inflation & unemployment in vietnam
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INFLATION & UNEMPLOYMENT IN VIETNAM
WHAT IS THE CONNECTION?
Tut2-TR08 : Pham Que DuongHoang Thi MyBui Thu TrangDoan Thi Thoa
Outline
VIETNAM STATISTICS 1996-2010
HOW DO INFLATION & UNEMPLOYMENT RELATE?
SHORT-RUN RELATIONSHIP
LONG-RUN RELATIONSHIP
VIETNAM STATISTICS 1996-2010
Year Inflation rate(%) Unemployment rate(%)1996 4.5 5.881997 3.6 6.011998 9.2 6.851999 0.1 6.742000 -0.6 6.422001 0.8 6.282002 4 6.012003 3 5.782004 9.5 5.62005 8.4 5.312006 6.6 4.822007 12.6 4.642008 4.5 4.652009 7 4.662010 4.5 4.65
( Cont’d)
-2
0
2
4
6
8
10
12
14
1998 2000 2002 2004 2006 2008 2010
UNEMPLOYMENT INFLATION
HOW DO INFLATION & UNEMPLOYMENT RELATE?
Short-run relationship The Phillips phaseThe stagflation phaseThe recovery phase
Long-run relationship
THE PHILLIPS CURVE
Suggests a negative relationship between inflation and unemployment
Expansionary monetary or Fiscal policyAggregate demand increasesReal GDP and price level are higherUnemployment is lower
Quantityof Output
0
Short-runaggregate
supply
(a) The Model of Aggregate Demand and Aggregate Supply
Unemployment
Rate (percent)
0
Inflation
Rate
(percent
per year)
PriceLevel
(b) The Phillips Curve
Phillips curveLow aggregate
demand
Highaggregate demand
(output is8,000)
B
4
6
(output is7,500)
A
7
2
8,000(unemployment
is 4%)
106 B
(unemploymentis 7%)
7,500
102 A
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However, in Vietnam…
The Phillips curve only accounts for: 1996-1997 2000-2002 2003-2004 2006-2007
=> The Phillips Phase
CHANGES IN EXPECTATION & THE STAGFLATION PHASE
Higher price level ( higher inflation rate)Adjusted expectations of Firms & WorkersHigher nominal wagesA left-ward shift of the short-run AS curveHigher unemployment and inflation
=> Stagflation phase: high inflation & increasing unemployment
Stagflation periods in Vietnam
1997-1998: Inflation rate increases by 5.6%
Unemployment rate is 0.84% higher
2008-2009: Inflation rate increases by 2.5%
Unemployment rate is 0.01% higher
THE RECOVERY PHASE
Happens when Government attempts to stop the recession created in the stagflation phase.
Results in lower unemployment and higher prices, but the price rise is less than before, so the inflation rate is lower.
For Vietnam: 1998-2000 2009-2010
LONG-RUN RELATIONSHIPIn the 1960s, Friedman and Phelps
concluded that inflation and unemployment are unrelated in the long run
The long-run Phillips curve is vertical at the natural rate of unemployment
Natural rate of unemployment recognizes that there’ss always be some level of unemployment in an economy
At this level, all unemployment will be voluntary
=> Monetary policy could be effective in the short run but not in the long run
UnemploymentRate
0 Natural rate ofunemployment
InflationRate Long-run
Phillips curve
BHighinflation
Lowinflation
A
2. . . . but unemploymentremains at its natural ratein the long run.
1. When the Fed increases the growth rate of the money supply, the rate of inflation increases . . .
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