Economic Policies & Goals: Inflation, Recession & Unemployment

Inflation, Recession & Unemployment

Inflation

Inflation is the steady and continuous rise in general price levels (average of prices) within an economy over time (usually measures from one year to another).

Types of Inflation(Causes):

1. Demand Pull: rise in aggregate demand induces rise in prices

2. Cost Push: increase in costs of factor inputs is passed on to consumers as price increases

3. Imported: increase in costs of imported factor inputs and consumed goods rises and so local prices rise

4. Increase in money supply: monetarists(group of economists) attribute increased money supply to increased aggregate demand and economic activity which causes demand pull inflation

Consequences of Inflation:

1. Fall in real income: fall in purchasing power of money

2. Fall in international competitiveness: increased local prices make exports more expensive to foreigners

3. Social and political unrest and instability

4. Fall in economic growth and development

5. Creditors’ loss/ Borrowers’ gain: face value of previously-loaned money is now worth less now as prices have risen

6. Menu costs: costs incurred by businesses to republish and update their prices

Government Role in Reducing Inflation: (Identify cause then solution)

1. Demand-pull: Policies to reduce aggregate demand.

   • deflationary fiscal and monetary policy(credit squeeze)

2. Cost-push: Policies to make funds more-readily available to cover increased production cost.

   • inflationary fiscal policy(lowering corporate taxes and increasing gov. expenditure on subsidies and grants)

   • inflationary monetary policy(lowering reserve requirements & interest rates, and increasing open market operations to buy government securities from firms to make credit more accessible)

   • Regulation to limit power of Trade Unions to raise wages

3. Imported: Reduce imports and incentivize local production of goods needed from abroad.

   • Institute trade barriers & protectionist trade policies (e.g. tariffs, import quotas or complete ban on some imports)

   • expansionary fiscal policy(lowering corporate taxes and increasing gov. expenditure on subsidies and grants to promote local production)

4. Increase in money supply: Reduce funds available for consumption.

   • deflationary monetary policy(increasing reserve requirements & interest rates, and increasing open market operations to sell government securities to make credit less accessible,)

   • deflationary fiscal policy(increasing corporate taxes and decreasing gov. expenditure on subsidies and grants)

   • credit squeeze

Recession

A significant and prolonged decrease in economic activity within an economy for a given period (usually years).

Types/Causes of Recession:

1. Trade Cycle(image attached)

2. Demand shock

3. Supply shock

Consequences of recession:

1. Fall in economic growth and development

2. Retrenchment and unemployment

3. Decreased consumer spending

4. Decreased investment by firms and individuals

5. Decreased revenue for government

Government Role in Decreasing Recession:

1. Expansionary/Inflationary fiscal policy(lowering overall taxes and increasing gov. expenditure, subsidies, grants and transfer policies)

2. Expansionary/Inflationary monetary policy(lowering reserve requirements & interest rates, and increasing open market operations to buy government securities from public to make credit more accessible)

Retrenchment VS Unemployment

Unemployment Rate

Retrenchment refers to the act of employers permanently terminate or discharge employees from their jobs

Unemployment refers to persons who are currently looking for a job but cannot find one.

The unemployment rate is a measure of the number of unemployed persons in an economy as a percentage of the workforce(total number of people able to work).

Types of Unemployment:

1. Frictional

2. Structural

3. Seasonal

4. Cyclical(Trade Cycle)

5. Real Wage

Consequences of Recession:

1. Fall in standard of living and quality of life.

2. Emotional, social and political instability.

3. Erosion of human capital as unemployed people may loose skills due to lack of practice.

Role of Government in Reducing Unemployment:

1. Frictional: Help unemployed transition into jobs and industries with their skills.

   • Programs to equip people with skills necessary to transition into new job

   • Investment in job search platforms

2. Structural: Equip unemployed with skills for new industry.

   • Programs to equip people with skills demanded in another industry or match with industry demanding similar skills.

   • Subsidies and grants to firms whom hire displaced workers.

3. Seasonal: Equip unemployed with skills for longer-tern industry and incentivize industry to work longer(where possible).

   • Programs to equip people with skills demanded in another industry or match with industry demanding similar skills.

   • Subsidies and grants to firms to encourage hiring displaced workers.

   • Subsidies and grants to seasonal firms to encourage longer-term work(wherr applicable).

4. Cyclical(Trade Cycle): Measures to reduce unemploymwnt-causing recession.

   • Expansionary/Inflationary fiscal policy(lowering overall taxes and increasing gov. expenditure, subsidies, grants and transfer policies)

   • Expansionary/Inflationary monetary policy(lowering reserve requirements & interest rates, and increasing open market operations to buy government securities from public to make credit more accessible)

5. Real Wage: Encourage firms to still hire above wage.

   • Limit the power of trade unions to negotiate for wages above prevailing equilibrium wage.

   • Subsidies and grants to firms to help cover employing workers above equilibrium wage.

Trade Unions

A Trade union is an organization owned and run my workers of a particular firm or industry to advocate for their interests and see to their wellbeing.

Role of trade Unions in The Economy:

1. Collective Bargaining

2. Worker Representation

3. Workplace Democracy

4. Training and Education