Inflation and unemployment relationship pdf

inflation and unemployment relationship pdf

The study has been found negative relationship between inflation and unemployment during the study period but the results found are statistically insignificant. tion as well as of real unemployment. In studying the relationship between inflation and unemployment econo- mists such as Phelps [2,3] have found no long-run. PDF | On Mar 1, , Rubee Singh and others published Impact of GDP The correlation between unemployment and inflation is positive i.e.

However, when inflation crosses the reasonable limits it delivers negative effects accordingly. It reduces the value of money in term of foreign exchange. It also decline investment and economic growth. Usually inflation results in inefficient resource allocation and hence reduces potential economic growth. Inflation imposes high cost on economies and societies; excessively affecting the poor and fixed income groups and creates uncertainty throughout the economy and weakens macroeconomic stability.

High inflation has always hurts the poor more than the affluent group, creating economic instability. Likewise unemployment is a measure of the number of workers that want to work but do not have jobs or in simple terms, the unemployment rate is the number of people looking for works divided by the total number of people in the labor force. According to unemployment theory, there is always negative relationship between inflation and unemployment and due to uncontrolled inflation, unemployment increases and vice versa.

Even if a central bank of a country has a single goal of maintaining price stability, like central banks of advanced countries like New Zealand, Canada, England, and Australia, etc. The fact that unemployment usually hurts the economy more than inflation comes up empirically in various surveys conducted in advanced countries. In addition various studies carried out in developed and developing countries for the purpose to analyze the trade-off between inflation and unemployment using the Indian data over the period to Dholakia, 5.

The study found no any substantial trade-off between inflation and unemployment even in the short run in the LDCs like India. They verified Okan law by using secondary data for Pakistan.

They found the threshold level of GDP where there will be no reduction in unemployment if this level is maintained, and found that one percent increase in GDP above threshold level will reduce unemployment by 0.

To prove upon the theory by using empirical evidence from Pakistan, would certainly help to affix valuable addition to the literature in general and to maintain desirable level of inflation and unemployment rate in the country.

Low level of inflation and unemployment are the ultimate goals of policy makers, as both of these would lead to economic development. The main objective of this study is to evaluate empirically the relationship between inflation and unemployment in Pakistan during the study period. Trade off between Inflation and Unemployment Generally macroeconomics concentrated on three primary important areas of an economy.

These are production, prices, and unemployment. If policy-makers expand Aggregate Demand ADthey can lower unemployment, in the short-run, but only at the cost of higher inflation.

Inflation And Unemployment Relationship: Case Study Of Pakistan | iqra iqra cheema -

If they reduce Aggregate Demand ADthey can lower inflation, but at the cost of higher unemployment. Hence macroeconomic stabilization policies can shift the aggregate demand curve, thus moving the economy along the Phillips curve inPhillips8 examined empirically the relationship between unemployment rate and wage inflation in the UK over a period from to Unemployment during at average rate was 3.

During unemployment was 4. From unemployment was estimated 4.

Such as during unemployment was 6. Unemployment was estimated 7. Likewise during unemployment was estimated 9. According to the Pakistan Economic Surveythe total unemployment during was estimated 2. While inflation rate during was estimated 7. Recently the Federal Reserve has kept the interest rates unchanged citing the low inflation in the US. But shockingly, this relationship has failed in the context of India.

Recently, there was news that 23 lakh candidates have applied for the post of peons in Uttar Pradesh. The candidates not only included graduates but also 2.

The study is based on unbalance panel data. The result shows that there is negative relationship between inflation and unemployment rate in SAARC countries. Dholakia, IIM Ahmadabad Julythe study attempts to answer the question whether a tradeoff exists between inflation and unemployment in India.

inflation and unemployment relationship pdf

He empirically estimate the Phillips curve for India, subsequently incorporate the extended part of the Phillips curve, and find that a tradeoff does exist in the choice between inflation and unemployment in the short-run in the economy. The findings show that the conventional Phillips remains absent even on account of controlling for supply shocks, but clearly emerges as he incorporate the extended part into the basic Phillips curve framework.

The results of the extended Phillips curve show that the speed of recovery as captured by the extended part is an important factor in explaining inflation and the strategy for dis-inflation and recovery from adverse supply shocks.

Vashist, the study brings out the fact that the past studies have found mixed evidence about the shape of the Phillips curve from being horizontal to vertical.

