Relationship between Unemployment and Inflation Rate - Assignment Example

TABLE OF CONTENTS Production possibility curve pg.2 Demand and supply curve pg.3 Unemployment rate pg.4 GDP per capita pg.4 Inflation rate pg.7 Business cycles pg.11 Relationship between unemployment and inflation rate pg.12 LIST OF FIGURES Figure a. Production possibility curve pg.2 Figure b. Demand and supply graph pg.3 Figure c. Unemployment rate line graph pg.4 Figure d. GDP per capita graph pg.4 Figure e. Inflation rate graph pg. 9 Figure f. Business cycles graph pg.10 Figure g. Unemployment and inflate graph pg.11 LIST OF TABLES Table 1. GDP per capita pg.5 Table 2. inflation rate pg.7 Part I a) Introduction A production possibility frontier is a locus of a combination of two commodities whose production utilizes the available resources and technology. The curve shows the combinations that can lead to high production and it is upon the nation to decide what to produce so as to attain efficient results. Figure a) Graph showing Production possibility curve. Source; investopedia 2003 Point x marked on the graph and y shows inefficient production. Point x shows underutilization of resources whereby the resources are not used to full capacity. Point y shows unattainable production because it requires more resources than what is available in the economy. Point A, B, C shows efficient production because the available resources are used to full capacity for the production of the products. Opportunity cost refers to the value of foregone returns. In this case, the opportunity cost of producing product A is measured by the value of foregone resources for the production of product B. If resources required for production of product B are foregone and used to produce good A, more of A would be produced than if they were both produced. For the law of diminishing returns to hold, the extra output of product B declines as more resources are used to produce it. b) figure b) graph showing demand and supply Price supply Pe Demand Qe quantity Pe is the equilibrium price which shows the price at which quantity demanded is equal to quantity supplied. Demand is the quantity that a customer is able as well as willing to buy at a particular price and it is affected by several factors which are: income, preferences of consumers and the price of a commodity. Supply refers to the amount a seller is willing and able to produce at a particular price. Supply curve is affected by factors such as: price, cost of production and the existing government regulations. When suppliers charge a higher price than the equilibrium price, the demand will decrease causing them to have surplus produce. Once there is surplus production, the supplier is forced to sell at lower prices so as to raise the demand otherwise they would experience losses. Part ii Figure c) line graph showing unemployment rate from 1986-2005 Source; Australian government statistics Figure d) graph showing GDP per capita Source: Australian government statistics Table 1) GDP per capita between 1986-2005 Source: Australian government statistics Column1 GDP per capita: Chain volume measures - Percentage changes ; Unit Percent Series Type Trend Data Type DERIVED Frequency Quarter Collection Month 3 Series Start Dec-1973 Series End Mar-2014 No. Obs 162 Series ID A2304308C Mar-1986 -0.3 Jun-1986 -0.2 Sep-1986 0.1 Dec-1986 0.6 Mar-1987 1.0 Jun-1987 1.2 Sep-1987 1.3 Dec-1987 1.0 Mar-1988 0.4 Jun-1988 0.2 Sep-1988 0.3 Dec-1988 0.7 Mar-1989 1.1 Jun-1989 1.1 Sep-1989 0.7 Dec-1989 0.4 Mar-1990 0.1 Jun-1990 0.0 Sep-1990 -0.3 Dec-1990 -0.7 Mar-1991 -0.9 Jun-1991 -0.8 Sep-1991 -0.3 Dec-1991 0.2 Mar-1992 0.4 Jun-1992 0.6 Sep-1992 1.0 Dec-1992 1.1 Mar-1993 0.8 Jun-1993 0.4 Sep-1993 0.5 Dec-1993 1.1 Mar-1994 1.3 Jun-1994 1.0 Sep-1994 0.5 Dec-1994 0.2 Mar-1995 0.3 Jun-1995 0.5 Sep-1995 0.8 Dec-1995 0.9 Mar-1996 0.7 Jun-1996 0.7 Sep-1996 0.5 Dec-1996 0.6 Mar-1997 0.9 Jun-1997 1.0 Sep-1997 1.0 Dec-1997 0.8 Mar-1998 0.8 Jun-1998 1.1 Sep-1998 1.1 Dec-1998 1.0 Mar-1999 0.6 Jun-1999 0.4 Sep-1999 0.7 Dec-1999 0.9 Mar-2000 0.8 Jun-2000 0.2 Sep-2000 -0.2 Dec-2000 -0.1 Mar-2001 0.3 Jun-2001 0.7 Sep-2001 0.8 Dec-2001 0.8 Mar-2002 0.8 Jun-2002 0.7 Sep-2002 0.5 Dec-2002 0.2 Mar-2003 0.1 Jun-2003 0.6 Sep-2003 1.0 Dec-2003 1.1 Mar-2004 0.8 Jun-2004 0.5 Sep-2004 0.4 Dec-2004 0.4 Mar-2005 0.4 Jun-2005 0.5 Sep-2005 0.6 Dec-2005 0.3 Table 2) showing inflation rate from 1986 to 2005 Source; Australian government statistics Column1 Index Numbers ; All groups CPI ; Australia ; Unit Index Numbers Series Type Original Data Type INDEX Frequency Quarter Collection Month 3 Series Start Mar-1986 Series End Dec-2005 No. Obs 264 Series ID A2325846C Mar-1986 41.4 Jun-1986 42.1 Sep-1986 43.2 Dec-1986 44.4 Mar-1987 45.3 Jun-1987 46.0 Sep-1987 46.8 Dec-1987 47.6 Mar-1988 48.4 Jun-1988 49.3 Sep-1988 50.2 Dec-1988 51.2 Mar-1989 51.7 Jun-1989 53.0 Sep-1989 54.2 Dec-1989 55.2 Mar-1990 56.2 Jun-1990 57.1 Sep-1990 57.5 Dec-1990 59.0 Mar-1991 58.9 Jun-1991 59.0 Sep-1991 59.3 Dec-1991 59.9 Mar-1992 59.9 Jun-1992 59.7 Sep-1992 59.8 Dec-1992 60.1 Mar-1993 60.6 Jun-1993 60.8 Sep-1993 61.1 Dec-1993 61.2 Mar-1994 61.5 Jun-1994 61.9 Sep-1994 62.3 Dec-1994 62.8 Mar-1995 63.8 Jun-1995 64.7 Sep-1995 65.5 Dec-1995 66.0 Mar-1996 66.2 Jun-1996 66.7 Sep-1996 66.9 Dec-1996 67.0 Mar-1997 67.1 Jun-1997 66.9 Sep-1997 66.6 Dec-1997 66.8 Mar-1998 67.0 Jun-1998 67.4 Sep-1998 67.5 Dec-1998 67.8 Mar-1999 67.8 Jun-1999 68.1 Sep-1999 68.7 Dec-1999 69.1 Mar-2000 69.7 Jun-2000 70.2 Sep-2000 72.9 Dec-2000 73.1 Mar-2001 73.9 Jun-2001 74.5 Sep-2001 74.7 Dec-2001 75.4 Mar-2002 76.1 Jun-2002 76.6 Sep-2002 77.1 Dec-2002 77.6 Mar-2003 78.6 Jun-2003 78.6 Sep-2003 79.1 Dec-2003 79.5 Mar-2004 80.2 Jun-2004 80.6 Sep-2004 80.9 Dec-2004 81.5 Mar-2005 82.1 Jun-2005 82.6 Sep-2005 83.4 Dec-2005 83.8 Figure e) graph showing inflation rate from 1986 to 2005 Source: Australian government statistics b) From the graphs and tables above, it is evident that GDP per capita decreases over the years from 1986 to 2005. Unemployment is relatively low between 1986 and 1991 but rises between 1992 and 1996. However, it reduces significantly from that time to 2005. Inflation is observed to rise over the years between the periods of observation. The causes of a decline in economic growth could be a decrease in the aggregate demand and supply. If there is a decrease in aggregate demand and supply, it causes slow growth in the economy because there is minimal trade in the economy. Increased inflation is caused by cost push factors whereby the increased costs of production are passed on to the consumer thus making goods to be expensive. These cost push factors are; rise in wages, high prices for raw materials and imports and increased taxes. Unemployment rate is caused by factors such as; frictional unemployment which occurs when people are transitioning, structural unemployment occurs when people do not have the required skills, classical unemployment occurs when the wages are higher than the demand for labor, voluntary unemployment occurs if the people choose not to be employed and lastly cyclical unemployment which occurs when the economy is under recession. c) Figure f) graph showing the business cycles Source; investopedia 2003 The graph above shows a business cycle which refers to unpredictable movements in the economic