Relationship between inflation and unemployment in pakistan essay

relationship between inflation and unemployment in pakistan essay

The major focus of the economists was the relationship between inflation a positive relationship between exchange rate and inflation in case of Pakistan. Trends in GDP Growth in Relation to CPI Inflation in Pakistan growth relationship in the economy of Pakistan and to analyze Evaluating the Dilemma of Inflation, Poverty and Unemployment .. on my Ph.D. dissertation on the topic of "Essays on inflation-growth nexus in developing economies. Free Essay: Problem Statement Rising rate of inflation in Pakistan in Inflation, Unemployment and Poverty: Still Major Problems of Pakistan.

Inflation in an economy may arise from the overall increase in the cost of production. This type of inflation is known as cost-push inflation henceforth CPI.

Cost of production may rise due to increase in the price of raw materials, wages, etc. Often trade unions are blamed for wage rise since wage rate is not market-determined. Higher wage means higher cost of production. Prices of commodities are thereby increased. A wage-price spiral comes into operation. But, at the same time, firms are to be blamed also for the price rise since they simply raise prices to expand their profit margins. Thus we have two important variants of CPI: Anyway, CPI stems from the leftward shift of the aggregate supply curve.

Creeping or Mild Inflation: If the speed of upward thrust in prices is very low then we have creeping inflation. What speed of annual price rise is a creeping one has not been stated by the economists?

To some, a creeping or mild inflation is one when annual price rise varies between 2 p. If a rate of price rise is kept at this level, it is considered to be helpful for economic development.

Others argue that if annual price rise goes slightly beyond 3 p. If the rate of annual price increase lies between 3 p. When mild inflation is allowed to fan out, walking inflation appears.

Walking inflation may be converted into running inflation. Running inflation is dangerous.

relationship between inflation and unemployment in pakistan essay

If it is not controlled, it may ultimately be converted to galloping or hyperinflation. It is an extreme form of inflation when an economy gets shattered.

Inflationary situation may be open or suppressed. Because of ant-inflationary policies pursued by the government, inflation may not be an embarrassing one.

For instance, an increase in income leads to an increase in consumption spending which pulls the price level up. If the consumption spending is countered by the government via price control and rationing device, the inflationary situation may be called a suppressed one.

Once the government curbs are lifted, the suppressed inflation becomes open inflation. Open inflation may then result in hyperinflation. Essay on the Causes of Inflation: Former leads to a rightward shift of aggregate demand curve while the latter causes aggregate supply curve to shift leftward. There are two theoretical approaches to DPI —one is the classical and the other is the Keynesian. According to classical economists or monetarists, inflation is caused by the increase in money supply which leads to a rightward shift in negative sloping aggregate demand curve.

Given a situation of full employment, classicists maintained that a change in money supply brings about an equi-proportionate change in price level. That is why monetrarists argue that inflation is always and everywhere a monetary phenomenon.

Keynesians do not find any link between money supply and price level causing an upward shift in aggregate demand. According to Keynesians, aggregate demand may rise due to a rise in consumer demand or investment demand or government expenditure or net exports or the combination of these four.

Given full employment, such increase in aggregate demand leads to an upward pressure in prices.

relationship between inflation and unemployment in pakistan essay

Such a situation is called DPI. This can be explained graphically. Just like the price of a commodity, the level of prices is determined by the interaction of aggregate demand and aggregate supply. AD1 is the initial aggregate demand curve that intersects the aggregate supply curve AS at point E1.

The price level thus determined is OP1. As aggregate demand curve shifts to AD2, price level rises to OP2. Thus, an increase in aggregate demand at the full employment stage leads to an increase in price level only, rather than the level of output. However, how much price level will rise following an increase in aggregate demand depends on the slope of the AS curve.

Essay on Inflation: Types, Causes and Effects

Causes of Demand-Pull Inflation: DPI originates in the monetary sector. An increase in nominal money supply shifts aggregate demand curve rightward. This enables people to hold excess cash balances. Spending of excess cash balances by them causes price level to rise. Price level will continue to rise until aggregate demand equals aggregate supply. Keynesians argue that inflation originates in the non-monetary sector or the real sector.

Aggregate demand may rise if there is an increase in consumption expenditure following a tax cut. There may be an autonomous increase in business investment or government expenditure. Governmental expenditure is inflationary if the needed money is procured by the government by printing additional money.

In brief, an increase in aggregate demand i. However, aggregate demand may rise following an increase in money supply generated by the printing of additional money classical argument which drives prices upward. Thus, money plays a vital role. That is why Milton Friedman believes that inflation is always and everywhere a monetary phenomenon. There are other reasons that may push aggregate demand and, hence, price level upwards.

For instance, growth of population stimulates aggregate demand. Higher export earnings increase the purchasing power of the exporting countries. Additional purchasing power means additional aggregate demand. Purchasing power and, hence, aggregate demand, may also go up if government repays public debt.

Again, there is a tendency on the part of the holders of black money to spend on conspicuous consumption goods.

Such tendency fuels inflationary fire. Thus, DPI is caused by a variety of factors. In addition to aggregate demand, aggregate supply also generates inflationary process. As inflation is caused by a leftward shift of the aggregate supply, we call it CPI.

CPI is usually associated with the non-monetary factors. CPI arises due to the increase in cost of production. Cost of production may rise due to a rise in the cost of raw materials or increase in wages. Such increases in costs are passed on to consumers by firms by raising the prices of the products.

Rising wages lead to rising costs. Rising costs lead to rising prices. And rising prices, again, prompt trade unions to demand higher wages. Thus, an inflationary wage-price spiral starts. This causes aggregate supply curve to shift leftward. This can be demonstrated graphically Fig. Below the full employment stage this AS curve is positive sloping and at full employment stage it becomes perfectly inelastic. Now, there is a leftward shift of aggregate supply curve to AS2. With no change in aggregate demand, this causes price level to rise to OP2 and output to fall to OY2.

With the reduction in output, employment in the economy declines or unemployment rises. Thus, CPI may arise even below the full employment Yf stage. It is the cost factors that pull the prices upward. One of the important causes of price rise is the rise in price of raw materials. For instance, by an administrative order the government may hike the price of petrol or diesel or freight rate.

Firms buy these inputs now at a higher price. This leads to an upward pressure on cost of production. Not only this, CPI is often imported from outside the economy. Increase in the price of petrol by OPEC compels the government to increase the price of petrol and diesel. These two important raw materials are needed by every sector, especially the transport sector.

As a result, transport costs go up resulting in higher general price level. Again, CPI may be induced by wage-push inflation or profit-push inflation.

Trade unions demand higher money wages as a compensation against inflationary price rise. If increase in money wages exceeds labour productivity, aggregate supply will shift upward and leftward. Firms often exercise power by pushing up prices independently of consumer demand to expand their profit margins. Fiscal policy changes, such as an increase in tax rates leads to an upward pressure in cost of production. For instance, an overall increase in excise tax of mass consumption goods is definitely inflationary.

That is why government is then accused of causing inflation. Finally, production setbacks may result in decreases in output. Natural disaster, exhaustion of natural resources, work stoppages, electric power cuts, etc. In the midst of this output reduction, artificial scarcity of any goods by traders and hoarders just simply ignite the situation. Inefficiency, corruption, mismanagement of the economy may also be the other reasons. Thus, inflation is caused by the interplay of various factors.

A particular factor cannot be held responsible for inflationary price rise. Essay on the Effects of Inflation: When they act as buyers they want prices of goods and services to remain stable but as sellers they expect the prices of goods and services should go up.

The old people are in the habit of recalling the days when the price of say, meat per kilogram cost just 10 rupees.

Inflation and Unemployment

Today it is Rs. This is true for all other commodities. When they enjoyed a better living standard. Imagine today, how worse we are! This goes unusually untold. When price level goes up, there is both a gainer and a loser.

To evaluate the consequence of inflation, one must identify the nature of inflation which may be anticipated and unanticipated. If inflation is anticipated, people can adjust with the new situation and costs of inflation to the society will be smaller. In reality, people cannot predict accurately future events or people often make mistakes in predicting the course of inflation. In other words, inflation may be unanticipated when people fail to adjust completely.

This creates various problems. One can study the effects of unanticipated inflation under two broad headings: During inflation, usually people experience rise in incomes. But some people gain during inflation at the expense of others. Some individuals gain because their money incomes rise more rapidly than the prices and some lose because prices rise more rapidly than their incomes during inflation.

Thus, it redistributes income and wealth.

Essay on Inflation: Types, Causes and Effects

Though no conclusive evidence can be cited, it can be asserted that following categories of people are affected by inflation differently: Borrowers gain and lenders lose during inflation because debts are fixed in rupee terms. When debts are repaid their real value declines by the price level increase and, hence, creditors lose. An individual may be interested in buying a house by taking a loan of Rs.

The borrower now welcomes inflation since he will have to pay less in real terms than when it was borrowed. Lender, in the process, loses since the rate of interest payable remains unaltered as per agreement. However, if in an inflation-ridden economy creditors chronically loose, it is wise not to advance loans or to shut down business.

Never does it happen. Rather, the loan- giving institution makes adequate safeguard against the erosion of real value.

Furuoka using the data of Malaysia from shows and existence of co-integrated as well as casual relationship between inflation and unemployment. That is the study provides an empirical evidence to support the Philips curve. Likewise, Philips curve also exists in Japan, with negative coefficients of linear link between inflation and unemployment. Also there is a generalized linear and lagged relationship between labor force, unemployment and inflation in Japan, which is confirmed by the fact that the driving force behind unemployment and inflation is the change rate of labor force level Kitov In this paper, a Philips curve with linear link will be calculated for Pakistan to see if the negative relationship between the variables exists or not.

What is the likely relationship between inflation and unemployment in Pakistan? If unemployment increases, then inflation decreases. Secondary data for the purpose of this research has been obtained from the year The data on unemployment rate percentage of total labor force and inflation rate general not adjusted for food and energy for Pakistan, has been taken from the Economic Survey of Pakistan.

Objective The objective of this research is to determine the relationship between inflation and unemployment for the economy of Pakistan. Philips curve is based on the equation where unemployment is the function of inflation. The functional form of the model which is as follows: