Macroeconomic instability cycles unemployment inflation. Macroeconomic instability, economic cycles, unemployment and inflation - abstract
DEPARTMENT OF SCIENTIFIC AND TECHNICAL POLICY AND EDUCATION
Federal State Educational Institution of Higher Professional Education Kostroma State
AGRICULTURAL ACADEMY
DEPARTMENT OF ECONOMICS
COURSE WORK
MACROECONOMIC INSTABILITY:
ECONOMIC CYCLES, UNEMPLOYMENT
AND INFLATION
Performed:
2nd year student, 1st group
Faculty of Economics
Korzheva Nadezhda Alexandrovna
Scientific adviser:
K.E.N. assistant professor
Pavlov Mikhail Nikolaevich
Kostroma 2010
Introduction
1. Theoretical aspect business cycle research:
1.1. Theory of economic cycles……………………………………………………………..page 4-6
1.2. Causes of economic cycles……………………………………………………….page 6-7
1.3. Various theories of business cycles……………………………pages 7-9
2. Unemployment:
2.1. Forms of unemployment and its natural level…………………..pages 10-13
2.2. Okun's Law……………………………………………………………………………………….pages 13-14
3. Inflation………………………………………………………………………………………..pages 14-16
4. The relationship between inflation and unemployment, general statement of the problem…………………………………………………………………………………………………………………pages 17-18
5. Problems of macroeconomic instability in Russia and ways to solve them……………………………………………………………………………………………………………………page 19- 20
6. Conclusion
Bibliography
Introduction
In connection with the transition to a market economy, the study of the problem of macroeconomic instability in Russia is becoming increasingly relevant. Largest contribution The following people contributed to the development of this problem: L.S. Tarasevich, G.S. Vechkanov, T.A. Agapova.
The purpose of this course work is an analysis of the problem of macroeconomic instability in Russia at the present stage of economic development.
Based on the goal, it is necessary to solve the following tasks: analyze the concept and factors of economic cycles, unemployment and inflation. Explore models of economic cycles, consider and identify problems of macroeconomic instability in Russia and ways to solve them. The object of the study is macroeconomic instability in Russia. The subject of the study is a set of economic relationships arising in the process of macroeconomic instability. Theoretical basis are classics of economic thought, works of Russian and foreign economists legislative acts in the Russian Federation, statistical collections of all levels, etc. Methodological basis is formal logic, dialectics and systems approach.
1.1. The theory of business cycles:
The theory of business cycles along with the theory economic growth explains the nature of economic development over time. Statistical data indicate that changes in indicators characterizing the results of national economies do not change monotonically, but oscillatingly (cyclically).
The direction and degree of change in indicators or a set of indicators characterizing the development of the national economy are defined as economic conditions. Therefore, the theory of economic cycles is also called the theory of market conditions.
The economic cycle refers to the period of economic development between two identical states of the market. Cycle theory is intended to explain the reasons for fluctuations in the economic activity of society over time (a wavy curve), and growth theory examines the factors and conditions for sustainable growth as a long-term trend in economic development (trend line). In the structure of the cycle, the highest and lowest points of activity and the phases of decline and volume lying between them are distinguished. The total duration of a cycle is measured by the time between two adjacent highest or two adjacent lowest points of activity. Accordingly, the duration of the decline is considered to be the time between the lowest and subsequent lowest points of activity, and the rise - vice versa.
With more detailed analysis The economic cycle is divided into four phases.
Expansion. National income is growing despite full employment. The demand for investment increases, unemployment decreases below the natural level. The price level, wage rate and interest rate rise. The inevitable consequence of this development is the transition from growth to decline.
Recession (crisis). At this stage, production declines (growth rates become negative), unemployment rises and aggregate demand declines.
Depression. National income continues to decline, but the rate of decline is slowing; therefore, the growth rate curve “turns” upward.
Revival. The transition from a decrease in production to its increase; gradual return of the economy to a state corresponding to equilibrium growth.
The problems of the theory of business cycles determine the use of complex dynamic models using differential equations. /5,С 254-257/
Economic cycle
The main phases of economic cycles are boom and bust, during which there is a deviation from the average economic dynamics. (Fig.1)
Picture 1
Depending on how the value fluctuates economic indicators during the economic cycle, these indicators are divided into:
Procyclical(total production volume, loading production capacity, monetary aggregates, velocity of money, short-term interest rates, general price level, corporate profits). The listed parameters increase in the rise phase and decrease in the decline phase;
Countercyclical(unemployment rate, number of bankruptcies, size inventories annual production). When the named parameters are the other way around. During a rise they contract, and during a decline they increase;
Acyclic(export volume). When their dynamics are not associated with any phases of the economic cycle.
There are three types of economic parameters:
Leading or leading - these are parameters that reach a maximum (minimum) before reaching a rise (decline). These include: the average length of the working week in industry; average number of overtime hours, number of newly created business enterprises; number of new construction contracts; changes in inventories, stock market indices; corporate profits; change in the money supply.
Lagging or lagging which reach a maximum (minimum) after reaching a rise (decline). These include: the number of people unemployed for more than 15 weeks; expenses for new plants and equipment; unit costs for salary; average level of interest rate of commercial banks;
Matching, or corresponding, which change simultaneously and in accordance with changes in economic activity. These include GDP (GNP); unemployment rate; industrial products, personal income; producer prices; central bank interest rates; applications for advertising./2, C 248-249/
1.2.Causes of economic cycles:
From the point of view of determining the factors of economic cycles, three methodological approaches are distinguished.
The first assumes that cycles are associated with external (exogenous) factors. The second approach explains cycles by internal (endogenous) factors. The third approach defines cycles by synthesizing external and internal factors.
External factors – These are factors outside the boundaries of a given economic system. These include: population dynamics, population migration, discoveries of science and technology. Wars and others political events, changes in oil prices, the discovery of gold deposits, the discovery of new lands and natural resources, even sunspots and weather.
Internal factors – factors inherent in this economic system. These include consumption and investment. Therefore, this approach puts the multiplier mechanism—the accelerator—and the theory of demand at the center of the problems of economic cycles.
According to many economists, external factors are the producers of the initial impulses of cycles, and internal factors convert these impulses into phase oscillations. This approach is the most promising. Consumer and investment demands play a decisive role in the emergence of economic cycles. Moreover, if consumer demand influences changes in cyclical fluctuations relatively sluggishly, then investment demand is the main driving force of the cycles. /2, C 252-253/
1.3.Various theories of business cycles:
Neoclassical business cycle theory
Since the beginning of the 70s. 20th century Neoclassical models predominate in business cycle analysis. In their theoretical views, they proceed from the assumption of the perfection of the market mechanism and the flexibility of prices and wages. In such conditions of economic functioning, the cause of cyclical fluctuations in output and employment are shocks that lead to changes aggregate supply.
The neoclassical business cycle theory presents two approaches to explain cyclical fluctuations in the economy:
Imperfect information theory;
The theory of the real business cycle.
Imperfect information theory
The impulse to change aggregate demand can be monetary expansion carried out by the government. The result of such a policy will be an increase in nominal aggregate demand, the price level and nominal wages.
Manufacturers in the current economic situation, in the absence of sufficient information, cannot reliably determine whether the relative price of their products has increased or the general price level has increased. The volume of production depends on the correct answer to this question: in the first case, firms are interested in increasing production volume, but in the second they are not. Given imperfect information, producers may make the mistake of believing that prices have increased only for their products. In reality, the general price level has increased. Uncertainty is a feature of all decisions made by entrepreneurs in the absence of reliable information. This circumstance made it possible for R. Lucas to compare the market for each individual product with an island, the inhabitants of which can only know what is happening on it.
Market participants, like the islanders, have no idea what is happening in other markets - the islands. In the end, market participants (“islanders”) find out what is happening outside it, but with a delay (lag).
Workers may be aware of current wages but not the general price level in the country, making it difficult to determine real wages. If workers accept an increase in nominal wages as an increase in real wages, then they are willing to increase the supply of labor, which stimulates firms to increase production by real life relative prices and real wages remained unchanged.
If the behavior of economic entities is formed according to the scheme of rational expectations, then, according to R. Lucas, they evaluate changes in a particular market partly as an increase in the general price level, partly as an increase in the relative price of a product. An aggregate demand shock leads to an increase in aggregate supply by economic entities. According to the sentence function:
Where Y* is the potential production volume; - expected prices.
If P>, then each individual manufacturer believes that the relative price of a good has increased. If all agents understand the functioning mechanism of the economy and their expectations are rational, then the forecasts of economic agents for the future emerge as the optimal option for processing all information available to them, including information about economic policy government. /2, C 256-258/
Real business cycle theory
This theory explains fluctuations in business activity by supply-side shocks (John Dong, Charles Plosser, Edward Prescott).
