Chapter # 5
INFLATION
AND
UNEMPLOYMENT
BY
Kokab Manzoor
Overview
•
Inflation
1. Meaning and concept to Inflation
2. Kinds & causes of Inflation
3. Measures to Control Inflation
•
Unemployment
1.
2.
3.
4.
Meaning
Causes of Unemployment
Consequences of Unemployment
Remedial Measures
2
Definition of Inflation
Generally inflation means a process of rising
prices.
Technically speaking inflation means a
persistent rise in the general price level in a
country over a period of time.
Types of inflation:
Types of
inflation
Demand pull
inflation
Cost push
inflation
Caused by the
consumers
Caused by the
Producers
1
Demand pull inflation:
 It is a situation where the aggregate demand
persistently exceeds the available supply of output
at a current prices which causes the general price
level to go up.
 Means the demand is high in the market but
supply is less, so the sellers would increase the
price of products.
Causes of Demand Pull Inflation:
The following are the main causes of demand-pull inflation:
1. Population growth: Rapid increase in
population means more demand for goods. If
the rate of growth of population is more than
the rate of growth of goods, prices will start
rising.
2. Deficit Financing: When the budget is deficit
and the government expenditure is in excess
than the revenue. Government prints new
currency notes which increase the supply of
money in the country and thus causes
increase in prices.
Causes of Demand Pull Inflation:
3 Increase in wages: The rise in wages, salaries
and pensions has increased the purchasing
power of the people which caused inflation.
4 Foreign Remittance: Those who are working
abroad in other countries send dollars,
pounds, Euros etc to their families which
increases the purchasing power of those
families. Therefore, foreign remittance is a
major source of inflation in any country.
Causes of Demand Pull Inflation:
5 Construction of Houses and Colonies:- The
construction of houses and colonies has
brought a big hike in the prices of bricks,
cements, steel etc.
6 Lavish Spending on Ceremonies: The people
of developing countries spends a lot of
money on ceremonies like wedding, Eids,
Jeshn-e-noroz etc
2
Cost push inflation:
If in an economy, price level rises due to
increase in cost of production, it is given the
name of cost push inflation.
OR
It is a situation where a rise in the general
price level is initiated and sustained by rising
cost due to which prices go up.
Causes of Cost-Push Inflation:
The following are the main causes of Cost-Push
inflation:
1. Increase in Cost of Raw Materials: When the
prices of raw materials increases this increase
the cost of production of the producer and
the producer increases the price of the
product.
2. Increase in wages: The rise in wages
increases the cost of production which
increases the price of the product.
Causes of Cost-Push Inflation:
3 Decrease In production: Changes in the
volume of production, has inverse effect on
price level. If in some situation such as
floods, war or political disturbances,
production of goods falls, prices tend to rise.
4 Imported inflation: Sometimes a country has
to face inflation because it imports goods
from other countries at continuously rising
prices.
Causes of Cost-Push Inflation:
5 Indirect taxes:
Indirect taxes also push up prices of goods.
when the government imposed the sales tax
on the commodities like oil, gas, electricity,
telephone, food products etc the prices goes
up in the market.
Measures to control inflation
Three kinds of measures are used to control
inflation.
1. Monetary policy
2. Fiscal policy
3. Direct measure
Control inflation (continued).....
1. Monetary policy:
Monetary Policy is the policy which is adopted by the
central bank of a country. The central bank of a country
works in two directions to reduce inflation:
i) Central Bank reduces the money supply in
Circulation. In this method the central bank sell
govt. Bonds & Securities to commercial banks.
Thus the money with commercial banks reduces
and their ability to advance loans to people
reduces.
Control inflation (continued).....
ii) Secondly the central bank rises its interest
rate for the commercial banks. The
commercial banks do not take loans from
the central bank on high interest rate and
are thus unable to provide loans to the
people. Thus the control on credit reduces
the purchasing power of the people and
inflation is controlled.
Control inflation (continued)......
2. Fiscal policy:
The policy of changing of federal government
spending and taxes in order to control
inflation in the country is known as fiscal
policy.
So government take following steps to control
the inflation in the country.
Control inflation (continued).....
a During inflation, the govt. tries to reduce its
expenditures on unproductive activities.
b Government increase the direct taxes to
discourage the consumption thus aggregate
demand for goods falls and inflation is
controlled.
Control inflation (continued).....
3. Direct measure:
Apart from the monetary and fiscal measures we
also have other measures to curb inflation. it
includes:
a Increase in agriculture output:
Inflation can be controlled by increasing the
agricultural output. Using the modern technology,
better quality of seeds and fertilizer can increase the
agriculture productivity. Also more agricultural land
can be brought under cultivation using the modern
technology.
Control inflation (continued).....
b. Price control Committee:
Inflation can be controlled in the country by
government by fixing the prices of the
commodities and giving the price control list
to the shopkeepers and force them to follow
the list otherwise they will be fined.
UNEMPLOYMENT
its Causes, Consequences
and Policy Measures
Unemployment :
Unemployment refers to the situation where
the population of a country do not find work to
earn their livelihood.
The currently 40% of Afghanistan population is
unemployed.
Causes of Unemployment:
1
Increase in Population:The high birth rate in country leads to population
explosion in the country. When population increases this
leads to unemployment and poverty.
2
Rural- Migration:Migration from rural areas to urban areas increases the
population size in Urban areas. The number of available
jobs are less than the available human resources which
causes unemployment in the cities.
Causes of Unemployment:
3 Downsizing:Due to the downsizing of the public sector most of
the people are laid off. This is also one of the main
cause of unemployment.
5 Lack of Credit Facility:Due to the non-availability of credit facility in
country most of the peoples can not start business
and they therefore remains unemployed.
Causes of Unemployment:
6
Seasonal Variations:
There are many industries which produce the
goods seasonally like Ice factory. These industries
work only for few months and then remain close
in the remaining period of the years. So a large
number of people who are engaged with these
industries remain unemployed.
Causes of Unemployment:
7
Technological Advancement:
Absorption of persons in large-scale industries due
to the installation of improved automatic
machinery, has gone down. This had led to increase
in the unemployed labor force in the country.
8
Lack of Skill and Work Experience: Majority
of people do not have any skill about any particular
job. Or if they have the skill they have no working
experiences so they can not get the job.
Causes of Unemployment:
9
Lack of Education:- Those who do not have
enough education remains unemployed in the
country because without education they can not
find work in organizations.
10 Out-dated Curriculum:The outdated curriculum creates the mismatch
between educational outcomes and skill demand
in the market.
Causes of Unemployment:
11 Lack of Mobility :
Many of the people remain unemployed due to
the lack of mobility. Employment opportunities
may be available in other parts of the country but
due to their immobility they remain unemployed.
12 Lack of Information:
Most of the people remain unemployed due to
the non-availability of information about
employment opportunities.
Consequences of Unemployment :Rise in Criminal Activity and Violence
Unemployment leads to increase in criminal activities
like robbery and snatching purses etc.
Drug Addiction:Unemployment creates disappointment in the young
people due to which they start using drugs.
Civil Disorder (terrorism):Young unemployed men are prime candidate for
recruitment as soldiers in any civil dis-order.
Remedial Measures:
Control on population:There should be an effective check on the population
growth. Family planning Programs should be introduced
and population should be reduced according to the size
of natural resources. This will greatly help in reducing
the pressure from the supply side on the labor market.
Establishment of Small Scale Industries:The small scale industries are to be promoted by
providing liberal credit facilities. This will increase
employment potentially in the country..
Remedial Measures:
• Vocational and Technical Training Centers:Vocational and Technical training centers
should be established to provide training and
skill to the public. It will be very helpful in
curtailing the unemployment.
• Encourage Construction Industry:The construction of house, roads should be
encouraged in the private sector. This will
create more jobs in the country.
Remedial Measures:
Internship Programmes:Most of the people remains unemployed
because they have no work experience. Govt.
should start national internship Programmes for
graduates and postgraduates students so that
they can get enough experience of working in an
office.
Remedial Measures:
Overseas employment Opportunities:
On the government level, the overseas
employment and Exchange office should find
jobs for the people of the countries in the other
countries of the world. This will reduce the
unemployment in the country.
Thank
You