How does inflaton affect to unemployment?

 INTRODUCTION TO BANKING AND FINANCE Instructor: Trần Thị Hoàng Vi Topic: How are the effects of inflation to unemployment? Group Members Full name Student ID Nguyễn Tuyết Ngọc Anh 2008118 Trần Thị Thu Hòa 2009269 Lưu Thanh Huy 2005637 Nguyễn Diệp Phương Linh 2005202 Hình Tăng Phú 2006115 Hồ Thị Bích Trâm 2009269 Ho Chi Minh City, 2014 Contents MINISTRY OF EDUCATION AND TRAINING HOA SEN UNIVERSITY FACULTY OF ECONOMICS AND COMMERCE INFLATION Money, Banking and Financial Markets Instructor: Tran Thi Hoang Vi 1. Definition and classification of inflation 1.1. Definition of inflation Inflation is when the prices of most goods and services continue to increase which causes living standard goes down. How are the effects of inflation to unemployment? 2 | P a g e Money, Banking and Financial Markets Instructor: Tran Thi Hoang Vi How are the effects of inflation to unemployment? 3 | P a g e Money, Banking and Financial Markets Instructor: Tran Thi Hoang Vi 1.2. Classification of inflation 1. The rate of inflation • Moderate inflation: it’s considered to be a moderate inflation and occurs when the prices are a slow increased less than 10 percent a year. • Running inflation: it occurs when the prices rise by more 10 percent a year. • Galloping inflation: it refers to a situation where the price level grew dramatically. • Hyperinflation: it happens when the prices increase over 1000 percent in a year. 2. The nature of time period of occurrence • War- time inflation: it causes when expenditure is used excessively on war. • Post- war inflation: it occurs during the post war. • Peace- time inflation: government’s expenditure excess over the revenue. How are the effects of inflation to unemployment? 4 | P a g e Money, Banking and Financial Markets Instructor: Tran Thi Hoang Vi 3. The scope or coverage • Comprehensive inflation: in all sector or though out the economy, the price of most of goods grew. • Sporadic inflation: the price of some goods or to inflation. It occurs in agricultural sector, at a time. 4. The Government’s reaction • Open inflation: this is a situation that it has a rapidly rise in prices. • Repressed inflation: when the prices are prevented from rising up by governments. 5. The basics of Employment • Semi inflation: in this case, the prices increase which is accompanied in production and employments. • Full inflation: rise in prices is not accompanied in production and employments. 2. Causes of inflation  There are three main causes: demand-pull, cost-push, monetary expansion. 2.1. Demand pull inflation  Demand-full inflation is the most common  This is the imbalance of supply and demand. The main cause is aggregate demand increased dramatically, when aggregate supply is unchanged or not keeping up. In these cases an increase in aggregate demand (AD) will lead to an increase in prices. How are the effects of inflation to unemployment? 5 | P a g e Money, Banking and Financial Markets Instructor: Tran Thi Hoang Vi 2.2. Cost-push inflation  Cost-push inflation occurs when an economy experiences a negative cost shock. Causes:  The labor market: form of cost-push inflation arising from supply side, because of production which has higher cost has been transferred to the consumer. This can only be achieved in the period of economic growth as consumers are willing to pay higher prices.  Import prices: the higher import prices are transferred to the domestic consumers. The government publishes higher indirect- tax.  Rising imported raw material costs: rate of exchange increased or limiting the ability exploit then the cost of raw material increases  It can be illustrated by an inward shift of the short run aggregate supply curve. This will show in the diagram below. How are the effects of inflation to unemployment? 6 | P a g e Money, Banking and Financial Markets Instructor: Tran Thi Hoang Vi 2.3. Expansion of the money supply  Money supply is also credit, mortgages and loans.  When the loans are cheap, there will be too much money chasing too few goods and leading inflation. Prices begin to rise, although either supply or demand has not changed.  The increase in the money supply is the main reason leading to increased demand for goods and services. However, it is not the only reason of increasing demand. Inflationary pressure will increase after several years, if the demand for a good exceeds supply. The production has not been extended or using machines with limited capacity or due to factors of production cannot support an increasing demand. Imbalances will be disappeared, if the price level rises and this courses inflation. How are the effects of inflation to unemployment? 