activities and is indicated by changes in inflation, unemployment and GDP. The cycle is made up of 4 phases; Recession/trough – is the phase that’s characterized by minimal economic activity. This phase may also be severe to cause depression Recovery – is a phase where the economy starts improving and inflation reduces, unemployment also decreases and GDP increases. Growth – during this phase the economy expands and it is at full employment. The phase is accompanied by inflation. Decline – it is a contraction stage that shows end of growth, decrease in purchases and production. These business movements will affect the business plan in part I because it will only thrive at the growth stage but will be affected by recession. d) Unemployment and inflation rates will have a great impact on the business. Firstly, inflation will lead to a higher price for the commodity and this will consequently lead to lower demand for the product because the consumer will opt for cheaper substitutes and this will lead to poor performance of the business. Secondly, an unemployment causes a person to have a lower purchasing power because they do not have means of earning hence they cannot afford to buy products. This will affect small businesses because they will not have customers. However, unemployment could also be an opportunity for a business to start up and create employment. Figure g) graph showing relationship between unemployment and inflation rates Source: investopedia 2003 Unemployment rate The Phillips curve shows the inverse relationship between inflation rate and unemployment rate. The curve shows that the economy can experience either inflation or unemployment at different times but not concurrently. Decrease in unemployment leads to high inflation. For example during boom when there is high demand for labor, wage rate goes up because the employees have a good bargaining power. This consequently leads to inflation. References VROEY, M. D. (2009). Post Walrasian Macroeconomics: Beyond the dynamic stochastic general equilibrium model. Edited by DAVID COLANDER. Economica, 76(302), 405–406. doi:10.1111/j.1468-0335.2009.00643.x Colander, D., Howitt, P., Kirman, A., Leijonhufvud, A., & Mehrling, P. (2008). Beyond DSGE models: Toward an empirically based Macroeconomics. American Economic Review, 98(2), 236–240. doi:10.1257/aer.98.2.236 DeLorme, C. & Colander, D. (1997). Beyond Microfoundations: Post Walrasian Macroeconomics. Southern Economic Journal, 63(4), 1125. http://dx.doi.org/10.2307/1061253 Woodford, M. (2009). Convergence in Macroeconomics: Elements of the new synthesis. American Economic Journal: Macroeconomics, 1(1), 267–279. doi:10.1257/mac.1.1.267 Wiest, M. (2014). Brains Top Down: Is Top-Down Causation Challenging Neuroscience? Edited by Gennaro Auletta, Ivan Colagè, and Marc Jeannerod. Hackensack (New Jersey): World Scientific Publishing. $99.00. x + 365 p.; ill.; author and subject indexes. ISBN: 978-981-4412-45-2. 2013. The Quarterly Review Of Biology, 89(1), 65-66. http://dx.doi.org/10.1086/675032 Australia, C. of, & Statistics, A. B. of. (2014, June 4). Details - main features. Retrieved September 9, 2016, from http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/5206.0Mar%202014?OpenDocument Australia, C. of, & Statistics, A. B. of. (2014, July 10). Details - main features. Retrieved September 9, 2016, from http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6202.0Jun%202014?OpenDocument Australia, C. of, & Statistics, A. B. of. (2014, July 23). Details - main features. Retrieved September 9, 2016, from http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6401.0Jun%202014?OpenDocument Read More