Economic Growth, Unemployment and Inflation - Research Paper Example

Lecturer Unit Economic growth, Unemployment and Inflation This research paper is about economic growth, unemployment and inflation. It analyzes, compare and/or contrast the economic growth, unemployment, and/or inflation. To begin with, the paper will explain the three terms, before probing further in the discussion. Explaining economic growth unemployment and inflation Economic growth is the increasing capacity of the economy of a given state to be able to meet needs of its members. This implies that there is a growth in the real GDP of a country as well as physical expansion of the economy of a country (Elhanah 115). However, increase in productivity enhances economic growth because this lowers the inputs in terms of capital, labor, and material among others for a given amount of output. These low costs increase demand for goods and services. Unemployment, as defined by the International Labor Organization is a situation where people are with no jobs, and they have actively searched for employment for a period of four weeks. The rate of unemployment is an evaluation of the frequency and it is a percentage calculated by dividing the number of unemployed people by all people currently working (John and Steven 20). Unemployed people are not in a position to earn money to meet their financial obligations. Most of them are homeless through eviction or foreclosure because they are unable to pay rent. Inflation is an increase in the universal level of cost of goods and services in a given economy over a given period. This implies that general cost level increase and each currency unit purchases less goods and services. Because of this, inflation reflects on erosion in the purchasing power of money that is, a loss of actual cost in the interior medium of exchange and unit of account in the financial system. Inflation rate measures the price of inflation that is an annual percentage change in the general price index over time (Ben, et al 76). Analysis of economic growth The measure of economic growth is in terms of percentage change in the Gross Domestic Product or Gross National Product. These measures, though calculated separately represent the amounts that a country pays for goods and services produced (Philip, et al 243). To compare per capital economic growth among states, the total sales of countries that has to analysts compare must be in a single value to ease the process. This requires a conversion of the value of currency of various countries into a selected currency. Perotti (173) suggests that rapid growth of the economy makes scientific research be possible and this in turn leads to scientific discovery and modernization, which drive financial enlargement further. The economy of a state grows if individual markets and firms take actions that increase marginal benefits faster as compared to marginal costs. According to Hall (113), the economy of a state is said to have grown if it the underdeveloped countries change their domestic economic formation from a heavy stress on customary subsistence cultivation to a further urban, modern and industrially diverse manufacturing and service economy. The growth of economy focuses on the desire to improve the standard of living in a particular country, that is the level of goods and services that individuals purchase or access. When the population grows along with economic production, then the increase in GDP does not necessarily make standards of living to improve. The economic growth is in terms of per capital basis when analyzing living standards of people in a state (Elhanah 123). Analysis of unemployment There is a theoretical debate about the causes, consequences and solutions for unemployment in many countries. For example, Classical, neoclassical and Austrian School of economics argue with regard to market mechanisms and depend on the invisible hand of the market to resolve unemployment. According to Marco (63), interventions imposed on the labor market from foreigners, such as minimum wages, taxes, unionization and other regulations discourage hiring of employees in most of organizations that in turn cause unemployment. Further, the Keynesian economics stresses the recurring nature of joblessness and possible involvements to cut down on unemployment during recessions. Xiaohong (71) cites that the economic downturn around the globe is pushing so many countries into recession. Because of this, approximately 25 million people in 30 rich countries in the world will be unemployed between the end of 2007 and 2010. For example, in April 2010, the unemployment rate in the United States was 9.9%. The certified joblessness rate in the 16 EU states that use the euro increased to 10% in December 2009 because of recession that hit the world. Latvia had the highest rate of unemployment in EU at 22.3% for November 2009 (John and Steven 26). Analysis of inflation Inflation is a risky condition for any economy because it faces a crisis of scanty supply of products while on the other hand; the demand for services and goods is on the increase. There is a high supply of money and that is the clear reason as to why there is devaluation of money. This in turn has a negative impact on the demand of the majority of people. In addition, uncertainty over future inflation may discourage saving and investments. The inflation in any state makes it difficult to maintain stability in the price in general (Hummel 56) because marketers keep on adjusting depending on the rate of devaluation. In order to maintain money stability, the monetary policy has to be flawless. The government must also continue to formulate or if necessary, it may renovate the monetary policies with a review that aims at stabling the prices. However, positive effects of inflation include making sure that central banks adjust nominal interest rates