This shows that any policy aimed at rapid economy growth or recovery will not result in the rise of inflation. Rather it should reduce the involuntary unemployment.

inflation and unemployment relationship pdf

While, on the other hand, a slow recovery or lower growth rate may aggravate inflationary tendency in the economy. In sum, it can be said that India can reduce involuntary unemployment through faster and inclusive economic growth without facing the problem of inflation. Muhammad Auwal Abubakar et at. To analyse the objective the research study used ordinary least square method, Augument dickey fuller techniques and Granger causality test. The study found that the unemployment is positively and significantly effects the wage rate where as inflation rate is affecting the wage rate positively but not significantly.

The result of Unit root revealed that both the variables are stationary. The results of Granger causality test suggests that unemployment Granger causes wage rates but not inflation. Kirandeep Kaur, the study analyse the relationship between unemployment, exchange rate, Growth rate and inflation rate from period with the use of simple linear regression analysis.

inflation and unemployment relationship pdf

The study found that there is negative and significant impact of inflation rate and exchange rate on unemployment where as the GDP growth rate effect negatively to unemployment but it is not significant. The study found that there is trade off between unemployment and inflation but more research work is needed for further analysis of these variables. It has adverse impact on income distribution.

A price rise tends to benefit some and harm others. While for some income earners, income rises more rapidly than prices during inflation, for many others just the opposite is true. Those who have fixed incomes are seriously affected as the real income decline during periods of inflation. Inflation also has an effect on lending and savings. Inflation benefits the borrowers at the expense of the lenders and savers. It has also adverse effects on foreign trade.

The competitiveness of a country may be seriously affected. Factors affecting the inflation 1. Increase in Money Supply: Inflation is caused by an increase in the supply of money which leads to increase in aggregate demand.

The higher the growth rate of the nominal money supply, the higher is the rate of inflation. Increase in Disposable Income: When the disposable income of the people increases, it raises their demand for goods and services. Disposable income may increase with the rise in national income or reduction in taxes or reduction in the saving of the people.

Increase in Public Expenditure: Government activities have been expanding much with the result that government expenditure has also been increasing at a phenomenal rate, thereby raising aggregate demand for goods and services 4.

Increase in Consumer Spending: The demand for goods and services increases when consumer expenditure increases.

Consumers may spend more due to conspicuous consumption or demonstration effect. Cheap monetary policy or the policy of credit expansion also leads to increase in the money supply which raises the demand for goods and services in the economy 6. In order to meet its mounting expenses, the government resorts to deficit financing by borrowing from the public and even by printing more notes.

Repayment of Public Debt: Whenever the government repays its past internal debt to the public, it leads to increase in the money supply with the public.

The existence of black money in all countries due to corruption, tax evasion etc. Shortage of Factors of Production: One of the important causes affecting the supplies of goods is the shortage of such factors as labour, raw materials, power supply, capital, etc.

When the country produces more goods for export than for domestic consumption, this creates shortages of goods in the domestic market. This leads to inflation in the economy. Unemployment is a situation in which a person or an individual wants to work at existing or prevailing wage rate but he did not get it. India is a developing economy mainly based on agriculture but the percentage share of agriculture is declining after independence. Now the dependency is also increasing on others sectors also like service sector and industrial sector.

The main causes of unemployment in India are the poor economic condition, corruption and population. Economists general classify unemployment into three types according to the causal factors, namely, frictional unemployment, cyclical unemployment results from business recessions and depressions and structural unemployment mismatch between requirements of the employers and the type of unemployed.

Seasonal and disguised unemployment Disguised unemployment refers to zero or very low productivity level and is most prevalent in Indian agriculture sector are prevalent in India. Unemployment has both economic and social implications for a country like India. Occurrence of unemployment results in the loss of output, loss in revenue of the government and in consequence disastrous effect on developmental works.

Unemployment is negatively related to the growth rate of the economy. It states that there is trade off between real GNP and Unemployment. Unemployment also means loss of self-respect, poverty and frustration. It can even lead to social unrest in the country. The manufacturing sector in India, which provides the bulk of employment to the skilled and semi-skilled labour force, is growing at abysmally low rates of between 2 and 5 per cent.

Graphically, this means the short- run Phillips curve is L-shaped This is because: