Inflation & Unemploy Ment: Lecturer: Pn. Azizah Isa 1

Chapter
6
Inflation
&
Unemploy
ment
Lecturer: Pn. Azizah Isa
BUSINESS CYCLE
Aggregate Econ. Activity
(%
in
real
GDP)
Boom/Inflation
Potential
Growth
Path
Actual Growth
Path
Trough/Depression/Slump/
Unemployment
years
NATIONAL INCOME
EQUILIBRIUM
Y=E
Expenditure
(RM)
Inflationary Gap
Deflationary Gap
e1
Yfe=C+I+G+(X-M)
Y0 = C+I+G+(X-M)
ef
Y1=C+I+G+(X-M)
e0
45
Y0
Yfe
Y1
Real Output
(National Income)
3
KEYNESIAN EQUILIBRIUM
NATIONAL INCOME
Keynesian assume that equilibrium
output can be reached not necessarily

at the full-employment.
The equilibrium can be less or more
than the full-employment equilibrium,
causing the economy with the
inflationary or deflationary-gap.
RELATIONSHIP OF
INFLATION AND BOOMING
ECONOMY
The
higher the growth of an economy,

the higher is the inflation rate.
Inflation is related to the development
of an economy.
Definition of Inflation
as
a criteria of a continuous
increase in the general price
level of all goods in an
economy for a specific time
period.
as
measured by the increased in CPI.

Measurement Of Inflation
The
Rate Of Inflation:
is measured by the rate of increase of
price index, CPI.
Inflation Rate = (CPI1 CPI0)

CPI0
X 100
Negative Inflation is Deflation

INFLATION IN MALAYSIA
Year
Consumer Price Index (CPI)
1998
95.8
Annual Change
(%)
5.3
1999
98.5
2.8
2000
100.0
1.5
2001
101.4
1.4
2002
103.2
1.8
2003
104.4
1.2
2004
105.9
1.4
2005
108.9
2.8
Table 8.1: The Consumer Price Index (2000 = 100)

and Inflation Rate
Inflation as shown by the

% change in CPI
TYPES/ CAUSES OF
INFLATION
1.
DEMAND-PULL INFLATION
2. COST-PUSH INFLATION
10
1. Demand-Pull Inflation
TOO
MUCH MONEY CHASING FOR

TOO FEW GOODS
Fisher
AD > AS at fullemployment,
causes to shortage of goods
and
price hike.
11
Fishers Equation:
MV = PT
where,
M = money supply
V = velocity of money in circulation
P = general price level
T = total transaction of outputs
V and T are assumed constant;
therefore,
Money Supply,
Prices
(inflation)
12
Demand-pull Inflation
13
2. Cost-Push Inflation
is caused by the high rise in the cost of
production.
The cost increases can be caused by various
factors:
higher wage rate.
larger profit mark-up.
mark
expensive raw materials domestically
or from imported sources.
increase prices of intermediate (capital)
goods.
higher taxes.
14
Cost-Push Inflation
15
Effects of Inflation
1. On the individuals as gainers and losers:
Gainers are:
Debtors: pay back loan, with less value of
money.
Shareholders: higher dividend
Property owners: higher prices of assets
owned.
Businessmen: making larger profit as prices
for their goods produced and sold is higher.
16
Effects of Inflation
Losers are:
Creditors: received less value for loans
given out earlier.
Savers: lower value of money saved.
Fixed income earners: lower purchasing
value of money.
Pensioners: value of money falls.
17
Other Effects of Inflation
2.
3.
4.
may cause also to:

Production of goods increases
Savings depreciated in value (lower
purchasing power of money)
Deficit in Balance of Trade (domestic price
increases and become less competitive in the
international market)
18
To curb the problem of

inflation
Using:
1) Monetary Policy
2) Fiscal Policy
19
To reduce Inflation:
with Surplus Budget or
Tight Monetary Policy
Since inflation is related to the booming of an
economy, therefore to reduce inflation,
economic growth has to be slowed down.
Thus, reduces the aggregate demand and
closed-down the inflationary-gap while the real
output (Y) falls.
20
21
Unemployment in Malaysia
The unemployment rate is lowest in the
year 1997 but increase again in 1998 that is
from 2.7% to 3.2% due the slowdown of the
economy caused by the Asian Financial
Crisis whereby our economy is hit by the
large depreciation of Ringgit Malaysia (RM)
relative to American Dollar (US$)[1]
[1 ] Economic Report 1999/2000. Ministry of Finance
Malaysia, 1999.
23
UNEMPLOYMENT IN MALAYSIA
YEAR
UNEMPLOYMENT
RATE (%)
1997
2.7
1998
3.2
1999
3.4
2000
3.1
2001
3.6
2002
2003
3.5
3.6
2004
2005
3.5
3.5
Source: Economic Planning Unit and Ministry of Human Resources.

