How does inflaton affect to unemployment?

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.. POSITIVE  Higher tur

-INTRODUCTION TO BANKING AND FINANCE

Instructor: Trần Thị Hoàng Vi

Topic:

How are the effects of inflation to

unemployment?

Group Members

Ho Chi Minh City, 2014

Contents

1 Definition and classification of inflation

1.1 Definition of inflation

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

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

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

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

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

 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

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 =

gp = gpe - ε(u-u*)

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 period if demand shocks, assuming rapid increase aggregate demand, the economy along the Phillips curve upward, rising inflation and unemployment

4.3 Long-run Phillips curve (LPC)

In short, the unemployment rate may not equal the actual unemployment rate is expected, but in the long term they will equality by the impact of fiscal policy and monetary It is basis for building long-term Phillip curve:

or:

Thus, the actual unemployment rate is always equal to the natural rate of unemployment (in term of long-term) inflation even changes how So in the long term inflation and unemployment do not have a relationship with each other

5 Inflation and unemployment in Vietnam’s context

5.1 Inflation:

0 =

-u = -u*

CPI from 2002 to 2012 in Vietnam

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 USD in their transaction instead of VND, especially in export goods Besides that, several of Vietnamese people who want to save their money in USD Both of the reasons make the exchange rate kept moving up more and more

On the other hand, the payment on the government is one of the biggest reasons, which cause the inflation If the government pays more money for goods and services, the money will go directly into the economy, which cause the higher demand

The higher inflation rate in Vietnam relative to its neighbors is explained by the higher degree of persistence in inflation in Vietnam than in the others The response of inflation in Vietnam to national currency depreciation is also greater than in other Asian countries This contributes to straining inflationary pressure in Vietnam

Inflation in Vietnam has been a serious issue in the past, but has recently declined

o Jan 2012: Vietnam Inflation slowed for a fifth month in January It climbed

17.27% from a year earlier, compared with an 18.13% pace reported for December That will give the Vietnam Central bank more 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

o 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%

5.2 Unemployment:

The unemployment rate in Vietnam is a particular problem There are some reasons for this issue It makes demand and supply of labor unequal, in fact, more supply than demand so that unemployed has rosin

Vietnam is a developing country has had to recover from the devastations of war

in the last 35 years In 1986 the government has introduced the “Doi Moi” policy (renovation), which has creating good effect in the economy In order to modernize the economy and produce more competitive, raising the export; Vietnamese governors have changed the policy to increase economic liberalization and ordain structural reforms The economic has been transformed from a 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 increases in population, national economy, monetary and inflation These factors can intensify the growth in unemployment

Unemployment Rate in Vietnam decreased to 2.18 % in the first three-month of

2014 from 2.22 % in the third quarter of 2013 Unemployment Rate in Vietnam averaged 2.46 %t from 1998 until 2014, reaching an all the time high of 4.5% in the fourth quarter of 1998 and a record low of 1.81 % in the fourth quarter of

2012 Unemployment rate in Vietnam is reported by the General Statistics Office of Vietnam

Vietnam calculated its unemployment rate at 1.9 % late in 2013, a figure that included many well-qualified young unemployed people for more than a year The Ministry of Labor, Invalids and Social Affairs said 900,000 people of labor-age were unemployed in the fourth quarter of 2013, up 5.6 % year on year The ministry’s first edition of quarterly labor report said the unemployment rate

in young people (between 15-24 years of age) is around threefold the average rate and people with college degrees and technical expertise around fourfold The high unemployment rate among the qualified group was blamed on either their pickiness or on the fact that their training did not suit market demands Nearly 45 percent of the unemployed are “long-term” cases, defined as being

Unemployment rate in Vietnam from 2008 to June 2013

Workforce

2012 2011

2008 2009 2010

The report forecasts more employment opportunities this year in several sectors including manufacturing, construction, retail, hospitality and dining services

Reason:

The unsuitable population unbalance arrange among vary areas and business lines Most of the immigrants are form the rural areas They move to lives in the big city where placed lots of industrial parks It makes the urban population is getting crowed Therefore, the unemployment rate is always high

 The competition between the firms

 On the other hand, thousands of manufactory has reduced its employees because of global economics decline and the fiscal crisis in 2008

6 Conclusion

Inflation and unemployment are the main issues macroeconomic problems Presidential

elections are often won and lost on the basis of which candidate is able to convince the

public that he or she can best deal with 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