The foundation of the theory is the following:
Flexibility of prices and salaries in the short term;
For a short period, the principle of classical dichotomy is transferred. Consequently, changes in real indicators (real GNP, employment level) do not depend on changes in nominal values (money supply, price level), but are explained by shifts occurring in the economy;
Model IS – LM with flexible prices.
Based on the Keynesian IS – LM model, the creators of the real business cycle came to the conclusion that maintaining production at the potential level corresponding to full employment in the economy is possible provided that effective demand and potential GNP are equal. This equality ensures flexible prices.
In the figure, the LM curve passes through the intersection point IS of the long-term curve AS(). In this case, the interest rate is set at r*, which ensures equilibrium at the point.
If on money market changes occur, then prices will react in such a way that the equilibrium in the market of goods and money will be maintained, since the real parameters will not change, ensuring the stability of economic dynamics.
Since the real volume of aggregate supply shows the relationship between output and supply of labor, capital and current production technology, an imbalance can be caused by changes in these three components.
An increase in labor supply depends on two motives: wages (W) and the level real rate percent (r). According to proponents of the real business cycle theory, even small changes in wages can cause large fluctuations in the level of output and employment. These fluctuations cause:
High elasticity of labor supply in relation to wage dynamics;
Understanding by employees that wage increases during the business cycle are a temporary phenomenon.
Since the volume of production increases as the supply of labor increases, the aggregate supply curve becomes upward sloping.
Abrupt changes in technology have an impact in two ways, depending on whether they are permanent or temporary. The former primarily affect demand, while the latter affect supply. /2, C 260-262/
2.1.Forms of unemployment and its natural level.
The main types of unemployment are frictional, structural and cyclical.
Frictional unemployment
Information about vacancies and job applicants is imperfect, and its dissemination takes a certain amount of time. Territorial movement work force also cannot be instantaneous. Some employees resign of their own free will due to changes in professional interests, place of residence, etc. Therefore, frictional unemployment is predominantly voluntary and short-term in nature: this category of unemployed people has “ready” skills for work that can be sold on the labor market.
Structural unemployment
The combination of frictional and structural unemployment forms the natural rate of unemployment (or the rate of unemployment at full employment) corresponding to potential GDP.
Cyclical unemployment
Calculations of actual and natural unemployment rates are complicated by the fact that the classification criteria individuals to the categories of employed or unemployed are quite flexible. Typically, the unemployed are those who do not have a job at the time of the statistical survey, but are actively looking for one and are ready to start work immediately. People who have a job, as well as anyone who works part-time or part-time, are classified as employed.
The totality of employed and unemployed people forms the labor force. Persons who are unemployed and not actively looking for work are considered to have dropped out of the labor force. These include people of working age who potentially have the opportunity to work, but for some reason are not working: students, pensioners, the homeless, housewives, those who are desperate to find a job and have stopped looking for it, etc. The labor force also does not include persons who spend a long time in institutional institutions (psychiatric hospitals, prisons, etc.).
Unemployment rate is defined as the ratio of the number of unemployed to the size of the labor force or as the ratio of the share of employed people who lose their jobs every month and the sum of this share with the share of unemployed people who find work every month.
Natural rate of unemployment is determined by averaging the actual level of unemployment in the country over the previous 10 years (or a longer period) and the next 10 years (forecast estimates are used taking into account the probabilities of the dynamics of the expected level of inflation). /1, From 49-50/
The main reasons for the existence of a natural (sustainable) level of unemployment are the following.
Increased job search time under the unemployment insurance system.
Payment of unemployment benefits relatively reduces incentives for quick employment - the time for searching for a suitable job, retraining, etc. increases. In the long term, this helps to achieve greater balance in the structure of jobs and the structure of the labor force. At the same time, an increase in unemployment benefits and the period of their payment contributes to an increase in the number of unemployed and an increase in the unemployment rate. The tool to solve this problem is public investment into the labor market infrastructure (deployment various systems retraining of personnel, increasing their professional and geographical mobility, improving information about vacancies, etc.). In the short term, funding for employment management programs may increase the burden on the state budget, however already in medium term this will help reduce the natural rate of unemployment.
The stability (rigidity) of wages gives rise to “unemployment of expectation.” Expectation unemployment occurs as a result of the level of real wages exceeding its equilibrium value.
Figure 2
The “cruelty” of wages leads to a relative shortage of jobs: workers become unemployed because this level wages, the supply of labor exceeds the demand for labor, and people simply “wait” to get a job at a fixed rate of pay.
The “freezing” of the labor market in a disequilibrium state is associated with:
The legislative establishment of a minimum wage, which limits its free fluctuations. The limiting effect of wages is the more significant, the higher specific gravity youth, women, low-skilled workers in the labor force, since for these categories of employees the equilibrium wage rate is lower by law established minimum;
Fixation of wage levels in collective agreements with trade unions and individual labor agreements;
The disinterest of firms in reducing wages due to the risk of loss of qualified labor, an increase in overall staff turnover, a decrease in labor productivity, labor discipline and profit.
Unemployment rates vary across different demographic groups. In particular, the unemployment rate among young people is significantly higher than in other age groups.
The trend towards an increase in the natural rate of unemployment in the long run is associated with:
Increasing the share of youth in the labor force;
Increasing the share of women in the labor force;
More frequent structural changes in the economy. /1,С 51-53/
2.2.Oken's Law
Okun's law relates fluctuations in the unemployment rate to fluctuations in GDP:
where Y is the actual production volume;
Potential GDP;
u – actual unemployment rate;
Natural rate of unemployment;
β is the empirical coefficient of sensitivity of GDP to the dynamics of cyclical unemployment.
If the actual unemployment rate is 1% higher than the natural rate, then actual output will be lower than potential by β%.
The coefficient β is established empirically and varies depending on different countries Oh. Often its values fall in the range from 2 to 3, which indicates significant GDP losses caused by cyclical unemployment.
Y – actual production volume in this year;
– actual production volume last year;
u is the actual unemployment rate in the current year;
– actual unemployment rate last year.
If the actual unemployment rate has not changed relative to the indicator previous year, then the growth rate real GDP is 3% per year. This pace is due to population growth, capital accumulation and scientific and technological progress. For every one percent increase in the unemployment rate (relative to the previous year), the growth rate of real GDP decreases by 2%.
3.Inflation:
Inflation rate. Demand inflation and cost inflation.
Inflation –
In conditions of inflation different kinds prices change unevenly: some prices increase quickly, others slowly, and others remain unchanged.
Deflation –
Inflation rate (rate of price growth) – relative change in the average (general) price level. In macroeconomic models, the inflation rate can be represented as
Where P is the average price level in the current year;
Average price level last year.
The average price level is measured by price indices. An index is often used as a basis for calculating the inflation rate. consumer prices(CPI), and the indicator takes the following form:
Where CPI is the consumer price index for the current year;
– consumer price index in the previous year.
Disinflation –
Demand inflation arises as a consequence of excess aggregate expenditure (aggregate demand) in conditions close to full employment.
Figure 3. Model of price growth based on an increase in aggregate demand
Cost inflation arises as a consequence of excess unit costs and a decrease in aggregate supply. This type of inflation leads to stagflation, that is, to a simultaneous increase in inflation and unemployment against the backdrop of a decline in production (stagnation combined with inflation). An increase in average costs relatively reduces the profits of firms, which leads to a decrease in the output of firms and a decline in aggregate supply, leading to an increase in the average price level and an increase in the rate of inflation.
Figure 4 Model of price level growth based on rising costs
Reasons for increasing average production costs:
An increase in nominal wages that is not balanced by an increase in labor productivity;
Increase in prices for raw materials;
Increase in taxes and growth of the “tax wedge”.
Cost-push inflation is to a certain extent self-limiting: the decline in production restrains additional growth in production costs, since with an increasing level of unemployment, nominal wages gradually decrease.
The combination of demand-side inflation and cost-push inflation forms an inflationary spiral in which the increased inflationary expectations of economic agents act as a transmission mechanism. Budgetary - tax or credit - monetary expansion, aimed at short-term stimulation of aggregate demand, causes demand inflation as the economy approaches a state of full employment of resources. An increase in nominal wage rates causes an increase in average production costs, which is the basis for the development of cost-push inflation. If the government and the Central Bank do not have the tools to manage inflation expectations, then hyperinflation arises based on the wage-price spiral. It is uncontrollable inflation with rapidly rising prices, which has a particularly destructive effect on employment and output, since under these conditions it is economically profitable to invest in speculation rather than in investment. The situation of distrust in the inconsistent policies of the government and the Central Bank, characteristic of many transition economies, is a suitable “environment” for the development of uncontrollable inflation.
The impact of inflation on real income levels is controversial. Inflation has different effects on the redistribution of income depending on whether it is expected or unexpected. In the event of expected inflation, the income recipient can take steps to prevent or reduce the negative effects of inflation, which would otherwise affect his real income.
Unanticipated inflation leads to a decrease in all types of fixed incomes and “subsidizes” those economic agents whose nominal incomes increase faster than the average price level. In conditions of unexpected inflation, loan recipients benefit at the expense of creditors, since debts are repaid in devalued money. Governments that have accumulated significant state debt, often pursue a policy of short-term inflation stimulation, which contributes to the relative depreciation of debt.
4. The relationship between inflation and unemployment: general statement of the problem
As we approach economic potential, a well-known alternative arises between employment growth, on the one hand, and rising inflation, on the other. An increase in employment and a decrease in unemployment is accompanied by an increase in demand inflation, since the volume of unused resources in the economy is constantly decreasing and production has to be expanded by “luring” resources from one firm to another, from one industry to another, by increasing wage rates and prices for investment goods. Reducing demand-side inflation can only be achieved by limiting employment and increasing unemployment. This means that in the short term there is an inverse relationship between inflation and unemployment rates, defined as the Phillips curve.
At any point in time, a government managing aggregate spending may be on the Phillips curve with a certain combination of inflation and unemployment rates for the short-term time interval. This choice depends on the expected rate of inflation: the higher the expected inflation, the higher the Phillips curve. The choice of economic policy in this case becomes more difficult, since the actual inflation rate will be higher for any level of unemployment.
Figure 5
The trade-off between inflation and unemployment in macroeconomic models can be represented in the following form:
Where is the actual inflation rate;
Expected inflation rate;
Demand inflation;
External price shock (cost-push inflation).
Since it is determined by the dynamics of cyclical unemployment in accordance with Okun's law, the equation of the short-term Phillips curve takes the form
Where are the actual and expected inflation rates (respectively);
u and are the actual and natural unemployment rates (respectively);
External price shock; /1, C 55-61/
Empirical coefficient.
5. Problems of macroeconomic instability. Ways to solve them.
Macroeconomic instability entails a number of consequences. These consequences are diverse, contradictory and are as follows:
It leads to the redistribution of national income and wealth between various groups society, economic and social institutions in an arbitrary and unpredictable manner.
High inflation rates and sharp changes in price structures complicate the planning of firms and households. As a result, the uncertainty and risk of doing business increases. The price for this is an increase in interest rates and profits.
The political stability of society is decreasing, social tension is increasing.
Relatively more high tempo price increases in the “open” sector of the economy lead to a decrease in the competitiveness of national goods. The result will be an increase in imports, an increase in unemployment and the ruin of commodity producers.
Demand for more stable foreign currency. The flight of capital abroad is increasing, speculation on foreign exchange market, which accelerates price increases.
The special value of savings accumulated in in cash, the demand for real assets. As a result, prices for these goods rise faster than the general price level changes.
The structure of the state budget is changing and real revenues are decreasing. The budget deficit and public debt are increasing.
In an economy operating under conditions of underemployment, moderate inflation, slightly reducing the real income of the population, forces them to work more and better. As a result, creeping inflation is both a “payment” for economic growth and a stimulus for it.
Significant inflation prevents employment from increasing.
There is a multidirectional movement of relative prices and production volumes of various goods.
Solutions are a set of government regulation tools.
Direct regulation was carried out within the framework of income policy. Price targets and wage and price controls are sometimes called income policy. The reason for this is that the real income of an individual - i.e. the number of goods and services that he can purchase with his nominal salary, - depends on the amount of nominal income and prices of goods and services. Guidelines and controls are designed to limit both nominal income and price. Thus, they affect real incomes.
Conclusion
Based on the analysis performed, the following conclusions can be drawn: Economic cycle– fluctuations in the price level of economic activity in actual GDP, when periods of expansion are followed by periods of economic decline; passing process market economy from one phase to the next the same, for example, from crisis to crisis.
Frictional unemployment associated with searching for and waiting for work. This is unemployment among people for whom finding a job that matches their qualifications and individual preferences requires some time.
Structural unemployment associated with technological shifts in production, changing the structure of demand for labor. This is unemployment among persons whose professions turned out to be “outdated” or less necessary for the economy due to scientific and technological progress. Structural unemployment is predominantly forced and more long-term in nature, since this category of unemployed people does not have skills that are “ready” for sale and obtaining jobs for them is associated with professional retraining, often accompanied by a change of residence.
Cyclical unemployment represents the deviation of the actual unemployment rate from the natural one. During a cyclical downturn, cyclical unemployment complements frictional and structural unemployment; During periods of cyclical expansion there is no cyclical unemployment.
Inflation – a stable tendency towards an increase in the average (general) price level.
Deflation – a steady downward trend in the average (general) price level.
Disinflation – reduction in inflation (rate of price growth).
The problem of effectively managing inflation processes in the economy almost never leaves the agenda. If we consider our country, then low inflation rates in its economy were observed, perhaps, only in Soviet times, and the entire recent economic history of Russia, starting from the 1990s, demonstrates inflation rates from extremely high to moderately high, practically never falling below 10 % in year.
As authoritative wrote Russian economist, specialist in the field of monetary circulation and well-known critic of monetarist methods of regulating the economy V.M. Usoskin, “modern deterioration credit basis money gives grounds to consider modern money as a kind of hybrid of credit and paper money. Undermining the credit basis of money leads to a violation of the optimal boundaries of monetary circulation and serves as an important factor in the development of inflationary processes. The formation of excess demand for means of payment is not just an element of balancing the system, but evidence of the presence of imbalances between production and social needs, manifested in the overproduction of goods and other imbalances. Equilibrium is an exception, a fleeting phase. The process of making key business decisions is not subject to prior approval. It is decentralized and initially bears the stamp of the market element. Accordingly, the prices prevailing in the markets are, as a rule, suboptimal, and the existence of monopolistic relations makes it difficult to adjust them. The price mechanism only partly takes upon itself the elimination of the emerging disequilibria, and the entire burden of restructuring, as a rule, falls on the real sector - the sphere of production and commodity circulation. This finds expression in the accumulation of unsalable goods, underutilization of capacity, mass unemployment and other phenomena that represent the scourge of the modern capitalist system. /3, C 55-56/
A retrospective analysis of the main milestones in the development of monetary theories of business cycles allows us to make a number of generalizations and assumptions regarding the further research program. In particular, we should point out the weak dependence between different generations of these theories. It is hardly possible to talk about a single monetary theory of fluctuations in business activity; rather, it is a conglomerate of concepts.
In this conglomerate there is continuity between early monetary theories of business cycles and modern stage their development, based on an unambiguous conclusion about the significant influence of money, credit and operating features banking sector on the dynamics of real output seems to be more pronounced than the connection of each of them with the period 1940-1980. This stage was not characterized by serious progress compared to the 1920-1930s, but provided an instrumental “breakthrough” in connection with the development of econometric methods.
Considering that the concept of a financial accelerator and its derivatives from the non-business cycle model, based on credit rationing, are based on a logically structured, practical model that is amenable to econometric testing, this direction of development of monetary cycle theories seems to be the most promising, synthesizing the results of early and intermediate stages of the formation of these theories./4, P 126-130/
Bibliography:
Agapova T.A. Seregina S.F. – Macroeconomics textbook 6th edition – M: “Business and Service” 2004
Vechkanov G.S. Vechkanova G.R. – Macroeconomics textbook 2nd edition M: 2008
Golovnin M. – Theoretical approaches to the implementation of monetary policy // Economic Issues - No. 4. – 2009 – S45-49
Popkova N.A. – About anti-inflationary processes in the economy // Financier - No. 9. - 2009 - P 55-60
Stolbov M. - Evolution of monetary business cycles // Economic Issues - No. 7. - 2009 - P 126-130
Tarasevich L.S. Grebennikov P.I. Mussky A.I. – Macroeconomics – textbook 6th edition M: Higher education 2008
Cyclicality economic development.
Unemployment and its types. Consequences of unemployment.
Inflation: definition, principles, types, consequences.
1. Cyclical nature of economic development
A market economy is characterized by macroeconomic instability, expressed in periodic ups and downs in economic activity, which shapes the economic cycle. Macroeconomic equilibrium acts as a desired state, as a tendency, an ideal to which one strives real economy. The functional forms of instability are cyclical declines in production, unemployment and inflation.An economic cycle is a time interval between two qualitatively identical states of economic conditions.
Reasons for cyclicity:
External or external:
wars, revolutions, major social, political, demographic natural shocks).
Internal or internal:
physical contribution of fixed capital,
changes in consumer and investment spending,
change in government policy.
Synthesis of external and internal causes
External causes produce the initial impulses to start the economy, and internal factors turn them into a cycle of fluctuation.
The cycle and its phases.
The graph shows a 4-phase business cycle model. It distinguishes the following phases:
I - economic recovery.
The national product, the volume of investment, the capital stock of the economy are growing, inventories of unsold products are decreasing, unemployment is decreasing and inflation is increasing.
The phase ends with point A (peak, boom point), at which full employment, and the price level, interest rate and wages are maximum.
II - recession (crisis) of the economy.
Fall in production growth, rising unemployment, reduction in investment, prices and wages).
III - depression.
National income and GDP continue to decline. At point B (economic bottom), the unemployment rate reaches a maximum, the price level, wages and interest rates are minimal, and the volume of investment approaches zero.
IV - revival.
Production volume and GDP begin to grow. Unemployment decreases, investment volumes, interest rates and price levels increase.
Types of cycle (classification according to certain characteristics).
By duration
a) short-term (3.4 years)
b) medium-term (up to 20 years)
c) long-term (40-60 years).
By activity environment
a) industrial
b) agricultural
According to the specifics of manifestation
a) oil
b) food
c) energy
d) raw materials
e) economic
e) currency
By spatial ghost
a) national
b) international.
2. Unemployment and its types. Consequences of unemployment
From the point of view of employment and unemployment, the country's population can be classified according to the following scheme:
The institutional population is people who have not reached working age, have retired, are in hospitals, etc.
The non-institutionalized population is the working-age population.
Economically inactive population- this is the working-age part of the population that is not employed and is not looking for hired work.
The economically active population is the employed and the unemployed.
Busy people have a job.
A person is considered unemployed if he does not work anywhere, but is actively looking for work.
The unemployed do not include:
people of retirement age;
carers at home for children;
stopped looking for work;
not working for any reason not stated above.
Types of unemployment:
By duration of existence:
Short term;
Long-term;
Depending on the nature of the manifestation:
Open;
Closed (hidden).
Ratio of unemployed to employment:
Valid;
Fictitious.
Types of unemployment:
Frictional - associated with searching for or waiting for work.
Structural - associated with the need to change a specialty or preparation, with additional training.
Natural is the sum of structural and frictional (as a rule, it is 5 - 6%, present in any market economy)
Cyclical - associated with short-term economic cycles, arises due to the fact that a reduction in aggregate demand for goods and services causes a decrease in employment and unemployment demand.
The unemployment rate is the share of unemployed people in the total economically active population (labor force). 
Where:
Z - busy;
B - unemployed;
RS - labor force, RS=Z+B
Consequences of unemployment
Economic.
Part of the potential volume of production of goods and services is lost without compensation; the production capabilities of the economy are not fully realized.
There is a certain economic relationship between the unemployment rate and the volume of GDP produced, known as Okun's law. This law states that an excess of the actual unemployment rate by 1% above its natural level leads to a decrease in actual GDP from 2x to 3x%.
Okun's law reflects the following equality: 
Where:
Y* - potential GDP;
Y - actual GDP (per this moment);
β - Okun's coefficient or empirical coefficient of sensitivity of GDP to the dynamics of cyclical unemployment (can be from 2x to 3x%, usually 2.5% is accepted);
u is the actual unemployment rate (at the moment);
u* is the natural rate of unemployment.
Social:
1.loss of qualifications or self-esteem
2. complete and partial loss of income
3.decrease in living standards.
Moral and ethical.
Regulation of unemployment.
in social policy.
It is intended to provide assistance to the unemployed in order to maintain their standard of living.
in macroeconomic policy.
Providing assistance to the unemployed involves the implementation of monetary and fiscal measures to reduce unemployment.
employment policy.
It involves the creation of new jobs, a personnel retraining system, and employment centers.
3. Inflation: definition, principles, types, consequences
Inflation is a situation in the economy in which there is an increase in the price level and (or) depreciation of the money supply in the economy.Types of inflation:
Hidden (suppressed).
This inflation is associated with a shortage of goods and services, or with a deterioration in their quality, or with the establishment of upper price limits by the state.
Open inflation.
It is characterized by an increase in the price level and does not destroy the market mechanism.
Open inflation comes in the following forms:
- inflation on the demand side (buyer inflation). It is characterized by an excess of aggregate demand compared to aggregate supply, i.e. the economy wants to consume more than it produces.
-inflation on the supply side (seller inflation). Characterizes an increase in the price level due to an increase in production costs, i.e. raw material costs, energy costs.
Inflation classification:
1. depending on the tempo:
1.moderate or creeping (~10%)
2.galloping (~200%)
3.hyperinflation (from several hundred to several thousand or more than 200%).
2. according to the degree of synchronicity:
1. balanced
Accompanied by a uniform, moderate rise in prices.
unbalanced
Accompanied by an uneven, spasmodic rise in prices.
3. by degree of predictability:
1.expected
2.unexpected.
Causes of inflation:
Central bank policy.
Budget deficit.
Militarization of the economy
Market monopolization:
Monopolization of the market by the manufacturer
Monopolization by the trade union
High tax penalties
Public Policy Uncertainty
External economic factors
Consequences of inflation:
Deformation of the market pricing mechanism
Redistribution of income and wealth
Decline in real income of the population
Depreciation of household savings
Deterioration of living conditions of some social groups
Destabilization of the economy
In conditions of inflation, not all prices change equally, since the rate of increase in prices for consumer goods always differs from the rate of increase in prices for industrial goods.
The inflation rate is defined as the ratio: 
Where:
Рit - price level in the current period;
Pi0 is the price level in the base period.
The rate of inflation varies depending on the changing phases in economic development. Inflation is replaced in the depression stage and at the lowest point. Inflation accelerates during the economic recovery phase.
Inflation originates in the money market, and then gradually all the others occur (commodity market, labor market, etc.)
The relationship between inflation and unemployment. Phillips curve. 
In the short term, there is an inverse relationship between inflation and unemployment. Point 1 is characterized by high unemployment and low inflation.
Point 2 is characterized by high inflation and low unemployment.
In the long term, with high level unemployment prices also begin to rise.
URAL SOCIO-ECONOMIC INSTITUTE
ACADEMY OF LABOR AND SOCIAL RELATIONS
DEPARTMENT OF ECONOMIC THEORY AND STATISTICS
Coursework on “Economic Theory” on the topic
“Macroeconomic instability. Inflation and unemployment »
Completed by a 2nd year student
correspondence department
majoring in "Organization Management"
Group MZ-202
Checked _________________
Chelyabinsk – 2003
Introduction. 3
1. Unemployment. 5
1.1. The essence of unemployment... 5
1.2. Types of unemployment... 6
1.3. Unemployment in Russia and the dynamics of its level. 8
2. The essence and causes of inflation. eleven
2.1. Inflation, its causes. eleven
2.2. Measurement and indicators of inflation. 14
2.3. Types of inflation. 15
2.4. The mechanism of the influence of inflation on the economy. 16
2.5. Inflation in Russia. 17
3. The relationship between inflation and unemployment. Ways to solve these problems. 20
Conclusion. 25
List of used literature... 27
Introduction
In an ideal model of a market economy, the gross national product (GNP) grows steadily and all resources are used fully and efficiently. However, reality is far from ideal. Instead of steady growth, production moves cyclically through booms and busts. With a general upward trend, the employment rate experiences significant fluctuations. There is also an increase in prices. Why does instability arise, how natural is it, can society ensure full employment and price stability at the same time?
According to most economists, unemployment is the central problem of advanced economies. Unemployment is a macroeconomic problem that has the most direct and severe impact on every individual. Losing a job for most people means a decline in their standard of living and causes serious psychological trauma. It is therefore not surprising that the problem of unemployment is often the subject of political debate.
The economic losses of a period of mass unemployment are much greater than the losses associated, for example, with monopolization. For example, in the 70-80s of the 19th century in the USA they amounted to about 1 trillion. dollars. In addition, the loss of a job is a psychological stress, second in level only to that caused by the death of a close relative or imprisonment. American researchers have found that 1 year of unemployment takes 5 years of a person’s life. . It is also not difficult to understand what a potential danger to society is posed by a person who has lost his job and is left to the mercy of fate. Famous and heavy social consequences unemployment: an increase in drug addiction, crime and an increase in the number of suicides.
Another phenomenon of instability is inflation.
Inflation has significant economic and social consequences for all economic entities. These consequences are complex and varied. Its small pace contributes to an increase in prices and profit margins, thus being a factor in the temporary revival of the market situation. As inflation deepens, it turns into a serious obstacle to reproduction and aggravates economic and social tension in society. Inflation intensifies the flight from money to goods, turning this process into an avalanche, aggravates the hunger for goods, undermines incentives for monetary accumulation, disrupts the functioning of the monetary system, and revives barter.
But both unemployment and inflation can be fought. Moreover, as economists have found, there is a relationship between these two phenomena.
Seasonal unemployment– is associated with unequal production volumes performed by some industries in different periods of time, that is, in some months the demand for labor in these industries increases (and, therefore, unemployment decreases), in others it decreases (and unemployment increases). Industries that are characterized by seasonal fluctuations in production volumes (and therefore employment) include primarily agriculture and construction.
Unemployment oversupply– intervention of “non-market” forces (for example, a trade union demanding an increase in wages, or a state legislating a minimum wage).
1.3. Unemployment in Russia and the dynamics of its level
After the collapse of the USSR, the unemployment rate in the country grew steadily. During the period of reforms, starting from the 90s, the largest increase in unemployment was recorded in connection with structural changes in the economy - some specialists simply turned out to be superfluous (structural unemployment). A significant amount of labor previously employed in the military-industrial complex and manufacturing industry turned out to be unclaimed.
According to the State Statistics Committee of the Russian Federation, at the end of 1992 the number of people employed in the Russian economy was 72.1 million people (95.3% of the economically active population), at the end of 1997 - 65 million (91%), and now - 65, 7 million (91.8%).
Among the specific reasons behind the decline in employment working population in Russia, the following can be noted:
First reason is rooted in the fact that characteristic feature Soviet economy was the excessive number of production personnel (including support and management) of enterprises. The literature has long noted the fact that Soviet enterprises, in comparison with those similar in profile and production volume in Western countries, employed two to three times more workers.
This situation was based, firstly, on the fact that the directors of Soviet enterprises were guided by the deep-rooted dogma of economic theory about the fundamental incompatibility of socialism and unemployment; secondly, the fact that the surplus of labor turned out to be practically useful for the enterprise to serve various administrative duties imposed on it, not related to the nature of its activities: participation in harvesting, in ensuring the safety of products at bases, in the construction of social and cultural facilities, in street cleaning etc. Thus, for many years there was a stable and very widespread hidden unemployment.
The second reason. The transition to market criteria for assessing the management of enterprises reveals the inconsistency of many of them, since they cannot adapt to real demand for types of products, their range, quality, and price. It is hardly possible to privatize such enterprises in the usual way(who needs bankrupt shares?), they will have to be first sanitized, and then sold entirely to individuals or legal entities who are willing and able to pay off debts and make productive investments. It is obvious that these new owners will risk becoming such only if they have complete freedom to free themselves from the burden of unnecessary personnel. And this is another channel that replenishes unemployment.
Creeping inflation characterized by low (up to 10%) annual price growth rates. It is inherent in most countries with developed market economies. The average inflation rate in the countries of the European Community has been 3-3.5% in recent years.
Galloping inflation, unlike creeping ones, becomes difficult to control. Monthly price increases range from several units to several tens of percent. A typical example is the rise in prices in Russia in the first half of the 1990s.
If price growth exceeds 50% per month, then in this case we speak of hyperinflation. The peculiarity of hyperinflation is that it turns out to be practically uncontrollable. Normal functional relationships and control levers do not work.
Examples are the rise in prices in a number of European countries after the First World War, the rise in prices in Hungary from August 1945 to July 1946 (millions of times).
Inflation in Hungary has broken all known previous records. In August 1946, 829 octillions (one followed by 22 zeros) of devalued forints was equal to the value of one pre-war forint. The American dollar was worth 3*1with 22 zeros) forints. In 1947, Japanese fishermen and farmers used scales to weigh currency and change rather than bother with counting. From 1938 to 1948, prices in this country increased 116 times.
High inflation is the main destabilizing factor in a market economy. At the same time, real incomes of the population are decreasing, production costs are rising, while the increase in wages and prices for final products does not keep pace with its pace. In addition, a high level of inflation is usually undesirable for most companies focused on operating domestic market, since a significant part of their profit is “eaten up”. The exception is export-oriented companies whose revenue is calculated in hard currency. This type companies even benefit from internal inflation, as this allows for additional cost savings. The optimal inflation rate for a developed market economy is 2-5% per year.
2.4. The mechanism of the influence of inflation on the economy
What is the mechanism by which inflationary expectations influence the economy? The fact is that people, faced with rising prices for goods and services over a long period of time and losing hope of their reduction, begin to purchase goods beyond their current needs. At the same time, they demand an increase in nominal wages and thereby push current consumer demand to expand. Manufacturers are setting ever higher prices for their products, expecting that raw materials and components will soon become even more expensive. The flight from money begins. An example from our Russian economy (January-April 1992) in conditions of high inflation rates, each manufacturer was afraid that its supplier would greatly raise prices for its products. Therefore, wanting to protect himself in advance, he repeatedly inflated the price of his products. As a result, prices (after their liberalization) jumped not only to the level of previously unsatisfied effective demand, but also to the value of inflation expectations.
So, it is obvious that the expansion due to inflationary expectations of current demand stimulates further price increases. At the same time, savings are reduced and credit resources are reduced, which restrains the growth of productive investment and, consequently, the supply of goods and services. The economic situation in this case is characterized by a slow increase in aggregate supply and rapid growth in aggregate demand. The result is a general increase in prices.
Inflation punishes:
People who receive relatively fixed nominal incomes. Most countries are introducing indexation of social security benefits; Social Security payments are adjusted to the consumer price index to prevent the ravages of inflation;
Some hired workers. Those who work in unprofitable industries and lack the support of strong, militant unions;
Gain from inflation can receive:
People living on unfixed incomes. The nominal incomes of such families may overtake the price level, or cost of living, causing their real incomes to increase;
Firm managers and other profit recipients. If the prices of finished products rise faster than the prices of inputs, then the firm's cash receipts will grow at a faster rate than its costs. Therefore, some earnings in the form of profits will outpace the rising tide of inflation.
Inflation also redistributes income between debtors and creditors. In particular, unexpected inflation benefits debtors (loan recipients) at the expense of creditors (lenders).
Many causes of inflation are observed in almost all countries. However, the combination of various factors in this process depends on specific economic conditions. Thus, immediately after the Second World War in Western Europe, inflation was associated with an acute shortage of many goods. In subsequent years, government spending, the price-wage ratio, the transfer of inflation from other countries, and some other factors began to play a major role in promoting the inflation process. Concerning former USSR, then, along with general patterns, the most important cause of inflation in recent years can be considered a unique disproportionality in the economy, which arose as a consequence of the command-administrative system. The Soviet economy is characterized by long-term development in a wartime regime (the accumulation rate reached 1/2 of national income against 15-20% in Western countries), an excessive share of military expenditures in GNP high degree monopolization of production, distribution and other features.
2.5. Inflation in Russia
Our country is very familiar with demand inflation. It persisted throughout the entire period of the existence of the USSR, but in the form of a shortage of goods, i.e., unsatisfied demand, which, in turn, was a consequence of strict price fixation by the state.
In the early 90s, hyperinflation in our country led to a decline in production and trade. Thus, in 1992, prices increased by an average of 2508%, and in 1993 - by 844%. The fact is that with high levels of inflation, enterprises and commercial organizations do not have the opportunity to find money to implement large long-term projects, which is associated with prohibitively high interest rates.
Between the end of 1994 and the summer of 1996, the Russian government carried out a number of measures designed to suppress inflation and reduce it to a moderate level (strict control of the “printing press of paper money” and the introduction of a currency corridor - a forced limitation on the dollar exchange rate). Thus, in 1995 the inflation rate was 131.3%, in 1996 – 21.3%, and in 1997 it dropped to 11%. A period of active suppression of inflation is usually accompanied by a decline in production and other severe economic consequences.
However, an undervalued exchange rate inevitably leads to an increase in imports, a reduction in domestic production and exports, and the emergence of a high need for foreign currency. Nominal rate The ruble fell behind the rate of inflation. As a result, it fell tens of times, while prices rose thousands of times.
The largest source of inflation in Russia at this time was the federal budget deficit. Refusal to cover the budget deficit with credit resources of the Central Bank of the Russian Federation to government borrowing on the securities market (GKOs).
In our country, the consequence of anti-inflationary policy was a crisis in the banking system associated with the fact that the state and banks were unable to fulfill their obligations to the owners of deposits, primarily GKOs, and, as a consequence, the bankruptcy of many banks and the temporary inability of Russia to service State obligations to international financial institutions. As a result, the August default occurred in 1998, and inflation, due to the devaluation of the ruble against freely convertible currencies, jumped sharply to 80%.
The decisive factor in the failure of all attempts at financial stabilization in the mid-1990s. there were political reasons: the absence of senior bodies among the leaders state power understanding of the need, as well as the desire and readiness to carry out tough anti-inflationary policy. Attempts at financial stabilization were characterized by a lack of comprehensiveness, inconsistency and short-termism, and did not provide for complete budget balancing.
Since 2000, the Government of the Russian Federation has managed to achieve significant success in controlling inflation (Fig. 3) - its level in 2001 decreased to 18.6% compared to 84.4% in 1998. In 2002 it will be 14-15%, and in subsequent years it is planned to reduce to 8-10%. Moderate inflation rates help increase the welfare of the population and companies.
Rice. 3. Annual inflation in Russia
After the mid-1990s. A number of economists in Russia have changed their views on inflation. In particular, according to Doctor of Economic Sciences, Professor V. Pugachev, the fight against inflation in our conditions cannot be reduced to the fight against the budget deficit. Neither cutting budget expenditures nor increasing budget revenues can solve the problem of inflation.
He sees a fundamental measure to reduce inflation in changing tax policy. Taxation of producers should be structured so as not to increase their costs per unit of production. Value added tax (VAT), as well as all taxes and payroll charges (WSA), should be abolished. They only fuel inflation and increase the decline in production. Then the main tax should be income tax (IP), it should be increased to 50-60%.
It would be advisable to provide subsidies to a number of industries: agriculture, food, light industry, etc.
These measures, according to Professor V. Pugachev, will make the majority of enterprises profitable. Then inflation will decline as production increases.
Currently adopted by the Government The Russian Federation's decision to gradually reduce taxes, along with stabilizing the economy in general and inflation in particular, indicates the correctness of this approach.
3. The relationship between inflation and unemployment. Ways to solve these problems
Unemployment and inflation have a certain quantitative relationship. Professor of London economic school A. Phillips at the end of the 50s established the following pattern: the lower the inflation rate, the higher the unemployment rate, and vice versa. And this is understandable. As the unemployment rate increases, the purchasing power of the population decreases. Unemployment has a negative impact on wage levels. As a result, the inflation rate decreases. This process is visually represented by the Phillips curve.
Rice. 4. Phillips curve
Based on the Phillips curve, two options arise for different practical combinations of interrelated quantities:
Or low unemployment and high inflation(point A on the graph);
Or low inflation and high unemployment (point B on the graph).
Thus, under US President R. Reagan, it was possible to curb inflation by increasing the unemployment rate to a record level.
Meanwhile, the Phillips curve reflects the relationship between inflation and unemployment only in the short term. If you take long periods(5-10) years, then with high unemployment, prices continue to rise. This was the case in the USA in the 70s and 80s.
The fact that the Phillips curve does not work in the long run is explained by the following circumstances. In the second half of the 20th century, wages, and thus unemployment benefits, systematically increased even during a decline in production, due to rising qualifications and labor costs. As a rule, entrepreneurs and employees enter into long-term wage agreements. Moreover, due to inflation expectations, entrepreneurs increase wages to compensate for future price increases.
As a result, a phenomenon called cost-push inflation arises.
Cost-cost inflation is a rise in prices that is caused by an increase in production costs (increased wages and rising prices for raw materials, energy, etc.). Therefore, with cost-push inflation, prices rise along with an increase in unemployment.
In this case, the cost of fighting inflation by increasing the unemployment rate becomes very high. According to the calculations of foreign economists, in order for inflation to decrease by 1%, unemployment must exceed its “natural level” by 2%. But this will reduce the real gross national product by 4% compared to its potential value (in 1985 in the USA such losses in the country's income would have amounted to $160 billion).
However, society is forced to pay for inflation and other costs.
The negative social and economic consequences of inflation force governments of different countries to pursue certain economic policies. At the same time, first of all, economists are trying to find an answer to such an important question - to eliminate inflation through radical measures or to adapt to it. This dilemma is solved in different countries taking into account a whole range of specific circumstances. In the USA and England, for example, state level The task is to combat inflation. Some other countries are developing a set of adaptation measures (indexation, etc.).
Assessing the nature of anti-inflationary policy, we can distinguish two approaches. The first approach (developed by representatives of modern Keynesianism) provides for active fiscal policy- maneuvering government spending and taxes in order to influence effective demand.
With inflationary, excess demand, the government limits its spending and increases taxes. As a result, demand is reduced and inflation rates are reduced. However, at the same time, production growth is also limited, which can lead to stagnation and even crisis phenomena in the economy, and to the expansion of unemployment. This is the price for society of containing inflation.
Fiscal policy is also being pursued to expand demand in times of recession. If demand is insufficient, government investment and other spending programs are implemented and taxes are reduced. Low taxes are established primarily in relation to recipients of average and low incomes, who usually immediately realize the benefits. This is believed to increase demand for consumer goods and services. However, stimulating demand budget funds, as the experience of many countries showed in the 60s and 70s, can increase inflation. In addition, large budget deficits limit the government's ability to maneuver taxes and spending.
The second approach is recommended by neoclassical economists, who emphasize monetary regulation, indirectly and flexibly affecting the economic situation. This type of regulation is carried out by a formally non-government-controlled Central Bank, which changes the amount of money in circulation and rates loan interest, thus affecting the economy. In other words, these economists believe that the government should carry out deflationary measures to limit effective demand, since stimulating economic growth and artificially maintaining employment by reducing the natural rate of unemployment leads to a loss of control over inflation.
A modern market economy is inflationary in nature, since it is impossible to eliminate all factors of inflation (budget deficit, monopolies, imbalances in the national economy, inflation expectations of the population and entrepreneurs, transfer of inflation through foreign economic channels, etc.).
In this regard, it is obvious that the task of completely eliminating inflation is unrealistic. Therefore, many states set themselves the goal of making it moderate, controlled, and preventing its destructive scale.
Extensive experience in carrying out anti-inflationary measures in Western countries shows the advisability of combining long-term and short-term policies. Schematically, a set of anti-inflationary policy measures can be presented as follows.
Long-term policy includes, firstly, the task of extinguishing the population's inflationary expectations, which are pumping up current demand. To do this, the government must pursue a clear, consistent anti-inflationary policy, thus winning the trust of the population. It should contribute through its activities (production stimulation, anti-monopoly measures, price liberalization, weakening of administrative customs control, etc.) to the effective functioning of the market, which will affect changes in consumer psychology.
Secondly, measures to reduce the budget deficit (since its financing through loans from Central Bank leads to inflation) by increasing taxes and reducing government spending.
Thirdly, measures in the field of monetary circulation, in particular, the establishment of strict limits on the annual increase in the money supply, which makes it possible to control the level of inflation.
Fourth, weakening influence external factors. In particular, the task is to reduce the inflationary impact on the economy of foreign capital flows (with a positive balance of payments) in the form of short-term loans and government borrowings abroad to finance the budget deficit.
Short-term policy is aimed at temporarily reducing inflation rates. Here, a successful result is possible if aggregate supply expands without increasing aggregate demand. For these purposes, the state provides benefits to enterprises that produce by-products and services in addition to their main production. It can privatize part of its property and thus increase revenues to the state budget and make it easier to solve the problem of its deficit, as well as reduce inflationary demand through sales large quantity shares of new private enterprises. Massive imports of consumer goods contribute to supply growth.
A decrease in current demand with constant supply has a certain impact on inflation rates. This can be achieved by increasing interest rates on deposits that stimulate a higher savings rate.
So, we have looked at ways to solve the problem of inflation. What are the ways to solve the problem of unemployment?
In Western countries, over the past thirty-odd years, a system of social shock absorbers (protective devices) has been in place, which the state uses to ensure the economic security of workers. This system includes special protection measures employees from unemployment and ensuring their right to work
The first element of such a system is employment regulation. The state is taking the following actions:
Reduces the legally established length of the working day and working week during periods of mass unemployment;
Early retirement of workers in the public sector of the economy who have not reached retirement age by 2-3 years;
Creates new jobs and organizes public works (in the field of infrastructure - for the construction of high-quality roads, etc.), especially for the chronically unemployed and young people;
Reduces the supply of labor in the labor market: limits immigration (entry into the country) of those wishing to work and stimulates repatriation (return to their homeland) of foreign workers, etc.
Another element of the system of social shock absorbers are labor exchanges, created in the first half of the 19th century. Labor exchanges are institutions that mediate between entrepreneurs and workers in hiring. IN modern conditions These institutions are, as a rule, state-owned. They are responsible for registering and finding employment for the unemployed, assisting those wishing to change jobs, studying the state of the labor market and providing information about it, and assisting in the vocational guidance of young people. However, a job referral issued by labor exchanges is not mandatory for entrepreneurs, who often prefer to recruit from their own HR departments. Refusal of a job offered by the labor exchange usually entails deprivation of unemployment benefits.
The next element of the system economic security workers are unemployment insurance funds, which provide financial assistance to those who have lost their jobs. These funds are formed largely through deductions from workers' wages. Due to many restrictions, less than half of the unemployed can use unemployment insurance funds.
Serious problems arise in the legislative determination of the amount of unemployment benefits and the duration of their payments. One of them is to correctly determine at what level the unemployment benefit should be set. Extreme cases may be allowed here. The higher the benefit (compared to the highest wage), the less incentive to look for work. However, the smaller the benefit, the more deprivation and suffering the unemployed have, for which it is not their own fault. The solution, obviously, is to find a compromise between maintaining the incentive to find a new job and freeing people from severe economic destitution.
Another problem is no less difficult: for how long should unemployment benefits be paid? The shorter the receiving time financial assistance, the fewer opportunities an unemployed person has to find new job(especially with structural unemployment) or acquire another profession. At the same time, the longer the period of payment of unemployment benefits, the less actively a person seeks to change his profession and looks for another job. Apparently, the period of financial assistance should be sufficient for the unemployed to get out of his crisis state.
Conclusion
Unemployment is temporary lack of employment of the economically active population. The reasons for this phenomenon are varied. Firstly, structural changes in the economy, expressed in the fact that the introduction of new technologies and equipment leads to a reduction in excess labor. Secondly, an economic recession or depression, which forces employers to reduce the need for all resources, including labor. Third, government wage policy: raising the minimum wage increases production costs and thereby reduces the demand for labor, as illustrated by the classical labor market model. Fourthly, seasonal changes in the level of production in certain sectors of the economy. Finally, fifthly, changes in the demographic structure of the population, in particular the growth of the working age population, increases the demand for labor and, consequently, the likelihood of unemployment increases.
Inflation is the overflow of circulation channels with the money supply in excess of the needs of trade turnover, which causes depreciation monetary unit and, accordingly, an increase in commodity prices. Inflation is an increase in the general price level in a country, which arises due to a long-term imbalance in most markets in favor of demand. In other words, inflation is an imbalance between aggregate demand and aggregate supply. Specific economic circumstances can also spur price increases.
As we have found out, there is a direct relationship between inflation and unemployment. However, decisions when, with inflationary, excess demand, the state limits its spending and increases taxes, are flawed. As a result, demand is reduced and inflation rates are reduced. But at the same time, the growth of production is also limited, which can lead to stagnation and even crisis phenomena in the economy, to the expansion of unemployment.
Unemployment and inflation are objective categories of any market economy. Their complete absence leads to a decrease and even cessation of economic growth. But, on the other hand, too high a level of unemployment and inflation leads to macroeconomic instability and can lead to a deep crisis.
The solution may be detailed modeling and regulation of these processes; solving inflation problems not by increasing unemployment. In this case, the approach recommended by neoclassical economists, who highlight monetary regulation, which indirectly and flexibly affects the economic situation, seems more effective. This type of regulation is carried out by a formally non-government-controlled Central Bank, which changes the amount of money in circulation and interest rates, thus influencing the economy.
The state, as a supervisory body, is necessary to carry out stabilization policy– a set of macroeconomic policy measures aimed at stabilizing the economy at the level of full employment, or potential output. There are a lot of recipes for government intervention in the economy in conditions of macroeconomic instability. However, the general principles of influencing the level of business activity boil down to the following provisions: in conditions of recession, the government should pursue a stimulating policy, and in conditions of recovery, a contractionary macroeconomic policy, trying to prevent a strong “overheating” of the economy (inflationary gap). In other words, the government must smooth out the amplitude of fluctuations in actual GDP around the trend line.
One can compare stabilization policy to shooting at a moving target: the object of government influence (the “target” is the country’s economy) is always in motion. And there is a great danger of missing and not making an accurate shot. And if so, then all stabilization policy measures will turn out to be useless or even harmful. Discussions on this matter have been ongoing by economists up to the present day.
American capitalism differs from Japanese capitalism, and Japanese capitalism differs from the transition economy of Russia. Therefore, there can be no universal recipes for stabilization policy. However, knowledge of the basic patterns of cyclical development of the economy is an absolutely necessary prerequisite for effective macroeconomic policy of the government in any country.
List of used literature
1. Money and inflation // Society and economics. – 2002. – No. 1. – P. 62-72.
2. Davydov in economics: world experience and our problems. –M.: Economics, 1991.
3. Fundamentals of the doctrine of economics. – M.: Delo, 1994.
4. Ivashkovsky. – M.: Delo, 2000.
5. Kravchenko inflation in Russia // Management in Russia and abroad. – 2000. – No. 5. – P. 141-144.
6. The state of the economy and the objectives of economic policy // Economist. – 2001. – No. 4. – P. 12-22.
7. Course economic theory: Textbook for universities / Ed. , . – Kirov: ASA, 2001.
8. Lipsitz. – M.: Finance and Statistics, 1997.
9. , Bru: principles, problems, politics: Textbook in 2 volumes. M.: Respublika, Infra-M, 2001.
11. Inflation in Russia: the current situation and ways of control // Society and Economics. – 2002. – No. 6. – P. 72-82.
12. Problems, successes and difficulties of the transition economy // Ed. . – M.: Delo, 2000.
13. Losses from inflation in Russia // Questions of Economics. – 2002. – No. 2. – P. 49-60.
14. Fundamentals of economic theory: Unemployment and inflation. – M.: Nauka, 1998. – 180 p.
15. Russian statistical yearbook. – M.: Goskomstat, .
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Macroeconomic instability: inflation
Inflation is the process of depreciation of money as a result of the overflow of commodity circulation channels with the money supply. Inflation is the result of macroeconomic instability when aggregate demand exceeds aggregate supply. Regardless of the area in which inflation originates, a chain reaction occurs and Feedback, because production, distribution, exchange, consumption are interconnected.
Being a consequence of economic imbalance, inflation, in turn, aggravates reproduction imbalances and disorganizes economic relations. Uneven price growth across product groups generates inequality in profit rates and wage rates, and stimulates the outflow of resources from one sector of the economy to another (in Russia, from industry and agriculture to trade and the financial and banking sector).
Inflation depreciates the monetary savings of enterprises and the population and weakens interest in the results of economic activity, stimulates the development of the “shadow” economy and antisocial phenomena. Inflationary processes are characteristic of economically developed countries and developing ones; for countries with both planned and market economies.
IN economic science The following causes of inflation are identified:
1. growth of government spending, to finance which the state often resorts to money emission, increasing the money supply beyond the needs of commodity circulation;
2. a reduction in the real volume of national production, which, with a stable level of money supply, leads to an increase in inflation rates, because a smaller volume of goods and services corresponds to the same amount of money;
3. the monopoly of trade unions, which limits the ability of the market mechanism to determine the level of wages acceptable to the economy;
4. monopoly: large firms on determining prices and their own production costs, especially in the primary industries.
Inflation is measured using the consumer price index, which is calculated relative to a base year. The inflation rate can be determined as follows:
Inflation rate = Current year price index - Base year price index / Base year price index X 100%.
From the point of view of manifestation, a distinction is made between open and suppressed (hidden) inflation. Open inflation is manifested in a prolonged increase in the price level, suppressed inflation is characterized by a relatively stable price level in the economy, but its immediate manifestation is a commodity deficit, which also essentially means the depreciation of money. In a market economy, inflation is open; in a command-administrative economy, it is suppressed.
Open inflation can occur at different speeds. Depending on the growth rate, there are:
1. creeping, or moderate, inflation, when price growth is less than 10% per year. Western economists consider it as an element of normal economic development that does not cause much concern;
2. galloping inflation - annual price increases amount to tens and hundreds of percent. Such inflation is dangerous for the economy and requires anti-inflationary measures;
3. hyperinflation - prices are rising at an astronomical rate, reaching several thousand percent per year. Such inflation paralyzes the economic mechanism, destroys economic ties, and causes a transition to barter exchange. Open inflation can take the forms of demand inflation and supply (cost) inflation. Demand-pull inflation is caused by an excess of aggregate demand relative to actual output. Demand demand inflation can be caused by an increase in the money supply, an increase in government spending and private investment, and adaptive inflation expectations that increase the velocity of money circulation.
Supply-side inflation means an increase in prices caused by an increase in production costs in the face of underutilized production resources. Increasing unit costs reduces the amount of output that producers are willing to supply at current price levels. As a result, the supply of goods decreases while demand remains unchanged and the price level increases.
Based on the degree of balance in price growth, a distinction is made between balanced and unbalanced inflation. With balanced inflation, the prices of various goods relative to each other remain unchanged, and with unbalanced inflation, the prices of various goods change relative to each other in different proportions.
There are predicted and unpredictable inflation. Predicted inflation is inflation that is taken into account in the expectations and behavior of economic entities; unpredictable inflation comes as a surprise to the population, because the actual growth rate of the price level exceeds the expected one.
The combination of balanced and predictable inflation does not cause much harm to the economy, but unbalanced and unpredictable inflation is dangerous and fraught with large costs during the adaptation period.
The negative social and economic consequences of inflation force governments of different countries to pursue anti-inflationary economic policies.
The fight against inflation is possible only at the macroeconomic level and by the state. Anti-inflationary measures can only be applied to open inflation; the repressed cannot be limited because it cannot be measured. The first step in the fight against suppressed inflation should be its translation into open inflation.
The anti-inflation program should be based on an analysis of the causes and factors causing inflation and a set of economic policy measures that help reduce inflation.
