Interrelationships between economic growth, unemployment and inflation - Research Paper Example

? Analysis, Comparison and Contrast of Economic Growth, Unemployment, and Inflation Introduction: In general, factors like economic growth, unemployment and inflation are certain limitations for the economic policies in the world as well as for different countries. In any country, the economic growth is expected and desired to be faster and advanced and on the other hand it is desired that the rates of unemployment are less along with lower rates of inflation. These factors are somewhat related to each other as far as an economic policy of any country is concerned. With higher growth in economy, people live a better life in terms of obtaining materials for their living (Economic Growth, Inflation, and Unemployment: Limits to Economic Policy). However, the relation with inflation, in this regard, is also significant, since if there is too much of growth within a very short term, then the rate of inflation tends to increase. Again if the economic growth is very low, the problems of unemployment arise. Thus there are relationships between economic growth and unemployment as well between unemployment and inflation. These factors are required to be understood significantly before policymakers decide on different economic issues within a country (Economic Growth, Inflation, and Unemployment: Limits to Economic Policy). The present study focuses on an analysis, comparison and contrast of economic growth, unemployment and inflation as associated with micro and macro economics of the world and in any individual country. Economic Growth, Unemployment, and Inflation: An Analytic Study: Economic growth, unemployment and inflation are the factors of macroeconomics of any country. These are factors that affect the markets and businesses in general. Economic growth refers to the capability of the economy of any country to turn out growing capacities of goods and services. The understanding of this concept is essential since the living standards of people are dependent on how the growth within an economy persists. If the growth is too low, then it reflects upon lowering the living standards of people. The alternating periods of expansion and recession in an economy are referred as the business cycle that has direct influence on the economic growth, unemployment as well as rates of inflation (Pride, Hughes & Kapoor, 30). There are four phases in the business cycle depending on which the effects on economic growth, inflation and unemployment change. During the period of a peak or a temporary maximum stage of the business cycle, the rate of inflation is high while the unemployment rate is low. During a recession that reflects on a decline in the total production, inflation lowers and rates of unemployment increase. Unemployment rises to a height or peal during the period of trough that refers to the bottom stage of the period of recession. This phase also reflects on lower rates of inflation. Recovery or expansion is the period when production increases again, and during this stage the rates of unemployment decline and after a certain period of time the inflation rate rises (Chapter 9- Business Cycles, Unemployment, Inflation). Inflation is such a phase that leads to increase in the costs of goods and services thereby affecting the entire economy of any country. The economy is never benefitted with rising inflation. However it has been obtained that governments in general often try to take suitable measures to minimize the effects of inflation, when they can study expected rising inflation in the economy. The growth in an economy and the rate of inflation move parallel and hence they cannot be expected to meet. The value of money reduces as a result of inflation thereby making the lives of people in any country difficult. The inflation and the growth in economy being inapt to each other affect different sectors of an economy that include the consumer price index, and the gross domestic product (Inflation and Economic Growth). Also, the effects of inflation and economic growth are found in other areas as well that include the rates of interest, the rates of exchange, investment, unemployment, and stocks, a variety of monetary policies as well as different fiscal policies. Employment is largely responsible for the growth of any country. If inflation rates are high, the unemployment is low and vice versa. In fact, a lower rate of economic growth accompanied by a rising economy is not possible. However, if the rate of inflation is low, it would reflect on slower growth in the economy (Inflation and Economic Growth). Economic Growth, Unemployment, and Inflation: A Comparison: Economic performances of different countries vary at different points of time. The performance of an economy is best understood through the analysis of the indicators where economic growth, unemployment and inflation are included as major factors. Considering unemployment and employment, it has been obtained that economists record the number of inhabitants of any country who are employed or unemployed. A better economic state of a country may be realized if a higher percentage of its workforce is found to be doing well. However in this regard, the quantity and quality of the jobs are significantly necessary to be considered. If people have jobs that are temporary in nature, that may incur insecurities in their lives leading to adverse effects on their standards of living. Moreover there are certain jobs that are not paid well, are unskilled with poor quality of work. These factors reflect that people only being employed may not necessarily be happy and hence the issues of unemployment are much severe in nature (Grant & Vadler, 125). While trying to understand a country’s performance in terms of inflation rates, the rate needs to be studied over a certain period of time, as well as comparing them with rates of other countries. It can be explained as follows. “If a country is experiencing 6 per cent inflation whereas in recent years it has experienced 9 per cent inflation, its performance is improving” (Grant & Vadler, 125). There are certain measures that are used to determine the rates of inflation like the index numbers. A measure of the relative change is provided by this in the form of figures. Through this kind of measure, percentage change on a previous year can be determined without any severe calculations being involved (Grant & Vadler, 126). Unlike unemployment and inflation, the economic growth of a country is measured in terms of GDP or gross domestic product. It represents the total production that a country generates in a certain period of time, say a year. It can be calculated by summing up the total output, income or expenditure that occurs within a country in that particular time period. However these calculations are minute and needs significant care while measuring and determining the results. If the income amount has to be calculated, it includes the incomes “which have been earned in return for providing goods and services” (Grant & Vadler, 126). Real GDP represents the figure that has been obtained by adjustment for inflation. The percentage rise in output represents the nominal GDP through which the economic performance of a country may be determined (Grant & Vadler, 126). In this regard difference between production and productivity is also essential for understanding. While production represents the total output produced during a certain period of time, productivity is the output per hour of a working labor. The economic performance of a country may also be determined through the measurement of productivity within a country for a certain period of time. “If productivity rises by more than wages then labour costs will fall and a country can become more price competitive” (Grant & Vadler, 127). Production will increase if there is expansion in the growth of the economy. However, if the productivity is less, then production will be affected. Thus, these factors are highly related and get influenced by each other. Real GDP determines the standards of living of people in a country and a sustainable economic growth is obtained only when such standards are well maintained (Grant & Vadler, 127). Economic Growth, Unemployment, and Inflation: A Contrast: Growth in economy is one of the most important factors in macroeconomics and is directly examined by policy makers as well the community. Together with inflation, the rates of exchange and the unemployment rates, it facilitates the creation of a representation of the economy of a country and its level of development. In order to measure the growth in the economy, generally information concerning gross domestic product are considered, as it reckons the total income of each person existing within the economy. Hence, differences in the rates of real GDP can clearly reflect upon the practical differences in the standards of living across different countries. It is essential to state here that “even small differential in the growth rates can create important gaps between countries determined by the compounding effect” (Andrei, Vasile & Adrian, 317). The association between growth in real GDP and unemployment is extremely significant for policy makers to understand such that they can attain a sustainable increase in the standards of living. If the rate of GDP growth is less than its normal rate it indicates that it would promote employment as this increase in total income will not make inflationary difficulties. “In contrast, if the GDP growth is above its natural level, policy makers will decide not to intensively promote the creation of new jobs in order to obtain a sustainable growth rate which will not generate inflation” (Andrei, Vasile & Adrian, 321). The relationship of unemployment and inflation has extensively apprehended the interest of economists. For some period of time, it was thought that a trade-off existed between the two that could be exploited by the policymakers. By this it was meant that a lower rate of unemployment could be obtained by enduring a higher inflation rate. However that conception is not accepted any more as far as long term thinking is concerned. Although negligible unemployment might be considered as an advantageous policy goal, some economists would identify full employment as “employment for everyone who wants a job” (Cashell, 1). As an alternative, others have different views that “full employment is the lowest rate of unemployment consistent with a stable rate of inflation” (Cashell, 1). Inflation has been obtained to be sluggish to react to those alterations in policy which have an effect on it. At times when the rate of inflation is comparatively high it is expected to take action gradually towards policies intended to put it down. “Because inflation tends only gradually to respond to changes in underlying economic conditions, a way of predicting it or of identifying the conditions that are likely to lead to an increase in the inflation rate, would be extremely useful to policymakers” (Cashell, 1). Also, inflation inflicts pessimistic externalities on the economy of a country when it gets in the way of the efficiency of an economy (Gokal & Hanif, 2). Conclusion: From the above study, it can be concluded that the concepts of economic growth, inflation and unemployment are significantly associated with each other and influence each other as well. Thus analysis of these factors are highly essential, and the differences and comparison in which increase in one factor may lead to fall in another, facilitates the policymakers of any country to decide on measures that would suit for the betterment of a country such that the standards of living of the people in any country can be improved and sustained at the same time. References 1) Andrei, Dumitrescu Bogdan, Vasile, Dedu and Enciu Adrian, “The Correlation Between Unemployment and Real GDP Growth. A Study Case on Romania.” uoradea, n.d. http://steconomice.uoradea.ro/anale/volume/2009/v2-economy-and-business-administration/53.pdf. 15 September 2012. 2) Cashell, Brian W. “Inflation and Unemployment: What is the Connection?” ilr. 2004. http://digitalcommons.ilr.cornell.edu/cgi/viewcontent.cgi?article=1182&context=key_workplace&sei-redir=1&referer=http%3A%2F%2Fwww.google.co.in%2Furl%3Fsa%3Dt%26rct%3Dj%26q%3Ddifference%2520between%2520economic%2520growth%252C%2520unemployment%252C%2520and%2520inflation%26source%3Dweb%26cd%3D3%26ved%3D0CDEQFjAC%26url%3Dhttp%253A%252F%252Fdigitalcommons.ilr.cornell.edu%252Fcgi%252Fviewcontent.cgi%253Farticle%253D1182%2526context%253Dkey_workplace%26ei%3DMYtUUM3-BYzqrQft94HYCw%26usg%3DAFQjCNGVuUjzRVrcc_cATHdePIYab5bQqg#search=%22difference%20between%20economic%20growth%2C%20unemployment%2C%20inflation%22. 15 September 2012. 3) “Chapter 9- Business Cycles, Unemployment, Inflation.” Harpercollege. n.d. http://www.harpercollege.edu/mhealy/eco212i/lectures/ch9-18.htm. 13 September 2012. 4) “Economic Growth, Inflation, and Unemployment: Limits to Economic Policy.” Library of Congress, Congressional Research Service, Policy Archive. 2006. http://www.policyarchive.org/handle/10207/3021. 12 September 2012. 5) Gokal, Vikesh, and Subrina Hanif. “Relationship Between Inflation and Economic Growth.” Reserve Bank. 2004. http://www.reservebank.gov.fj/docs/2004_04_wp.pdf. 15 September 2012. 6) Grant, Susan and Chris Vidler. Economics in Context. London: Heinemann. 2000 7) “Inflation and Economic Growth.” Economy Watch. 2010. http://www.economywatch.com/inflation/economy/economic-growth.html. 14 September 2012. 8) Pride, William M., Hughes, Robert J. and Jack R. Kapoor. Business. Connecticut: Cengage Learning. 2006 Read More