INFLATION & UNEMPLOYMENT

Effects of Inflation & Unemployment on Economic Growth

Effects of Inflation & Unemployment on Economic Growth

Introduction

Inflation is generally defined as the "increase in the general price level, meaning that most of the prices of goods and services available in the economy start to grow simultaneously. Inflation thus implies a loss in the purchasing power of money, i.e., people could buy more and less with their income, as in periods of inflation the prices of goods and services grow at a rate higher than wages (Carlin, 2005, p36).

The reverse phenomenon of inflation is deflation, and this occurs when a large amount of price decrease simultaneously, i.e. a decrease in general price level. Usually distinguish between an increase in "occasional" general price level and the sustained increase in prices. The first is called by some economists as the weak definition of inflation, not to require the price increase is permanent, and some do not consider inflation itself. The second concept, called the strong definition of inflation, if required to be given an increase in prices over time.

Discussion

Inflation is to increase the general level of prices in the country, which arises in connection with the long-term balance in most markets in favor of the demand. In other words, inflation is an imbalance between aggregate demand and aggregate supply. In today's economy, inflation occurs as a result of a complex of causes (factors), which confirms that inflation - not purely a monetary phenomenon, as well as economic and socio-political phenomenon. Inflation is also dependent on social psychology and public sentiment.

In this regard, just the term "inflation expectations": if society expects inflation, it will inevitably arise. Inflation has become a permanent feature of the market economy (Feenstra, 2006, pp. 240). It was promoted by a number of factors, the global order: the rapid growth of commodity production, the complication of its structure, price system and social transfers have become universal; changed under the influence of pricing practices of monopolistic enterprises, dramatically decreased the scope of price competition. Increased efficiency is shown as a rule, not to reduce prices and increase in weight gains and income participants in the production.

Causes

There are two main causes of inflation: 1) an increase in aggregate demand, 2) inflation cost-push, 3) Inflation by structural roots, 4) Inflation expectations and 5) Inflation caused by excess money in circulation. In accordance with the reasons for the increase in the general price level, two types of inflation: inflation, demand and cost inflation.

Increase in aggregate demand

An increase in aggregate demand, such as an increase in government spending generates upward pressure on prices that is causing inflation. So this growth in demand for goods and services, greater than the supply of goods and services forces an increase in prices, provided they are free to go. Also increase in aggregate demand affects the prices of inputs, which are pushed upwards. This type of inflation is said to be more likely in an economy close to full employment, since it is more difficult for increasing ...