and encourage investment in non-monetary capital projects. The estimation of inflation is by calculating the inflation rate of a price index that in most cases is the consumer price index. The price index measures prices of a selection of goods and services that a typical consumer purchases. Inflation makes it difficult for companies to come up with long-term plans because they set aside specific amount of money for a particular project due to devaluation and rising prices of commodities. It also drags productivity because this force companies to move funds away from goods and services to concentrate on profits and losses from currency inflation (Ben 80). Relationship among inflation, unemployment and economic growth When economy of a given state grows, there is rapid growth in the GDP that increases the employment rate, and this reduces unemployment because businesses will seek for more workers to produce a higher output. Because of rapid growth in the GDP, it is likely to cause price inflation because this force firms to bid against each other increasingly scarce employee (Hummel 56). Inflation in any state causes unemployment because firms will have to cut down on some of their employees due to the high cost of production. This is because there is currency devaluation in the affected state and it causes a financial constraining to firms if they continue to have a large working load. In addition, importers will not bring in the country more goods due to fear of paying more while importing (Xiaohong 69). Further, the country gets less money from exportation of its domestic products because it currency has a lower value in comparison to other currencies. This will slow down the economic growth because the country will be spending more on importation as compared to importation of commodities. Relationship between inflation and economic growth In order to control inflationary pressure, countries gradually increase their interest rates and this cause the speed of economic growth to slow down. This implies that the few people or organizations take loans to make investments. For example, according to Philip (240), in the United States, the interest rate has been on the increase between 2004 and 2006 and this reduces the economic growth. Low inflation rate contributes to a higher economic growth in the long-term durations. This is because low inflation assists in promoting confidence, security, and stability and hence encourages investment. The investment aids in promoting long-term growth of the economy. Comparison between economic growth and unemployment The growth of the economy has an indirect potential to eradicate poverty in any county because of a simultaneous increase in employment opportunities and increase in productivity of labor. According to Elhanah (120), Overseas Development Institute (ODI) carried out a research in 24 countries that experienced economic growth. In 18 cases, there is eradication in poverty because more people get jobs and hence improve their living standards. Comparison between inflation and unemployment While looking at unemployment and inflation in the short term, there is a rough relationship inverse correlation between the two. This implies that when unemployment is high, inflation is low and vice versa. Economists note while analyzing unemployment and inflation in the long term; there seem to be no correlation between the two (Robert and John 57). Contrast between economic growth and unemployment It is not guarantees that increase in production in a country, results in increase number of employment opportunities. For example, in Viet Nam the economy is growing while employment level is going down. This implies that policy makers of labor market should concentrate on quality and not quantity (Hall 117). Conclusion In conclusion, a number of factors are essential for economic growth of any state. Measures are in the direction of recording data and statistics nevertheless; all developing countries will have to follow the path of development. It is clear that economic development may be a steady course of union by all nations. States will move in succession from a set of pitiable countries to a group of wealthy countries. Inflation plays a major role in economic growth of any country because it determines the interest rates that commercial banks impose on loans and hence this alters the level of investment. Lastly, for any county to eradicate unemployment then it must ensure that the economy grows because this allow purchase of more goods and services hence firms will look for more people to employ in their firms. Works Cited Ben Bermanke, et al. inflation targeting; lessons from the international experience: Princeton University Press, 2001, page 72-84 Elhanah Helpman. The Mystery of Economic Growth: Harvard University Press, 2004 Hall Charles, et al. Energy and Resource Quality: The ecology of the Economic process: Niwot, Colorado: University Press of Colorado, 1992 He Xiaohong: From trade among nations to trade within firms across national borders in Globalization and Regionalization: Strategies, policies and Economic Environments: New York: 2010, page 15-73 Hummel Rodgers. Death and Taxes, Including Inflation: the Public versus Economists: 2007, page 56 John, Bregger and Steven, Haugen. BLS introduces new range of alternative unemployment measures: Monthly Labor Review: 2009, Page 19-29 Marco Giugni. The contentious Politics of Unemployment in Europe: Welfare States and political opportunities: Palgrave, Macmillan; 2011 Perotti, Roberto. Growth, Income Distribution, and democracy: What the Data says. Journal of Economic Growth 1(2), 149-187, 1996 Philip Arestis, et al. Economic growth: new directions in theory and policy: Edward Elgar publishing: 2007, page 240-247 Robert Solow and John Taylor: Inflation, unemployment and monetary policy: the MIT Press, 1999, page 53-60 Read More