Inflation and Unemployment

Macroeconomics help Name Institution Inflation is the rise in general prices of goods and services over a specific period of time. Unemployment is a state where people be able and pull up stakesing to work at the ongoing market prices of labor alone they ar unable to unshakable a Job. According to the Phillips curve, there is a consistent family surrounded by pretension and unemployment (Nevi, J. W. 1981, peg 3). When the appreciate of unemployment is low, the take aim of fanfare is high and when the level of employment is high, puffiness level is low.Since majority of the Americans regard splashiness to be a bigger threat than unemployment, they exit ether stay unemployed but to let the value of a dollar stabilize. Therefore they for lay out rather be employed during stable prices than rising prices. The Americans favor unemployment to pomposity. When 10% of the players are fit(p) off, it forget imply that unemployment pass on change magnitude and an increase in unemployment Implies a decrease In inflation. If the net profits are minify by 5%, it impart mean that even more worker can be employed due to the reduction of labor cost.This will lead to an accession In employment thus the level of unemployment will go down. A decrease In unemployment leads to an increase In level of inflation. Therefore they will rather go for 10% of workers being fixed off than a 5% trim down In their wages. They will suffrage for 10% workers being laid off. Their knowledge of who will be laid off wont affect their decision in voting because they are altogether against Inflation. They will rather non work than work for a wage with low purchasing force play. Therefore they are by and by their purchasing power than Just a Job.Fiscal constitution Is an attempt to manipulate administration expenditure and taxation so as to affect sum demand and aggregate lend to achieve full employment and price stability. M acetary insurance Is a policy that affects money growth (Landing, F. K. 2009, peg 34). Therefore when the government uses monetary policy, the money supply will Increase. The government will cut taxes to treat the deficit. When the Fed will prevent growth In reserves, It Implies that the adoption will be constant thus no preventions on acceptance from commercial banks.This will result to an Increase In money supply as the government too Is borrowing. According to the ELM curve, when the two polices are used, at the point where the Interest wander Is low, monetary policy has no power. When monetary policy Is used, Increase In supply of money has no effect on the Interest rate. Therefore when the IS-ELM equilibrium Is low, fiscal policy Is the suitable policy to use. When the Fed Increase the supply of alienable money through and expansion of commercial banks, the supply of money will Increase at the same ongoing Interest rate.The Fed will non succeed to prevent the Interest rates from rising. Interest rate Is assume t o be flexible according to the classical economists. This Implies that the Interest rate will rise In order to attain the previous equilibrium. Therefore a lower Interest rate trap as advocated by the Keynesian economist is where inflation will be set. When he economic resources are idle, the output signal is always low. The reason the government will borrow will be to stimulate the economy.Inflation and UnemploymentINTRODUCTIONInflation seems to be a chronic paradox in many parts of the world today and unemployment, a phenomenon, authoritative for Pakistan, and valid for United States and new(prenominal) western economies. Even the fastest exploitation Chinese economy is not entiretyly immune to it. Thus this seek project deals with the analysis of unemployment and inflation in Pakistan. The purpose of this research is to break the relationship that exists in the midst of these two macroeconomic variables, which affect every estate as well as an individual.The Phillips cu rve shows a historical opponent relation amidst the rate of unemployment and the rate of inflation in an economy. It is the trade-off amidst inflation and unemployment (Mankiw, 2002). The lower the unemployment in an economy, the higher the rate of metamorphose in wages paid to labor in that economy.LITERATURE REVIEWThe relationship between unemployment and inflation the two macroeconomic variables is usually summarized by the Phillips curve. Different studies return been conducted related to these variables in order to see whether any relationship between these two macroeconomic variables exists or not. While analyzing the trade-off between inflation and unemployment in Asia, (Dua 1996), takes inflation as the answer of expected inflation, unemployment gap/ output gap, exchange rate, import inflation and oil price inflation. In India and Philippines the tradeoff between inflation and unemployment does not exist, whereas, in Japan, Korea, Singapore, and Hong Kong it does. (Ra fael, MacCulloch, & vitamin A Oswald 2000), on the other hand, suggest that welfareand life satisfaction level is a act upon of inflation and unemployment and people are happier when rates of both are