of the business cycle - economy moves towards recession (kemelesetan).
DisruptionDisruption of the economic growth economic growth causes the slowdown in all sectors of the economy, alas reduction in job opportunities.
Lecturer: Pn. Azizah Isa 41
DISGUISED UNEMPLOYMENT/ DISGUISED UNEMPLOYMENT/ HIDDEN UNEMPLOYMENT. HIDDEN UNEMPLOYMENT.
where the industries are overstuffed with unnecessary additional workers – sharing jobs available and does not contribute to extra productivity.
i) in agriculture sectors
ii) in cottage/rural industries.
Lecturer: Pn. Azizah Isa 42
Impact of Impact of UnemploymentUnemployment can be a cost to an economy.
Unemployment can affect:i) the individuals: distressed, lose self esteem,
mentally disturbed.ii) the family/society: lost family income, domestic
violence, family splitting.iii) the economy: create social and economic cost. curing social problems, training courses, special
benefits, capital incentives. A cost to the economy ‘cos economy is not at the stage of fully utilising the resources (underutilization).
Lecturer: Pn. Azizah Isa 43
POLICIES TO POLICIES TO CURECURE
Government measures:
1. FISCAL POLICY
2. MONETARY POLICY
Lecturer: Pn. Azizah Isa 44
NATIONAL INCOME NATIONAL INCOME EQUILIBRIUMEQUILIBRIUM
Real Output (National Income)
Expenditure(RM)
Y0 = C+I+G+(X-M)
Y1=C+I+G+(X-M)Y=E
45°
Yfe=C+I+G+(X-M)
Y0 Yfe Y1
Inflationary Gap
Deflationary Gape0
e1
ef
Lecturer: Pn. Azizah Isa 45
FISCAL POLICY FISCAL POLICY
1. CONTRACTIONARY FISCAL POLICY
(surplus budget) G – T < 0 G < T
2. EXPANSIONARY FISCAL POLICY
(deficit budget) G – T > 0 G > T
3. BALANCED BUDGET POLICY
G – T = 0 G = T
Fiscal Policy attempts to regulate the economy by varying the level of government spending and the rate of taxation.
Lecturer: Pn. Azizah Isa 46
To reduce To reduce Unemployment/recession: Unemployment/recession:
Expansionary Fiscal Expansionary Fiscal Policy / Policy /
Deficit Deficit BudgetBudget When government collects less tax revenue
but spends more on expenditure, G > T. Therefore, it cause to a larger effects on real
output. Deficit Budget Deficit Budget is implemented(dilaksanakan) to
raise-up the economic activities.
Lecturer: Pn. Azizah Isa 47
Balanced Budget Balanced Budget PolicyPolicy
When government expenditure is just equivalent to the tax revenue collection
(G = T)
A balanced budget is also used to increase real output and economic growth.
Its multiplier is equivalent to one (1). Y = 1 . G Thus, the resulting increase in the
equilibrium Y is exactly equal to the increase in G or T itself.
∆Y = ∆G = −∆T
Lecturer: Pn. Azizah Isa 48
MONETARY POLICYMONETARY POLICY
To cure recession/unemployment:
Ease / Expansionary monetary policy.
To reduce inflation:
Tight / Contractionary monetary policy.
Lecturer: Pn. Azizah Isa 49
Keynesian AD-AS DiagramKeynesian AD-AS Diagram
General Prices AS
AD1
AD2
Real GDP
P2
P1
I, G
Effect of Surplus Budget OR Tight Monetary Policy to reduce inflation
Lecturer: Pn. Azizah Isa 50
THANK YOUTHANK YOU
FOR LEND ME YOUR EARS.