7 | P a g e Money, Banking and Financial Markets Instructor: Tran Thi Hoang Vi 3. Positive and negative effects of inflation 3.1. NEGATIVE a. Increase in interest.  Inflation impacts on many aspects of micro and macro economy through interest, because interest has effects on sides such as: income, consumption, investment…  To keep the balance of debit and credit, banking system must maintain stability of real interest. However, the nominal interest and inflation rate will increase together, if real interest is constant. Consequently, economy declines and unemployment rises, when the banks and fiscal institutions make nominal interest grows with the increase of inflation rate. This result to a sharp fall of the real investment. Finally, unemployment steadily grows and people‘s life are harder. b. The unequal allocation of the national income. Nominal national income goes up when inflation has growth. This causes redistribution for different groups of population. i. Between employers and employees. When inflation occurred, salary rising is slower than price rising. Therefore, employers have advantages more than their employees. ii. Between buyers and sellers main asset. The majority of main assets have constant nominal interest, so the bondholders have drawbacks more than the other. iii. Between two companies. Merchandises have different rate of rise of price, so enterprises produce and store goods which have price creeping up will have many disadvantages. How are the effects of inflation to unemployment? 8 | P a g e Money, Banking and Financial Markets Instructor: Tran Thi Hoang Vi  Inflation has effects on the real value of people‘s wealth. In general, unanticipated inflation causes some problems such as: transferring the money from creditor to debter who brings borrower benefit and making a loss to lender.  Inflation involves perturbation of economy, causes a huge gap between the poor and the rich, making process of redistribution become irrational and unequal. c. Impact on foreign balance. The exchange rate increases and domestic currency is quickly devalued in compare with foreign currency because of inflation, which makes the liabilities become bigger. If the domestic inflation is constant and the foreign inflation rises, domestic currency will be put up and the liabilities will be reduced. However, decreasing debit cannot off-set with injuries in manufacture and production. 3.2. POSITIVE  Higher turnovers and profits: a low stable inflation rate from 1% to 3% allows businesses to raise their prices, turnovers and profits, while at the same time workers can expect to see an increase in their salary packers, which might lead to rising investment and productivity.  Tax revenues: the Government earns revenue from inflation through what is called “fiscal drag effects”.  Inflation is considered grease, which helps economy to develop. In some circumstances, the minus real interest is used to adjust consumption, borrow at interest in order to invest. Therefore, it involves the economic growth and the decrease of unemployment.  Allowing Government to choose tools so as to operate investment through extending credit.  Inflation which is controllable and has reasonable level brings economy many benefits. It becomes the tool to regulate economy. How are the effects of inflation to unemployment? 9 | P a g e Money, Banking and Financial Markets Instructor: Tran Thi Hoang Vi 4. Effects of inflation on unemployment Analyze the relationship of inflation and unemployment: When it comes to the relationship between inflation and unemployment, economists often refer to the concept of “trade-offs”. Offs this means that the loss of the other, chose this one to give the other. A.W. Phillips found that unemployment tends to increase the salaries, salary increase will increase the price. Thus, unemployment will lead to rising inflation. This discovery led to an argument that between inflation and unemployment trade-off with together. Therefore, this trade-off is shown how? There must always happen that no trade-off? 4.1. The original Phillips Curve  Based on the experimental results of several years of wages, prices, unemployment in Britain, it was born and call “the original Phillips curve”  This line show the inverse relationship unemployment and inflation, it is also consistent with economic realities many Western European countries in 1950s. Means that haves a trade-off between them. Phillips curve was built and had form below: where o gp: inflation rate o u : actual unemployment rate o u*: natural rate of unemployment o : the Phillips curve slope The line shows the following characteristics :  Inflation = 0 when actual unemployment rate same natural rate  When actual unemployment below the natural rate, the inflation appear  The larger slope is an increase or decrease of unemployment will cause to rise or reduction in inflation. 