How to measure inflation rate


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How to measure inflation rate

  1. 1. INFLATION <ul><li>Inflation refers to a situation in which the economy’s overall price level is rising. </li></ul><ul><li>The inflation rate is the percentage change in the price level from the previous period. </li></ul><ul><ul><li>Not all prices rise at the same rate during inflation. </li></ul></ul><ul><ul><li>Not everyone suffers equally from inflation. </li></ul></ul><ul><ul><li>Although inflation makes some people worse off, it makes some people better off </li></ul></ul><ul><li>Hyperinflation is an extraordinarily high rate of inflation such as Germany experienced in the 1920s. </li></ul><ul><li>Hyperinflation is inflation that exceeds 50% per month </li></ul>
  2. 2. Types of Inflation <ul><li>Demand-Pull Inflation </li></ul><ul><ul><li>Demand-pull inflation results from excessive pressure on the demand side of the economy. </li></ul></ul><ul><ul><li>“ Too much money chases too few goods” enabling producers to raise prices. </li></ul></ul><ul><li>Cost-Push Inflation </li></ul><ul><ul><li>The pressure on price could also originate on the supply side. </li></ul></ul><ul><ul><li>Higher production costs put upward pressure on product prices </li></ul></ul>
  3. 3. Effects of Inflations [on..] Stagnant for almost same level of production No incentive to produce more, Same production Not affected at all Zero inflation Economy squeezes as production falls Producers of inelastic products affected, Production lower for lower demand Affected much, Demand may be lower in many products High Inflation Economy expands as production increase Have incentive to produce more, Higher production Affected but not much, Demand may be same Mild Inflation Economy Producers Consumers
  4. 4. UNEMPLOYMENT Under 16 years (70.5 Million) A distribution of Total Population to Labor Force, Employment, and Unemployment Total Population (296.6 Million) Disable or Not in Labor Force (76.8 Million) Employed (141.7 Million) Labor Force (149.3 Million) Unemployed (7.6 Million)
  5. 5. Measuring Unemployment L abor force is the sum of the employed and unemployed people able to work. U nemployment rate is defined as the percentage of the labor force that is unemployed. L abor force participation rate is the percentage of the adult population who are in the labor force. Unemployment Rate = Number of Unemployed Labor Force  100 Labor-Force Participation Rate = Labor Force Adult Population  100
  6. 6. Types of Unemployment <ul><li>Structural Unemployment: </li></ul><ul><ul><li>Unemployment caused as a result of the decline of industries. The economic structure is not adequately developed to provide jobs. </li></ul></ul><ul><li>Frictional Unemployment: </li></ul><ul><ul><li>Unemployment caused when people move from job to job. People can get a job but don’t work because they want to get a better job. </li></ul></ul><ul><li>Disguised Unemployment: </li></ul><ul><ul><li>People claim that they are working but they really are not needed in the job place. </li></ul></ul><ul><li>Which type of unemployment is the worst? </li></ul>
  7. 7. Unemployment from a Strict Wage Above Equilibrium Labor 0 Wage Surplus of labor = Unemployment Labor supply Labor demand Minimum wage L D L S W E L E
  8. 8. Impacts of unemployment [on…] <ul><li>Individuals </li></ul><ul><ul><li>Livings </li></ul></ul><ul><ul><li>Health </li></ul></ul><ul><ul><li>Education </li></ul></ul><ul><ul><li>Physically </li></ul></ul><ul><li>Society </li></ul><ul><ul><li>Non-productive groups became burden for the society </li></ul></ul><ul><ul><li>Illegal works and restlessness </li></ul></ul><ul><ul><li>Violence by the non-working people </li></ul></ul><ul><li>Nation </li></ul><ul><ul><li>Lower level of production and hampers GDP growth (Okun’s law) </li></ul></ul><ul><ul><li>Vicious cycle of underdevelopment </li></ul></ul><ul><ul><li>Less infrastructural development because lower government tax </li></ul></ul>
  9. 9. The negative relationship between unemployment and GDP is described in Okun’s Law, named after Arthur Okun, the economist who first studied it. It is defined as: Percent change in Real GDP = 3% - 2  Change in Unemployment rate If the unemployment rate remains the same, real GDP grows by about 3 percent. For every point of unemployment rate rises, real GDP growth typically falls by 2 percent. Hence, if the unemployment rate rises from 6 to 8 percent, then real GDP growth would be: Percentage Change in Real GDP = 3% - 2  (8% - 6%) = -1% Okun's Law Okun's Law
  10. 10. EXERCISE <ul><li>The BBS reported that the population of the country in 2004 was 142 million (142,000,000) of which 50% are adult. If the number of people unemployed in that year was 15,000,000, and the adults NOT in the labor force was 30,000,000, find out the unemployment rate in that year? </li></ul><ul><li>2. If other things remain same and your unemployment rate changes from 24% in 2007 to 27% in 2008, then what will be your GDP growth rate for 2008 as per Okun’s Law? </li></ul>