Exam Notes on Inflation, Deflation, and Unemployment

Inflation

  • During inflation, profits may rise with prices, encouraging increased production and employment.
  • Controlling inflation is challenging; efforts may not fully restore prices to original levels.

Controlling Inflation

  • Price Control: Administrative decisions set prices, needing extensive policing, especially when supply is short.
  • Fiscal Policy:
    • Reduce government expenditure (run surplus budgets).
    • Increase taxes on income; these measures reduce aggregate demand.
  • Incomes Policy:
    • Limits wage increases, effective if matched by productivity gains.
    • Often, profits, dividends, and interest are left uncontrolled, especially in developing countries.
  • Reducing Money Supply:
    • May quickly control inflation but can raise interest rates, damaging capital formation.

Deflation

  • Deflation is a fall in the average price level, opposite of inflation.
  • Undesirable effects include income redistribution from lower to higher earners, potentially reducing aggregate demand.
  • Banks may become unwilling to take risks, curtailing credit.
  • Keynes effect: falling prices increase output and employment by stimulating investment through lower interest rates.
  • Increased real value of transfer payments and stimulated exports may offset the fall in aggregate demand.

Unemployment

  • Unemployment indicates the portion of the workforce not employed; measured by ILO standards.
  • Includes those out of work, seeking a job, and available to start, or waiting to start a job.
  • Common in developing countries with substantial open unemployment.
  • Underemployment: individuals with qualifications in jobs below their skill level.
  • Hidden unemployment: workers employed full-time with low productivity.

Types of Unemployment

  • Structural Unemployment: Results from economic structure changes like technology or shifts in consumer preferences.
  • Frictional Unemployment: Occurs when workers move between jobs; frictions prevent instant job placement.
  • Seasonal Unemployment: Arises from seasonal industry changes.
  • Cyclical Unemployment: Linked to trade cycles (booms and slumps); demand falls during slumps.
  • Residual Unemployment: Individuals uninterested in working or unemployable due to unstable conditions.

Effects of Unemployment

  • Reduces national income and output.
  • Leads to loss of income, reduced savings, and decreased investment.
  • Government revenue decreases due to fewer taxable individuals.
  • Labour skill levels decline and social unrest increases.
  • Can prolong the age of marriage due to reduced living standards.

Government Programs in Nigeria

  • Efforts to mitigate unemployment effects include NDE, NERFUND, NOIC, IDCs, Peoples Bank, N Poverty Eradication Programme, and NEEDS.
  • Many programs were poorly funded and executed with resources mismanaged.
  • Part-time employment is emphasized, and many full-time workers are underemployed.
  • Some individuals drop out of the labor market after prolonged job searching.

Phillips Curve

  • Illustrates the trade-off between employment and price stability; inverse relationship between inflation and unemployment.
  • Reduction in aggregate demand reduces inflation but increases unemployment.
  • Stagflation:
    • Rising prices and increasing unemployment simultaneously.
    • Caused by unsustainable price rises, falling exchange rates, and import difficulties.
    • High prices exist with money scarcity because only a few elites have significant spending power.
    • Government employment programs are often ineffective due to mismanagement.