4.2. The short-run Phillips curve: Nowadays, price don’t lower over time due to expected inflation, therefore the Phillips curse has been extended by including the expected inflation rate and takes the following form: gp e : expected inflation rate How are the effects of inflation to unemployment? 10 | P a g e gp = gp = gp e - ε(u-u*) [...]... short term – like from several weeks to several months – has a better ability to reintegrate into the labor market, while the longterm unemployed often begin to have problems with their social relationships The high long-term unemployment rate could be unsettling the country's social orders, possibly increasing the rates of crime How are the effects of inflation to unemployment? 14 | P a g e Money, Banking... Markets Instructor: Tran Thi Hoang Vi government uses economic tools to operate and control country economy such as printing money, deflation, etc Consequently, although everything in theory is almost extremely much easier than in real life, we have to understand methods, equations, formulas, charts, etc thoroughly in theory to apply to the real life If we are not able hold the balance of economy totally,... uncontrolled increase in price It means the devaluation of Vietnam currency How are the effects of inflation to unemployment? 12 | P a g e Money, Banking and Financial Markets Instructor: Tran Thi Hoang Vi Due to the fluctuation of the U.S.A economy, the exchange rate between VND against USD changed a lot within general increasing trend which is showed in the figure beside As a result, most of enterprises applied... confidence to cut rates o Feb 2012: February CPI rose only 1.37% m/m; up 16.44% y/y and 2.38% YTD Although the m/m inflation trend was slightly faster than January’s m/m CPI of 1% due to the seasonal factors Indeed, we think this marks a modest increase in the consumer price index compared to previous years and we are likely to have the second least inflationary Tet season since FY2007 How are the... these problems Many economists, however, argue that in the long term, maintaining high rates of growth of real GDP per person is the most important macroeconomic concern Only when real GDP per person is increasing will a country’s standard of living increase In addition, general speaking, GDP increases or decreases, it depends on how the How are the effects of inflation to unemployment? 15 | P a g e Money,... centrally planned to a market economy since 1986 It accomplished considerable achievements such as maintaining high growth for a long time Vietnam has partially alleviated poverty, rose living standard of people in a stable political foundation However, Vietnam is still facing to high rate of unemployment and especially underemployment The Vietnam’s unemployment is contributed by several factors: the natural... Financial Markets Instructor: Tran Thi Hoang Vi This line shows the actual unemployment in the natural unemployment rate, the inflation rate expected by If actual unemployment is higher than the natural unemployment rate, the inflation rate is lower than expected This line is called the short-term Phillips curve corresponding to the period when the inflation rate is not expected to change During this... this period if demand shocks, assuming rapid increase aggregate demand, the economy along the Phillips curve upward, rising inflation and unemployment How are the effects of inflation to unemployment? 11 | P a g e Money, Banking and Financial Markets Instructor: Tran Thi Hoang Vi 4.3 Long-run Phillips curve (LPC) In short, the unemployment rate may not equal the actual unemployment rate is expected, but... inflationary Tet season since FY2007 How are the effects of inflation to unemployment? 13 | P a g e Money, Banking and Financial Markets Instructor: Tran Thi Hoang Vi Mar 2012: The March CPI release coming as it did even lower than the latest predictions were well received The 0.15% m/m increase was the lowest in two years and brings the y/y CPI down to 14.15% o 5.2 Unemployment: The unemployment rate in Vietnam... http://voer.edu.vn/m/nguyen-nhan-gay-ra-lam-phat/f7cf91f7 7 investopedia.com 8 inflationdata.com 9 https://www.boundless.com/economics/inflation-and-unemployment/therelationship-between-inflation-and-unemployment/the-short-run-phillips-curve/ 10 http://economistsview.typepad.com/economistsview/2007/02/inflation_and_u.ht ml 11 http://www.clevelandfed.org/research/data/inflation_expectations How are the effects of inflation to unemployment? 16 |