Inflation and Unemployment

Macroeconomics help represent Institution splashiness is the rise in general prices of goods and services over a specific period of cartridge clip. Unemployment is a state where mass be able and testamenting to work at the on-going market prices of beat back but they atomic number 18 unable to secure a Job. According to the Phillips curve, in that location is a consistent relationship betwixt rising prices and unemployment (Nevi, J. W. 1981, peg 3). When the gait of unemployment is low, the level of fanfare is high and when the level of employment is high, rising prices level is low.Since majority of the Americans regard rising prices to be a bigger affright than unemployment, they volition ether stay un apply but to let the shelter of a dollar stabilize. whence they bequeath or else be assiduous during stable prices than rising prices. The Americans favor unemployment to rising prices. When 10% of the workers are place off, it provide imply that unemplo yment will ontogeny and an improver in unemployment Implies a muffle In inflation. If the wages are reduced by 5%, it will mean that even more worker can be employed due to the reduction of elbow grease cost.This will lead to an Increase In employment thus the level of unemployment will go down. A drop-off In unemployment leads to an increase In level of inflation. Therefore they will rather go for 10% of workers being laid off than a 5% cut In their wages. They will vote for 10% workers being laid off. Their knowledge of who will be laid off wont affect their finish in voting because they are all against Inflation. They will rather non work than work for a wage with low purchasing power. Therefore they are after their purchasing power than Just a Job.Fiscal constitution Is an attempt to manipulate government expenditure and taxation so as to affect aggregate demand and aggregate tag on to achieve wide employment and price stability. Monetary policy Is a policy that affe cts silver 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 ply will prevent growth In reserves, It Implies that the borrowing will be changeless thus no preventions on borrowing from mercenary banks.This will termination to an Increase In money supply as the government to a fault Is borrowing. According to the ELM curve, when the dickens polices are used, at the point where the interest run Is low, monetary policy has no power. When fiscal policy Is used, Increase In supply of money has no effect on the divert deem. Therefore when the IS-ELM equilibrium Is low, fiscal policy Is the suitable policy to use. When the Fed Increase the supply of alienable funds through and expansion of commercial banks, the supply of money will Increase at the self aforesaid(prenominal)(prenominal) ongoing intimacy rate.The Fed will non succeed to prevent th e Interest order from rising. Interest rate Is assumed to be flexible consort to the classical economists. This Implies that the Interest rate will rise In monastic format to attain the previous equilibrium. Therefore a cut Interest rate trap as advocated by the Keynesian economist is where inflation will be set. When he economic resources are idle, the offput is always low. The drive the government will borrow will be to stimulate the economy.Inflation and UnemploymentINTRODUCTIONInflation seems to be a chronic problem in many move of the world today and unemployment, a phenomenon, true for Pakistan, and valid for United States and new(prenominal) western economies. Even the fastest growing Chinese economy is non totally immune to it. Thus this look project deals with the outline of unemployment and inflation in Pakistan. The purpose of this research is to analyze the relationship that exists between these both macroeconomic variables, which affect every nation as well as an individual.The Phillips curve shows a historical inverse relation between the rate of unemployment and the rate of inflation in an economy. It is the trade-off between inflation and unemployment (Mankiw, 2002). The lower the unemployment in an economy, the high the rate of change in wages paying(a) 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 have 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 function 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. (Rafael, MacCulloch, & Oswald 2000), on the other hand, suggest that welfareand life blessedness level is a function of inflation and unemployment and people are happier when rates of both are low.However unemployment in comparison with inflation depresses people more than inflation. Thus musical composition controlling 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 positive 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 rowing 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, exploitation the time series info 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-run Philips curve (Ogbokor 2005). (Furuoka 2007) using the data of Malaysia from 1975-2004 shows and human race 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 at that place 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 cigaret unemployment and inflation is the change rate of labor force level (Kitov 2007). In this paper, a Philips curve with linear link will be careful for Pakistan to see if the negative relationship between the variables exists or not.Problem Statement What is the apt(predicate) relationship between inflation and unemployment in Pakistan? Hypothesis If unemployment increases, then inflation reductions.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 base on the equation where unemployment is the function of inflation.METHODOLOGYHere, a regression is run for inflation rate and unemployment rate for Pakistan. The functional form of the mold 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 standard is I NFt = 30.96981 3.306067 UtDependent Variable INFMethod to the lowest degree 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-squared 0.583686 wet dependent var 8.549167 Adjusted 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-sta ts is less than 0.05 and so we jib H0. The intercepted 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 done for cable carcorrelation, 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 Scatter 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 main conclusion derived from this 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 exchange products, thus reducing inflation. This study makes the following recommendation in the waking of its analysis. Easy fiscal policy can be used to decrease unemployment at the expense 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 focus more on policies which lead to reduction in inflation but theGovernment should also control unemployment at the same time.