Simultaneous increase of unemployment and inflation
There is an in-depth discussion regarding the close inter-relationship between the unemployment and inflation. There is an inverse co-relation that exists between the unemployment and inflation, which is the core fundamental principle of economics(Fitzgerald and Nicolini 2014). The inflation is considered as the forces behind the parameters of demand and supply. However, the relationship between the unemployment and inflation is a complicated one which requires thorough understanding. The wage inflation is considered as the rate of changes of the wages, which is used simultaneously with the general inflation in the economic scenario.
In the instances of high unemployment, there is some people who are looking for jobs than the actual number of jobs available. This would enforce the employers to keep the wages stagnant over a period. There can also be a reverse situation in which there are low levels of unemployment. This also implies that there is more demand for labour than the actual supply of labour. This report would have a focused approach on the inter-relationship between unemployment and inflation.
There is an ongoing trade-off between unemployment and inflation, which has been further supported by the Philips Curve. There is an underlying justification that once there is a fall in the unemployment, then the workers would be empowered for higher wages. The multinational companies try to transfer these higher wage costs to their customers, which imply higher prices as well as inflation in the economy. The trade off supported by the Philips Curve implied that policymakers would be free to target either low unemployment or the low inflation rate; however, they would not be able to target both.
There has been a prominent role of the different central banks in the maintaining the equilibrium of the price stability. The United States of America has witnessed inflation in the last 30 year, which is measured by personal consumption expenditures priceindex that has an average of 2.4 percent every year (Fitzgerald and Nicolini2014). In the USA, the Congress has made the Federal Reserve promote employment along with the price stability. There have been controversies on the employment fluctuations.The dual mandate model has identified the non-negative co-efficient which can be well estimated by the regressions of the Philips Curve (Fitzgerald and Nicolini2014).
There have been instances of stagnant inflation rate in Japan, which was at 0.2 % (Fitzgerald and Nicolini 2014). The tightening labour market is beginning to push up the consumer prices or the wages. The labour market of Japan has reached its peak in the consumer spending and the salaries, which has led to stagnant consumer prices. There has been rising employment in Japan which confirmed that there was only 2.8 per cent unemployment in the country. As compared to this, there was a subsequent reduction in the inflation rate of Japan (which was perceived at around 0.1%). Hence, it can be concluded that there are instances when there is a simultaneous increase or decrease in the unemployment and the inflation rate.
Personal nature of inflation
According to Buffett (2012), inflation is regarded as the sustained increase in the average price level of service and goods, which is decided by the government entities. The inflation is the primary determinant of the personal investment of the individuals. The investment function is described as the process of utilising money in proper channels so that there is an increased return from them in the future (Buffett 2012). The transfer of the purchasing power from one entity to other is often termed as the investing. When there is a subsequent increase in the price level, one unit of the currency can purchase fewer services and goods. The inflation is directly responsible for the reduction in the purchasing power parity. There is a loss in the real value of the exchange within the economy. The consumer price index is one of the major measures of the inflation.
As opined by Blanchfloweret al. (2014), the personal consumption expenditures price indexis concerned with the actual as well as inputted expenditure of the household. This data is inclusive of the non-durable as well as durable services as well as goods. The personal buying patterns have a great influence on the inflation rate of the country. The particular situation often reflects the amount of buying patterns and the corresponding price indexes.
As opined by Christandl (2013), the strong personal belief is concerned with low economic impact and affected with an increase in the prices of the products. There is a perceived economic impact, and it is believed that market power is one of the prime causes of inflation. This has given rise to the forces that lead the firms to engage more number of consumers.
The underemployment is explained with the help of situation in which the candidates are employed in jobs that are below their skill level, education and the availability. There can be several categories of unemployment such as skilled workers employed in various low-paying jobs, skilled workers in several low-skill jobs and the part-time workers. It is important that the concepts of underdevelopment and unemployment are kept separate. However, there are situations when the unemployed candidates who are looking for suitable job options are also considered underemployed (Friedman 2016).
The underemployment has affected 10.5 % of the workforce of UK (BBC News 2017). It is believed that one out of all ten workers in UK is underemployed. There have been steep increases in the number of employees who wish to work for more hours every week. This is not good for the UK economy. It causes higher poverty levels since the educated candidates are getting recruited in low skill jobs(Bhalla and Lapeyre 2016). This reduces the purchasing parity of the consumers also since they are unable to spend more. This affects the consumer demand, and there is sluggish business growth. This affectsthe gross domestic product of the nation, and there is less job creation. This is considered to be a vicious circle, which affects the overall economy of the country.
Is underemployment good for the economy?
An increased instance of underemployment also leads to the employees being unable to update their essential skills by joining an “on-the-job training”. There are also instances that the employees would be downscaling their lifestyles, which is the primary cause of the structural unemployment (Bhalla and Lapeyre 2016). The over qualification often leads to a bad influence on the overall economy of the country. However, there are instances where the involuntary part-time work leads to regional planning (Bhalla and Lapeyre 2016). The regional planning is used to explain the regions in which there is unusually low economic activity due to several reasons.
As defined by Kuroda (2013), the concept of deflation is concerned with the decrease in the general price level of the different services and goods. The deflation takes place when the inflation rate is below 0%. The phenomenon of deflation is responsible for the increase in the real value of money or the actual level of debt in an economy. There has been a vicious circle of deflation, and the corporate sector is affected by it. As argued by Bean (2016), there has been more focus on the double inflation in the recent times. The real value added is considered as the estimate of the output’s nominal value. In UK, ONS is responsible for using the double inflation as value to the estimation of output with regards to electricity and agriculture industry. In the other cases, the concept of single deflation is applicable. The current practice of ONS would imply an increase in potential changes in the aggregation of the relative contribution of industry and real GDP. The single deflation is considered as the fact that the rise in moderate consumption would be the same as the output.
There is a direct relationship between deflation and unemployment. There is a tendency of the labour market to display sticky wages (Ojo and Ayadi 2016). This makes the employees resist the nominal wage cuts. In the instances of deflation, there is an increase in the rise of the wages. This is one of the reasons for the real wage unemployment. There are instances when the deflation is significantly related to unemployment. This can be corrected if there is a considerable pay drop.
As opined by Ojo and Ayadi (2016), the Okun’s law is used to describe the relationship between loss in country’s production and unemployment. For every 1% increase in the rate of unemployment, there is an additional 2% decrease in the rate of unemployment (than the usual GDP). The law emphasises on the fact that the increase in the cyclical unemployment is directly related to the two percent growth points of the negative growth in the actual GDP.
Concept of deflation
The CBI business group has asked Chancellor to utilise the windfall finance to boost the economic growth (BBC News 2017). The autumn statement was based on the state of the economy as well as outline changes in the economic policy of the government. The Chancellor is asking for cutting the pension tax relief, which is considered to be a measure for wealthier pensioners. The Chancellor has announced to reduce the corporation tax to 17 pc within the year 2020, and this makes millions of British companies to be the lowest “corporation tax payers” (Reporters 2017). The tax rate would be helpful in encouraging measures that would improve the UK’s productivity, emerging tech industry and the under-developed infrastructure (Reporters 2017).
Conclusion
There is a close relationship between the inflation and unemployment. The inflation is considered as the forces behind the parameters of demand and supply. It is possible that there is a simultaneous increase in the inflation and unemployment. The central banks have played a prominent role in maintaining a stability of prices. The inflation is sometimes co-related with the personal consumption expenditures price index. The fact that underemployment is not good for the economy is also discussed. The concept of deflation is considered along with its impact on the unemployment. The business view of the chancellor’s autumn statement is also noted. The Chancellor is asking for cutting the pension tax relief, which is considered to be a measure for wealthier pensioners. There is also a proposal for reduction of the corporation tax, which would lead to less income for the governments. This would decrease the inflation. However, there would also be a reduction in the government revenues.
The gross domestic product (GDP) is considered as the aggregate measure of the overall economic production of the country. It is a representation of the market value of the goods as well as services that are produced in the economy in a specified time frame. The GDP is considered to be a comprehensive measurement of personal consumption, private inventories, government purchases, foreign trade balance and others (Xiao 2015). GDP is an indication of how the growth of the economy is taking place as it is considered as the total of the corporate profits, wages, salaries and the interest collected by the various lenders (Jorgenson Landefeld and Schreyer 2014). The domestic expenditures of GDP include the government spending, housing investment, consumer spending and various business spending. It also includes the foreign investments by subtracting the spending on the imports.
Impact of deflation on corporate sectors
This report would discuss the low inflation and the GDP parameters and how they are inter-dependent on each other. The government tries to put a balance between the inflation and GDP, which is considered as some of the strong parameters of a strongeconomy. These concepts would be discussed along with the help of suitable examples from the developed or developing economy.
The GDP is considered to be the measure of the actual health of the economy and how it would affect the markets. The GDP is a widely discussed topic of all the nations and the emerging economies. It is advisable that the real GDP growth should be around 2.5 to 3.5 % per year, which would be sufficient to give corporate profit as well as jobs growth (Gordon 2014). This would also make it sure that the economy can deal with the inflationary concerns. The investors look for the long-term development of the economy and GDP is one of the criteria for determining the same (Xiao 2015). It is not desirable to have negative GDP growth for the economy, which would account for a recession in the economy. The consumer purchases of the imported items are not included in the contributions towards GDP (Gupta et al. 2014). However, the inventory data and the corporate profits are good sources for the equity investors as they indicate total growth during this period.
GDP is responsible for changing the dynamics of the stock market through the effects of inflation. The momentum of the stock market can also be regulated through the use of the increased economic activity. The GDP of a country can be calculated through the use of three processes namely production approach, expenditure approach and the income approach (Fuss and McFadden 2014). The production approach is concerned with the estimation of the gross value of the domestic output with the help of determining the intermediate consumption and deducting the intermediate consumption from the gross value to obtain the total value added (Xiao 2015).
