Inflation Theories , Unemloyment & Phillips Curve

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INFLATION THEORIES

UNEMLOYMENT & PHILLIPSCURVE

PRESENTED BY :

Yogendra mishra

Priya tikmaniUrvashiPrajnmaPrachi kalaUdita



Inflation

This is the process by which the price level risesand money loses value.

There are two kinds of inflation:

1. Demand pull

2. Cost push



1. Demand pull Inflation : Such inflation occurs whenaggregate demand exceeds the aggregate supply .

Causes of Demand Pull Inflation :

Deficit Financing and increase in money supply Increase in the disposable income. Role of black money

Uncontrolled growth of population



2. COSTS PUSH INFLATION

Cost push inflation occurs when the price of commodity increases as a result of the increase incost of production.

Cost of production increases due to :

•

Increase in the wage level• Rise in prices of imports

• Rise in taxes



THEORIES OF INFLATION

1. Quantity Theory of Money

2. Keynesian Theory

3. Monetarism

4.Structuralism



1. Quantity Theory of Money This refers to the identical or equal relationship between

national income estimated at market prices and the velocity of circulation of the money supply. Based on thistheory, there is a positive relationship between price levelsand the money supply.

This relationship is presented using the quantity equation (MV=PY) which was observed previously underthe study on money supply.



According to this theory it is believed that inflation iscaused by an expansion in the money supply of a giveneconomy.

It is consider that inflationary situations caused dueto an increase in money supply which is not followed

by or supported by an increase in output levels of aneconomy.



2.Keynesian Theory According to Keynes an increase in general price levels or

inflation is created by an increase in the aggregatedemand which is over and above the increase in

aggregate supply.

If a given economy is at its full employment output level,an increase in government expenditure (G), an increase

in private consumption (C) and an increase in privateinvestment (I) will create an increase in aggregatedemand; Leading towards an increase in general pricelevels.



http://cdn.tutebox.com/wp-content/uploads/2010/07/TuteboxGraph_aurora_1.jpg



3. Monetarism

The monetarists theory states that when the money supply is increased in order to grow or increase production andemployment, creating an inflationary situation within aneconomy.

A monetarist believes increases in the money supply willonly influence or increase production and employmentlevels in the short run and not in the long run. Accordingly,

there will be a positive relationship between inflationlevels and money supply. The monetarists explain thisrelationship using the theory of natural rate of unemployment.



4.Structuralism This theory states that the main reason for inflation is thein-elasticity in the structures of the economy.

This theory is mainly used to explain the nature and basis

of inflation in developing countries.This theory states thatthe inflation rates in developing countries are affected by the in-elasticity of the following reasons.

Production level and capacity Capital formulation

Institutional framework

High in-elasticity in the agricultural sector.



Consequences of Inflation

1. Adverse effect on production: Inflationleads to the economic recession in many sectors

of the economy.For Example: Prices of certain important articleof consumption such as cotton textile increasedto very high level resulting in the reduction of

its demand. With the decline in demandproduction too declines.



2. Inflation and labour productivity : One of themajor consequences of inflation is that it is marked

with the labour unrest.

3. The private corporate sector especially the capitalintensive ones,worry about the effects of strikes ontheir profit record and their ability to raise capital inthe future



WHAT IS UNEMPLOYMENT

Unemployment or jobless is defined by theInternational Labour Organization, occurs when peopleare without jobs .

The unemployment rate is calculated by dividing thenumber of unemployed individuals by all individuals

currently in the labour force.



The unemployment rate

Usually defined as a percentage of the labour force (theemployed plus the unemployed).

There are national variations : Germany excludes the self-employed from the labour force.

Belgium produces two rates expressing unemployment as apercentage of both the total and the insured labour force.

By changing the definition, the unemployment rate can be

moved up or, down by several percentage points.



Phillips curve

In 1958, a New Zealand economist , A.W.H. Phillipsproposed that there was a trade-off between inflation andunemployment.

The lower the unemployment rate, the higher was the rateof inflation.

Governments simply had to choose the right balancebetween the two evils.

Economies did seem to work like this in the 1950s and1960s, but then the relationship broke down.



Whenever unemployment is low, inflation tends to behigh.

Whenever unemployment is high, inflation tends tobe low.

This inverse relationship between inflation andunemployment is called the Phillips curve.

Inflation Theories , Unemloyment & Phillips Curve

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