24
Unemployment
with Business Cycle
Unemployment rate is high during recession.
The negative impact of the slowdown of the economic
growth during recession may:
less job opportunities.
bankruptcies,
closing down factories,
delay of constructing new plants etc.
thus, may reduced the number of economic activities in
the economy.
25
Natural Rate of Unemployment

The natural rate of unemployment is the level of
voluntary unemployment when the labour market is
in equilibrium.
Natural rate of unemployment is normally rated as
4% .
Full-employment is related to this natural rate of
unemployment, which includes(+) the frictional and
seasonal unemployment.
It is not easy to omit this natural rate of
unemployment in an economy. Therefore an economy
at this natural rate of unemployment is said to be at
full-employment.
26
Actual Rate and Natural Rate

of Unemployment
If the actual rate of unemployment is
more than the natural rate of
unemployment, than it is said that
the economy is with the real problem
of unemployment.
27
Who are
considered as
unemployed?
28
DEFINITIONS
UNEMPLOYMENT:
are people who are considered under the
labour force but being unemployed
(jobless).
29
Who are included

in the Labour
Force?
30
LABOUR FORCE:
are people of age group 15 64 years
and are willing and able to work either
has been holding a job or yet searching
for a job.
Those that are not considered under the labour
force includes:
School children and university students
although aged more than 15.
Sick bed, old aged and housewives .
31
LABOUR FORCE
= no. of employed + no. of unemployed
(willing and able to work of age 15 - 64yrs.
either working or jobless)
32
Measurement of Unemployment
Unemployment Rate
= no. of unemployed
100%
labour force
Unemployed people are jobless labour force
33
LABOUR FORCE
PARTICIPATION
RATE
=
Labour Force
Adult Population
X 100%
34
TOTAL POPULATION
CONSTITUTES ALL OF THE:

- CHILDREN
- ADULT
- OLD AGED
- HOUSEWIVES
(that are not considered under the labour force).
Therefore, for calculating the rate of
participation make sure that only adult
population is considered into the measurement.
35
For example:
Data collected from the year 1999 given as:
125.6 million employed people and 4.5 million
was unemployed and the adult population was
205.8 million.
Therefore:
Labour Force = 125.6 + 4.5 = 130.1 million
Unemployment rate = ( 4.5 / 130.1 ) x 100

= 3.6%
Labour Force Participation rate =

( 130.1 /205.8) x 100 = 63.2%
36
EXERCISE 1:
37
TYPES OF
UNEMPLOYMENT
FRICTIONAL
UNEMPLOYMENT
STRUCTURAL UNEMPLOYMENT
CYCLICAL UNEMPLOYMENT
DISGUISED UNEMPLOYMENT/
HIDDEN UNEMPLOYMENT.
SEASONAL UNEMPLOYMENT
38
STRUCTURAL
UNEMPLOYMENT
i.
ii.
Changes in the structure or technology of the

economy may lead to reduction in the number of
job opportunities.
Structural changes from labour intensive to
capital intensive (furthermore with high
technology use of robotics and highly
sophisticated machineries).
Structural changes from agricultural base to
industrial sectors those lack of skills and less
educated were ignored.
39
CYCLICAL
UNEMPLOYMENT
Caused
by the downturn of the business

cycle - economy moves towards recession
(kemelesetan).
Disruption of
the economic growth causes

the slowdown in all sectors of the economy,
alas reduction in job opportunities.
40
DISGUISED UNEMPLOYMENT/
HIDDEN UNEMPLOYMENT.
where the industries are overstuffed with
unnecessary additional workers sharing
jobs available and does not contribute to
extra productivity.
i) in agriculture sectors
ii) in cottage/rural industries.
41
Impact of
Unemployment
can be a cost to an economy.
Unemployment can affect:

i)
the individuals: distressed, lose self esteem, mentally
disturbed.
ii) the family/society: lost family income, domestic
violence, family splitting.
iii) the economy: create social and economic cost.
curing social problems, training courses, special
benefits, capital incentives. A cost to the economy
cos economy is not at the stage of fully utilising the
resources (underutilization).
42
POLICIES TO
CURE
Government measures:
FISCAL POLICY
2. MONETARY POLICY
1.
43
NATIONAL INCOME
EQUILIBRIUM
Y=E
Expenditure
(RM)
Inflationary Gap
Deflationary Gap
e1
Yfe=C+I+G+(X-M)
Y0 = C+I+G+(X-M)
ef
Y1=C+I+G+(X-M)
e0
45
Y0
Yfe
Y1
Real Output
(National Income)
44
FISCAL POLICY
Fiscal Policy attempts to regulate the economy by varying
the level of government spending and the rate of taxation.
1. CONTRACTIONARY FISCAL POLICY

(surplus budget)
GT<0
G < T
2. EXPANSIONARY FISCAL POLICY

(deficit budget)
GT>0
G > T
3. BALANCED BUDGET POLICY

GT=0
G = T
45
Unemployment/recession:
Expansionary Fiscal
Policy /
Deficit
When government
collects less tax revenue
Budget
but spends more on expenditure, G > T.

Therefore, it cause to a larger effects on real
output.
Deficit Budget is implemented(dilaksanakan) to
raise-up the
economic activities.
46
Balanced Budget
Policy
When
government expenditure is
equivalent to the tax revenue collection

(G = T)
just
A balanced budget is also used to increase

real output and economic growth.
Its multiplier is equivalent to one (1).
Y = 1 . G
Thus,
the
resulting
increase
in
the
equilibrium Y is exactly equal to the
increase in G or T itself.
Y = G = T
47
MONETARY POLICY
To cure
recession/unemployment:
Ease / Expansionary monetary policy.
To reduce
inflation:
Tight / Contractionary monetary policy.
48
Keynesian AD-AS Diagram

General Prices
AS
P1
P2
I, G
Effect of Surplus
Budget OR Tight
Monetary Policy
to reduce
inflation
AD1
AD2
Real GDP
49
THANK YOU
FOR LEND ME YOUR
EARS.
50

Inflation & Unemploy Ment: Lecturer: Pn. Azizah Isa 1

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Chapter

Lecturer: Pn. Azizah Isa

output can be reached not necessarily

higher the growth of an economy,

Lecturer: Pn. Azizah Isa

measured by the increased in CPI.

Inflation Rate = (CPI1 CPI0)

Negative Inflation is Deflation

Consumer Price Index (CPI)

Table 8.1: The Consumer Price Index (2000 = 100)

Inflation as shown by the

Lecturer: Pn. Azizah Isa

Lecturer: Pn. Azizah Isa

MUCH MONEY CHASING FOR

Lecturer: Pn. Azizah Isa

Lecturer: Pn. Azizah Isa

Lecturer: Pn. Azizah Isa

Lecturer: Pn. Azizah Isa

Other Effects of Inflation

may cause also to:

Lecturer: Pn. Azizah Isa

To curb the problem of

Lecturer: Pn. Azizah Isa

Lecturer: Pn. Azizah Isa

Lecturer: Pn. Azizah Isa

Source: Economic Planning Unit and Ministry of Human Resources.

Natural Rate of Unemployment

Lecturer: Pn. Azizah Isa

Actual Rate and Natural Rate

Lecturer: Pn. Azizah Isa

Lecturer: Pn. Azizah Isa

Who are included

Lecturer: Pn. Azizah Isa

Lecturer: Pn. Azizah Isa

Lecturer: Pn. Azizah Isa

CONSTITUTES ALL OF THE:

Lecturer: Pn. Azizah Isa

Labour Force = 125.6 + 4.5 = 130.1 million

Unemployment rate = ( 4.5 / 130.1 ) x 100

Labour Force Participation rate =

Lecturer: Pn. Azizah Isa

Changes in the structure or technology of the

by the downturn of the business

the economic growth causes

Lecturer: Pn. Azizah Isa

Lecturer: Pn. Azizah Isa

Unemployment can affect:

Lecturer: Pn. Azizah Isa

Lecturer: Pn. Azizah Isa

1. CONTRACTIONARY FISCAL POLICY

2. EXPANSIONARY FISCAL POLICY

3. BALANCED BUDGET POLICY

but spends more on expenditure, G > T.

equivalent to the tax revenue collection

A balanced budget is also used to increase

Lecturer: Pn. Azizah Isa

Lecturer: Pn. Azizah Isa

Keynesian AD-AS Diagram

Lecturer: Pn. Azizah Isa

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