The income approach is concerned with the estimation of GDP by using the sum of all primary assets of the resident producer units. It is important to make two adjustments to get an accurate GDP (Xiao 2015). These are indirect taxes minus the various subsidies and the depreciation that is added to the net domestic product (Lopez-Calva and Ortiz-Juarez 2014). The expenditure approach is based on the estimation of the GDP with the help of calculating the sum of the final uses of various goods as well as services.
As opined by Galí (2015), the inflation is considered as the general increase in the price level of goods as well as services and the resulting decrease in the purchasing power of the currency. The Federal Reserve uses the core inflation data to exclude all the light industries such as energy and food prices (Xiao 2015). The monetary policy goals of the Federal Reserve are to include the moderate long-term interest rates, maximum employment and price stability so that a stable financial environment is created.
There are different kinds of policies regarding how to reduce the inflation level. There can be monetary policy, tight fiscal policy and the supply side policies. There should be higher interest rates that would increase the cost of borrowings as well as discourage the spending of the individuals. The top income tax or the low government spending would reduce the aggregate demand which would lead to lower growth and less “demand-pull” inflation. The aim of the supply chain policies is to improve the long-term competitiveness such as deregulation and privatization.
The financial and the economic indicators of a country are the measures for an actual increase in GDP and maintaining the low levels of inflation. The major financial, as well as economic indicators, include the retail sales, industrial production, exchange rates, the balance of payments, stock prices, money supply, banking indicators and others (Economist.com 2017). It is a tough affair to balance the market forces of demand and supply. It is also important to lower the inflation rate and increase the level of GDP growth of the country. The government tries to increase the per capita income which would lead to higher GDP. It is a tough affair to balance the forces of GDP and inflation. There are countries which have managed to regulate their inflation rate and increasing their gross domestic products.
The countries such as Japan, Austria, Finland and Ireland are successful in lowering their inflation rate and improving their GDP (Economist.com 2017). Japan has GDP of 1.3, Austria has 2.3, Finland has GDP of 3.6 and Ireland has 7.2 GDP (all current figures) (Economist.com 2017). These numbers are significantly high as compared to other countries. On the other hand, they have lower levels of inflation. The consumer price percentage change of Japan, Austria, Finland and Ireland are 0.4, 2.1, 0.8 and 0.2 respectively. Japan has an average rate of inflation in the range of 0.8% with 101 consumer price index (Economist.com 2017). The country also has a high amount of the foreign direct investment of 74154 EUR million (Economist.com 2017).
There are modest opinions regarding the severe effects of the rising inflation. The inflation decreases the degree of goods that can be bought by the financial resources. It is responsible for reducing the purchasing power of customers (Ball 2014). There are several benefits of low inflation. The stable firms would be more optimistic as well as confident regarding the investment options and foster higher economic growth (Ball 2014). This would lead to greater investments in the economy, and there would be an economic boon. On the other hand, the high inflation is said to incur a variety of costs such as menu costs and the changing degree of prices. The inflation in UK is higher than in other parts of the world, and there is always a deterioration of the current account of the balance of payments.
Government tries to balance the inflation rate so that there is an overall good standard of living of the population (Ball 2014). This would be caused because the people would have higher per capita income and comparatively less price or value of goods.
A high GDP would indicate that the country is increasing the production levels and the citizens of the country have a higher standard of income (Ball 2014). It also ensures that the residents are spending more on the goods and services provided by the government (Ball 2014). An increasing GDP indicates a subsequent rise in the equality between citizens, which is necessary for the purpose of national prosperity (Ball 2014). However, for the welfare of the nation, it is important to have a trickledown effect across all the major sectors. This would also ensure the economic freedom in the lower income groups. In one of the capitalist nations, it’s hard to have complete parity in the distribution process and hence the major focus would be on the lower income groups. This case can be observed in developing economies such as BRICS (Brazil, Russia, India, China, South Africa)(Ball 2014).
Conclusion
The above analysis shows a positive trend of interrelationship between the rising GDP of the country and the low inflation rates. It can also be concluded that there is a growing disparity between the GDP of the world nations. There has been a different level of GDP for various countries. The inflation is considered as the forces behind the parameters of demand and supply. The gross domestic product (GDP) is seen as the aggregate measure of the overall economic production of the country. It is a representation of the market value of the goods as well as services that are produced in the economy in a specified time frame. The concept of GDP is explained. It is not desirable to have negative GDP growth for the economy, which would account for a recession in the economy. The GDP of a country can be calculated through the use of three processes namely production approach, expenditure approach and the income approach. There are different ways of achieving low inflation, which is discussed in detail. The various Economic and financial indicators are presented. The relationship of low inflation and high GDP are considered and the consequent effect on a strong economy.
References
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