Analysis Of The Rate Of Unemployment As Related To Inflation Rate - Essay Example

Analysis of the Rate of Unemployment as related to Inflation Rate, Fiscal Deficits and GDP Based on Regression and Forecasting Equation. Background of Dissemination: Econometrics is the science bridging the principles of Statistics, mathematics and economics helping to make a quantitative analysis of an actual economic phenomenon based on the concurrent development of theory and observation which is related to each other by appropriate methods of inference. Econometrics tries to find out the estimators which have desirable statistical properties including non bias, efficacy and consistency of the data. The estimators should have a low standard error in the population as because standard error is the deviation of the raw scores from the population mean. Low standard errors helps to infer that the sample drawn for estimating is truly representative of the population and gives a power to the statistical inference to a study (Vassilis, 2008).If there is no significant difference between the standard errors of the two samples we can consider that they belong to the same population or in a other way the test results are same with respect to a particular parameter. Basis Principles for Making the Econometric Analysis Phillips Curve This curve is a historical inverse relationship between the rate of unemployment and the rate of inflation in an economy. This means that lower unemployment in an economy is correlated with a higher inflation rate. When high levels of both inflation and unemployment also take place then it is called stagflation and violates the principle of forecast of the curve. To consider this anomaly various modifications of this curve has taken place. For example, New Kenysian “Dynamic Stochastic General Equilibrium” models based on macroeconomics has been developed with sticky prices it is reflected that there is a positive relation between the rate of inflation and the level of demand and thus a negative relation between the rate of inflation and rate of employment occurs. In the context of this article, we concentrate on the money wage Phillips curve given by the equation gW= gWT – f(U) where g is the equivalent of the percentage rate of growth of the variable, W is the money wage rate and signifies the total money wage costs per production employee, which includes the benefits and the payroll taxes. Hence the focus is on the production workers money wages as these costs are crucial to a firm for making financial decisions. The equation tells us that the growth of money wages rises with the trend in growth of the money wages (T) and falls with the unemployment rate(U). The function (f) is assumed to monotonically increase with U so the dampening of money- wage increases by unemployment is reflected by the negative sign. (Vassilis,2008) The function (f) was modified to generate the idea of Non accelerating Inflation Rate Of Unemployment (NAIRU) : gW= gWT – f(U-U*)-AgPex This explains the natural rate of unemployment or the inflation-threshold unemployment rate (U*).When U< U* inflation tends to accelerate and when the vice versa U* Read More