Economy Analysis: Inflation, Unemployment And Policies
The economy is one of the most critical aspects of national growth and development. And in this case, inflation and unemployment are the two most used economic indicators for the health of a country. Hence, they have to be carefully measured and kept under control. And this is keeping down unemployment cases and encouraging economic sustainability is one of the vital, if not, only, concerns for governments. It has been so since the beginning of economic science, leading to the theorization of different economic policies and doctrines. This has consequently resulted in varying literature on these critical subjects.
In this article, we are going to look at the economic effects of inflation and unemployment in a country. In addition, we shall be considering some of the approaches that governments apply to resolve these issues, including fiscal and monetary laws.
Economic Growth And Development
Many people use the terms of economic growth and economic development interchangeably. They seem similar, even in application, but they have a slight difference in their meanings. Economic growth is the long term, a consistent increase in a country’s income or output. In other words, economic growth deals with an increase in the flow of goods and services over a long period. It is, therefore, long-term growth in income. This happens when: there is a substantial increase in the production of goods and services, where prices remain constant, a type of growth known as real growth/real national income; there is an increase in prices of products and service with production remaining constant, a type of growth called nominal growth/income.
In economic analysis, actual growth and potential growth are two terms used to define growth. Actual growth is achieved or realized growth, where potential growth is expected or achievable increase, which can be realized in the future.
Economic development, on the other hand, is a broader concept. Whereas economic growth is the increase per capita, economic development includes economic growth plus social welfare. In other words, it is economic prosperity that does not focus on goods and services alone, but also the benefits of production to society. It includes economic welfare, where there is social justice leading to the decrease of the gap between the ‘haves’ and ‘have nots.’ Therefore, economic development is a process that carries an increase in per capita income, along with a decrease in social prejudice, poverty, illiteracy, and economy. Economic development ensures there is proper distribution of goods and services produced within a larger section of society.
Economic growth is calculated by the analysis of the growth of domestic products at factor cost (GDP) with the inclusion of some structural changes in the economy. These are the two factors that determine economic growth, where structural changes are often understood as economic development. Structural change is important in society as it involved a change from the dominance of the primary sector to that of secondary and tertiary industries. There is also technological change, which is the shift from labor focused on capital-focused technology. And a change of land ownership from absentee landlords to the actual user of the land is an instance of institutional change in terms of the economic development process.
Factors determining economic growth
Four critical factors determine economic growth; they include:
- Growth of the labor force
When a country invests heavily in offering the best labor laws, it initiates the creation of qualified personnel in every industry. This means they have proper labor training to handle even the most technical jobs. And this happens when there are good training institutions and schools. Practical knowledge leads to better human resources.
- Investment in human capital
Even though technology has to lead to more use of machines than people, social capital is still an essential aspect of modern economies. It is therefore important that we get well-trained persons in health, education, and training on the job. This means economic growth is determined by having experts who understand what to do in specific situations.
- Investment in physical capital
Since the agricultural revolution, through the industrial revolution and now the information era, nations have relied on physical capital as an indicator of economic growth. These include things like factories, machines, transport, and communication facilities.
- Technological change
The modern world relies on technological advancement. Over the years, different technologies have come up to help human beings lead a better life. And today, governments are investing more in technology for better dissemination of information and dissemination. Technology is, without a doubt, the future of development, and only those who can embrace it will have an easy time.
The determining of the economy above can be summarized and an equation, as shown below:
GDP = f(L, K, H)
In this case, GDP is a gross domestic product, f is function showing the link between input and output. L stands for the labor force, K for physical capital, and H for human capital. We can consider this an aggregate function because it relates the total out of an economy to the sum of the three main factors involved in output production.
Unemployment and Inflation
Unemployment and inflation are considered the biggest threats to economic growth and development. Economic growth is defined in terms of national income, which comes when people are working and are able to pay taxes. Investment increases national income, which tends to reduce unemployment.
Inflation is persistent in the rise of general level prices. It is represented as the rate per cent per unit time. There are three major categories of inflation.
- Demand-pull inflation
This type happens when aggregate demand has been increasing beyond what the economy can produce. That is, consumers want to buy, but the economy cannot produce enough products to cater to the demand. To bid on the limited number of goods available, manufacturers will pull the price up; hence, demand-pull inflation. An increase can influence this situation in money supply or public expenditure.
- Cost pull inflation
Or supply inflation, seller’s or mark up inflation, this inflation occurs when there are restrictions on the supply of one or more resources. It can also happen when the price is increased on one or more resources. Mark-up marks the difference between the cost of a product and its selling price. In this case, a producer may increase the price to make a profit.
- Structural inflation
This is the inflation that comes when producers cannot easily shift production to respond to changes in economic structure. In the economy, it is the change in demand processes and a shift in the technology of production.
Many people think they understand what unemployment means. However, it is a really wide and complicated subject. Unemployment can be defined as the loss of output, and also personal hardship for those looking for a job. Unemployment does not only reduce output, but it initiates high government expenditure on compensation and welfare programs, consequently leading to higher taxes. When there are high taxes on people, there is reduced productivity and efficiency. As such, unemployment does not only focus on the jobless youth, but it extends more in-depth into the general economy.
An unemployed person is any person between the age of 15 and 60 able to work, ready, and willing to work at the current wage rate, but they don’t work for lack of an opportunity. Some people may choose not to work, instead feeding from the alms of parasitic living they may choose. Such people are not counted among the unemployed because they choose the situation.
Various factors can cause unemployment. Hence, the types of unemployment include:
- Open unemployment.
There is no vacancy for a person with the ability and willingness to work.
This type of unemployment happens when (i) a person engaged in part-time work is ready to work above what they are supposed to do, (ii) when a person’s productivity increases where they shift from the current occupation to another.
- Structural unemployment
This is caused by changes in economic structure.
- Frictional or transitional unemployment
A person shifts from one job to another, but have to remain temporarily remain unemployed due to specific issues.
- Cyclical unemployment
Downswings of the business industry cause this. It ends when there are upswings.
- Disguised or Hidden Unemployment
People tend to be employed, but in terms of productivity, they are not.
- Natural rate unemployment
Even with the best economy, there are always unemployment issues.
Unemployment and inflation are the biggest causes of economic collapse. As such, the government put into plays specific intending to reduce or control unemployment. Therefore, a lot of literature has been created on this topic. The following are the major economic policies
Policies that reduce labor supply
The government reduces labor supply, and in the process, reducing the number of people legally allowed to work. This is known as the labor, through which the government reduces unemployment. This process is more effective when it focuses on a targeted group with a higher unemployment rate than average. For instance, when a country faces high unemployment among young people, it can reduce the minimum employment age while encouraging companies to take them. Also, this can happen where a targeted group has a low level of unemployment since there will be more opportunities for the unemployed. Another approach would be to reduce retirement age reduction while increasing military service duration.
Policies concerning labor demand stimulation
The use of demand stimulation policies to reduce unemployment has become very popular. There are different policies in this regard. They are used depending on where they affect labor demand using demand-side or supply-side regulations.
Demand-side law stimulates economic growth by increasing the demand for a product. In this case, the incentive firms to make more, compelling them to hire more. In this case, governments use expansive fiscal and monetary policies.
Supply-based laws deal with companies and production lines to increase supply. The policies focus on the costs of labor and production function. If the cost is low, companies will have more money to hire more people. These laws are the latest economic doctrines aimed at ensuring sustainable economic growth.
Structural reforms are laws that seek to reduce real wages. Lower wages means companies can hire more people.
These laws include an agreement between a company and its employees to reduce real wages. In this case, firms can hire more people, hence reducing unemployment.
In these cases, employees work fewer hours. As a result, they earn less but allow many employees to be hired. These laws increase marginal productivity, but they are not very popular.
Fiscal policy as a way to fight unemployment, recession, and inflation
It is important to emphasize that monetary policy is the condition where government spending and tax policy are used to change the economy. However, it does not include all spending. Fiscal policies may shift aggregate demand outward, in the situation of expansionary fiscal policy and inward, as in contractionary fiscal policy.
Note that aggregate demand and aggregate do not always move together. Sometimes aggregate demand may fail to increase as total supply does. And there are a number of reasons for this, including households no longer see the reasons for the consumer; companies stop investments in such; demand for export from other countries fail.
Monetary Policy and Bank Regulations states that a central bank has powers of the banking system, and can use it against the business industry actions. For instance, in times of threatening recession, the central bank uses an expansionary monetary supply to increase the money supply. It can also expand loan quantities, reduce interest rates, and change aggregate demand from the left. If it is inflation that is threatening, the same bank may use contractionary laws to do the opposite for money supply, loans, interest rate, and aggregate demand.
The economic analysis seeks to understand how much a country has grown economically. And since inflation and unemployment are the major cause in this economic growth and development, governments apply different methods to keep things under control. And this is where fiscal and monetary laws come in. Fiscal policy is done through discretionary fiscal policy, where a government imposes taxation or consumption changes to as per economic reforms or through automatic stabilizers, where taxing and spending mechanism change in response to economic status. All these cases aim at increasing the GDP of a nation, ensuring a more sustainable economic trend.
Author: James Hamilton