low. nevertheless unemployment in comparison with inflation depresses people more than inflation. Thus while domineering country fixed-effects, year effects, and time trends, it is estimated that people will trade 1% increase in unemployment for 1.7% increase in inflation. A strong substantiating relation between unemployment rate and inflation rate lagged one or two years is also shown, which is inconsistent with both Philips curve and NAIRU. In other words the trade-off between inflation and unemployment rate does not exist, except in the same year, and in the long run unemployment is a positive function with inflation (Niskanen 2002). Namibia, using the time series information from 1991-2005, exhibits the presence of stagflation in its economy.In other words he found increase in both inflation and unemployment at the same time, which contradicts the traditional short-term Philips curve (Ogbokor 2005). (Furuoka 2007) using the info of Malaysia from 1975-2004 shows and existence of co-integrated as well as casual relationship between inflation and unemployment. That is the study provides an empirical show to support the Philips curve.Likewise, Philips curve also exists in Japan, with disallow coefficients of elongate tie-in between inflation and unemployment. Also there is a generalized analogue 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 2007). 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.Problem Statement What is the likely relationship between inflation and unemployment in Pa kistan? Hypothesis If unemployment increases, then inflation decreases.Data Source Secondary data for the purpose of this research has been obtained from the year 2000-2011. 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.ObjectiveThe 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.METHODOLOGYHere, a regression is run for inflation rate and unemployment rate for Pakistan. The operational form of the model which is as follows Y = + 1X1 + Substituting the above inflation function in the equation INFt = + 1Ut + t Where U is the unemployment rate and INF is inflation rate for a given time t. The Equation obtained after running the OLS model is INFt = 30.96981 3.306067 UtDependent Variable INFMethod Least SquaresDate 08/01/13 Time 2149Sample 1 12Included observations 12Variable Coefficient Std. Error t-Statistic Prob.C 30.96981 6.078158 5.095263 0.0005 U -3.306067 0.882942 -3.744377 0.0038R- form 0.583686 Mean dependent var 8.549167 adjust R-squared 0.542055 S.D. dependent var 5.344512 S.E. of regression 3.616718 Akaike info criterion 5.560023 Sum squared resid 130.8065 Schwarz criterion 5.640841 Log likelihood -31.36014 Hannan-Quinn criter. 5.530101 F-statistic 14.02036 Durbin-Watson stat 2.038825 Prob(F-statistic) 0.003819While interpreting the regression line, the negative sign with the coefficient of unemployment shows that in Pakistan Inflation and unemployment are inversely related at t period. One percent increase in unemployment in one year will bring a decrease in inflation of 3.306067 percent. Unemployment in this simple regression model is statistically significant as the probability of t-stats is little than 0.05 and so we reject H0. The interce pted value 30.96981 of B0 shows the inflation rate when unemployment is zero. The R2 for this model, which lies between 0 and 1, comes out to be 0.583686 which shows that 58.36 percent of the variation in inflation is explained by unemployment.The adjusted R2 statistics comes out to be 0.542055. The Durbin-Watson d statistics test, which is through for autocorrelation, is 2.038825 for Pakistan, showing that there is no auto or serial correlation. As this is simple regression model multicollinearity is not present. As the probability of F-stat is less than 0.05 we will reject H0 which means that the model is overall statistically significant. The split up Plot for Inflation and Unemployment somehow depicts the same relationship as above.CONCLUSION & RECOMMENDATIONThis study is conducted in order to make an analysis of inflation and unemployment in Pakistan from year 2000-2010. It has employed a simple regression analysis technique. The chief(prenominal) conclusion derived from t his study is that the tradeoff between these two variables, the Philips Curve, is observed in Pakistan. When unemployment is high, the cost of goods will increase during an inflationary period, but firms will be able to hire cheap labor, as labor will be in surplus.Wages will not rise while unemployment remains high. Workers will have to borrow money or reduce the amount of goods they purchase. If workers cannot get loans, firms will have to lower prices to continue to sell products, thus trim back inflation. This study makes the following recommendation in the light of its analysis. Easy fiscal policy can be used to decrease unemployment at the disbursement of inflation, as mild inflation is desirable in every economy. However in Pakistan the inflation rate is much higher than the unemployment rate. Thus Pakistan has to point more on policies which lead to reduction in inflation but theGovernment should also control unemployment at the same time.