Anticipated and Lower Rates of Inflation in an Economy - Essay Example

Answer Unemployment refers to people who are eligible and actively searching for jobs yet are unable to find it due to various reasons. Similarly,unemployment rate refers to the people who are currently unemployed as a percentage against the total number of people who are in the economy and willing to work. Unemployment Rate: (Unemployed Workers / Total workers ) * 100 Since we know the employed workers in the U.S are 108.5 million and unemployed workers are 8.4 million, we can computer the “Total Workers” in order to get our employment rate. Total Workers = Employed workforce + Unemployed workforce = 108.5 + 8.4 = 116.9 Million workers Unemployment Rate: = ( 8.4 / 116.9 ) * 100 = 0.071856 * 100 = 7.1856 % (Unemployment Rate in 1991 in the US) Answer 2: In economics, discouraged workers are workers who are not in search of jobs any more due to past failures or attempts to find jobs. The continuous failures may have discouraged the workers therefore they stopped looking for jobs ahead and “gave up” the idea of employment. In the above calculation, these people were not included in the unemployed workforce as they are not currently seeking job. However, if the Bureau of Labor statistics decided to include these workers as “Unemployed labor force” then the number of unemployed would go up and therefore the unemployment rate will likely be increased followed by an increase in total workforce, as shown below: Unemployed workforce = 8.4 million + 1.2 million = 9.6 million workers Total workforce = 116.9 + 1.2 = 118.1 Million people New Unemployment Rate = (9.6 / 118.1) * 100 = 0.09129 * 100 = 8.129 % The discouraged workers are not usually taken in to the unemployed workers account as the term “unemployment” directly refers to people who are out of jobs and actively looking for them yet unable to find them, where as discouraged workers are workers who have given up on their search. However, as stated above, if it is included in the unemployed labor account, the number of unemployed people goes up followed by the total number of labor force (Employed + Unemployed), this thereby increases the ratio of unemployed workers to the total labor force, and therefore an increase of 0.9434 % (8.129 – 7.1856) is inevitable in the statistics. Answer 3: Unemployment is a vast term used in economics very frequently; unemployment does not only refers to people without jobs due to limited reasons but has more complexities to it that economics defines. There are different kinds of unemployment including frictional, structural, seasonal, classical and cyclical unemployment. Out of all these, for simplicity in theory, economists often use three types of unemployment for explanations of economic phenomena; cyclical unemployment, frictional unemployment and structural unemployment. Frictional Unemployment refers to unemployment that is a temporary condition caused as a result of “looking between jobs”. It’s when an individual leaves one job in search of another and this gap of leaving the job and finding a new job is a temporary period of unemployment known as frictional unemployment. On the other hand, structural unemployment is due to mismatch of skills of the workers; they may become obsolete or not appropriate for the job kind. These two are basic levels of unemployment that would ALWAYS be there in any economy as they are natural and inevitable, so economists don’t really worry about these kinds of unemployment. The major cause of concern for economists is the cyclical unemployment; also known as Demand deficient unemployment. This is caused as a result of lack of aggregate demand in an economy putting downward pressure on the economy and increasing the inflationary gap. This type of unemployment can drive the economy out of working condition if it exists for a long span of time without appropriate government interventions (The great depression of 1930’s may serve as an example for such a case). When economists talk about “Natural Rate of Unemployment” they are reffering to the full employment level as shown below: The RDOFE is the full employment level of the economy beyond which the economy would not want to expand as that would cause deflationary gap and put pressure on prices to go up without having impact of growth. This Full employment level (Natural rate of unemployment) is the level of output whereby the economy is producing on its maximum capacity; it refers to the fact that there is no demand deficient unemployment in the economy but it does not means there is no unemployment. The Aggregate demand is at the full employment level but there is still some unemployment in the economy, this is why the RDOFE point is not only known as the full employment level but also as the Natural rate of unemployment as there may be people who might be in between jobs looking for better jobs or better matches for their skills to accommodate themselves in a more efficient manner (as explained above – Frictional and structural unemployment). Therefore, to sum it up, Natural Rate of Unemployment refers to the maximum utilization of resources to produce maximum output creating aggregate demand but there is always room in all economies for the other two types of unemployment that would always prevail naturally. Answer 4: Inflation, rises in prices, are actually a lot better than deflation whereby prices decrease. However, it can never be wise to just conclude by saying inflation is always good; depending on the rate of inflation and its effects on an economy, one may be in a better position to judge and distinguish between good and bad inflation. There are two kinds of inflations; demand pull inflation and cost pull inflation. Usually, the scenario is that demand pull inflation is good and cost push inflation is bad; however, due to many complexities in the real world that may not always be the case. In case of demand pull inflation, prices rise as a result of increasing demand in the economy; that leads to more jobs and more utilization of an economy’s resources. It may be good for an economy however, if the economy is operating at the full employment level already, then increases in aggregate demand are likely to push the prices upwards and not output. This is illustrated in the diagram below: Increase in AD at the full employment level caused the prices to go up with the employment level constant; this is because the economy is already operating at the natural rate of unemployment and doesn’t has further capacity to expand in case of increases in demand; this can lead to hyper inflation and can ruin the overall balancing equation of an economy and put it in a lot of trouble. Furthermore, increasing in demand may cause more and more of an economies scarce resources to be utilized and the economy may suffer in the long run. However, if the country is operating below the full employment level of output, the ideal situation would be to use the government tools to increase aggregate supply as to increase more of output, reduce unemployment, and experience lower levels of inflation with positive economic growth. Cost push inflation may ruin the overall balance in an economy; the increases in recent oil prices are making it more difficult for the Asian developing countries to cope up, the imported inflation has vast impacts on small economies of Pakistan and Bangladesh. Developing countries that experience such cost push inflation not only experience the economic problems of this inflation but they are faced by more complex real world scenarios like strikes and other public protests. Cost push inflation reduces supply thereby reducing growth prospects and increasing prices. It is usually attached with negative connotations. However, in the real world, it’s very difficult to identify and distinguish between cost push and demand pull inflation. It is said that constant, anticipated and lower rates of inflation are good for an economy; they not only help predict but bring in confidence in the investors for a stable economy (as defined by Keynesians as “animal spirits”). This way, the economy moves towards potential output (full employment level of output) and in case the inflationary pressure starts building up when the economy reaches near the point; the government can always use contractionary monetary and fiscal policies. Anticipated and lower levels of inflation can ensure smooth running of an economy in the long run, yet due to complexities of the real world, even good inflation at times may turn out to have negative effects. References: 1. James J . Puplava, CFP. 2003 – Financial sense observations 2. Paul Krugman, 2011 – Good inflation, Bad inflation Read More