There are two approaches to managing the economy in conditions of inflation:
1. adaptation policy;
2. an attempt to reduce inflation through anti-inflationary measures.
Adaptation policy means that the economy must be adjusted to the conditions of inflation. Adaptive mechanisms include:
1. price and income policy, which means that the government either “freezes” prices and nominal incomes, or “links” price increases to increases in wages, and increases in incomes to increases in labor productivity;
2. increase in the discount rate (refinancing rate). The set of government measures to combat inflation includes:
3. limitation of the money supply, which can be reduced sharply (by the shock therapy method) or gradually (by the grading method), which will be successful if the growth of the money supply and the price level does not exceed 20-30% per year;
4. increasing the mandatory reserve rate;
5. reduction of government spending and social programs;
6. committing tax system and an increase in tax revenues to the budget.
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LECTURE 4. Macroeconomic instability: unemployment and inflation
One of the most important patterns in the functioning of a capitalist market economy is macroeconomic instability, manifested in periodic fluctuations in total production, employment (unemployment) and the price level. Unemployment and inflation, being among the most important macroeconomic problems, are the most striking manifestations of macroeconomic instability. At the same time, both unemployment and inflation have a strong impact on the socio-economic development of society as a whole, being the object not only of close attention of academic economists, but also of state macroeconomic policy.
1. Economic cycles. Potential and actual GDP. Causes of economic fluctuations
unemployment inflation economic cycle
Economic cycles. Potential and actual GDP.
The economic cycle represents periodically repeating and successive ups and downs of economic activity against the background of the general trend of economic growth.
Figure 4.1 shows a possible picture of the cycle. We plot years on the abscissa axis. On the y-axis is the volume of GDP as the most general indicator of economic activity. The straight line depicts the trend of economic growth (trend), that is, it represents the dynamics of the volume of potential GDP over time. The wavy line depicts the actual cyclical development of the economy, that is, it represents the dynamics over time of the volume of actual GDP (in nominal terms).
Potential GDP is the maximum volume of real output that an economy is capable of producing over a given period of time (usually a year) with the full and efficient use of all available factors of production and available technology.
Potential GDP therefore determines the productive potential of the economy and depends on the size of the total labor force and labor productivity. (More about this in the topic “Economic Growth”).
Actual GDP is the volume of real output created in the economy over a certain period.
The level of actual GDP is determined by the interaction of aggregate demand and potential GDP. If the level of aggregate demand is less than potential GDP, then the level of actual GDP will be lower than potential GDP, since it will be equal to the level of aggregate demand. When aggregate demand increases, actual GDP can reach the level of potential GDP, but by definition cannot be higher than it (Figure 4.1A).
In Figure 4.1, actual GDP is presented in nominal terms: upward deviations of the wavy line from the trend indicate inflation.
Causes of economic fluctuations.
The economic cycle first manifested itself in England, where in 1825 the first crisis of overproduction was noted (as an economic downturn or recession was then called). Since then, this phenomenon has been repeated periodically every 7-12 years. Since 1857, the cycle has become global in nature, since this year the economic downturn (recession) hit all the most developed countries. The deepest recession in capitalist countries took place in 1929-1933 and went down in history as the “Great Depression”: the drop in production reached 40% in some countries.
The scientific theory of cyclical development was developed by K. Marx in “Capital” on the basis of the labor theory of value. The classics and neoclassics did not recognize the natural nature of cyclical development. They believed (many of their followers still believe) that recessions are caused by exogenous (that is, external to the economy) factors: wars, revolutions, but mostly incorrect monetary policy states.
Since the time of Keynes, the opinion has been established that the reason economic downturns rooted in insufficient aggregate demand. Accordingly, the cause of macroeconomic fluctuations (that is, the existence of a cycle), according to most modern economists, is fluctuations in aggregate demand, especially investment demand.
Rice. 4.2
Phases of the economic (business) cycle
The economic cycle is divided into four phases (Figure 4.2):
a) depression - a period of rapid decline in aggregate demand combined with a rapid decline in GDP and rising unemployment, which ultimately ends in reaching the lowest point of the cycle (reaching the lowest point of the cycle is possible without depression).
b) recovery - an increase in aggregate demand combined with GDP growth and a reduction in unemployment;
c) boom - a period when aggregate demand reaches and then, as it approaches the peak of the cycle, exceeds the level of potential GDP. Full employment is achieved, the emergence of excess demand leads to an increase in the general price level (inflation).
d) recession - the phase following the boom. Aggregate demand declines, causing initially a modest decline in GDP and unemployment, and then a depression as aggregate demand declines further. (The difference between a recession and a depression is that during a recession the price level remains unchanged; if a recession turns into a depression, the price level falls).
2. Theories of cyclical development
Subsequently, cycles of other durations were discovered, associated with periodic renewal components fixed capital and inventory.
Cycles of short duration (3-4 years) are called Kitchin cycles and are associated with fluctuations in inventory.
N. Kondratiev discovered “large cycles of economic conditions” (1928) - cycles lasting 40-50 years associated with structural changes in the economy.
In the 40s of the twentieth century Austrian economist J. Schumpeter created a general picture of cycles of varying durations. They seem to be strung on top of each other and either weaken or strengthen each other (Figure 4.3).
In modern economic theory there is no unity of views on the problems of cyclical development. Many economists, for example, representatives of monetarism (M. Friedman), being followers of neoclassics in this matter, recognize the presence of macroeconomic fluctuations, but do not recognize the natural and regular nature of economic cycles. Following the classics and neoclassics, they express their belief in the exogenous nature of macroeconomic fluctuations, arguing that their main cause is incorrect economic, especially monetary, policy.
A prominent representative of the theory of rational expectations, R. Lukash, believes that cycles are caused by monetary shocks, but not all kinds, only unexpected ones.
You can also note “The Theory of the Real Economic Cycle” by A. Stockman.
Quite popular theories explain the economic cycle by periodic fluctuations in economic policy: the state, trying to avoid cyclical extremes (unemployment and inflation) during election campaigns, contributes to the swing of the economy.
3. Unemployment and its measurement. Forms of unemployment
Unemployment and its measurement.
Unemployment refers to the underutilization of labor. The unemployed are people who are part of the total labor force but do not have a job. The size of unemployment is characterized by the unemployment rate.
Unemployment rate = (unemployed: labor force)*100%, or
where u is the unemployment rate, U is the unemployed, L is the labor force. Since the labor force (L) is the sum of the unemployed (U) and the employed (E), the unemployment rate determines the share of unemployed in the (total) labor force, expressed as a percentage.
The size of the labor force depends on the population of the country and includes those who are able and willing (actively looking for work) to work. The workforce does not include:
children under 16 years old,
persons in specialized institutions (prisons, mental hospitals),
dropouts from the labor force (people who can work, but for some reason do not work and are not looking for work).
Full employment does not mean that one hundred percent of the workforce has a job. Consequently, the unemployment rate cannot be equal to zero, that is, there is a level of unemployment that is considered inevitable (the natural rate of unemployment). To understand what the natural rate of unemployment is, we need to consider:
Forms of unemployment.
Frictional unemployment (UF) is associated with changing jobs. People who quit one job can start another the very next day. Sometimes they may seek new employment for a period of time, becoming frictionally unemployed as labor markets fail to immediately balance the demand for labor with the supply of labor. Part frictional unemployment can be seen as voluntary because people decide to leave their jobs in the hope of finding a better one. Another part of frictional unemployment is involuntary: workers are fired and they are forced to look for a new job. Frictional unemployed include people who are waiting for their first job in life.
Structural unemployment (US) is long-term unemployment caused by the decline of individual industries and changes in production processes. It occurs when, over time, changes occur in the structure of consumer demand and in technology that change the structure of demand for labor: the structure of the labor force does not correspond to the structure of jobs (unemployment in some industries is accompanied by a shortage of workers in others).
It can sometimes be difficult to distinguish structural unemployment from frictional unemployment. However, the structurally unemployed, as a rule, cannot get a job without retraining or changing their place of residence. Structural unemployment is more long-term and therefore a more serious problem. IN developed countries government bodies develop and implement special programs in order to reduce structural unemployment.
Cyclical unemployment occurs during the recession phase and is caused by a fall in aggregate demand. This is the most severe and serious form of unemployment.
4. Natural rate of unemployment. Okun's Law
Natural rate of unemployment.
Since frictional and structural forms of unemployment are inevitable and exist at all phases of the cycle, they are combined under common name « natural unemployment"(U*). If there is no cyclical unemployment, then the unemployment rate is called the natural unemployment rate (u*):
u* = (UF + US)/L = U*/L
Economists currently believe that the natural rate of unemployment is approximately 5 - 6%. If unemployment is at its natural rate, the economy is said to have reached full employment.
The volume of real GDP that corresponds to the natural rate of unemployment is called the production potential of the economy (potential level of real GDP).
The main economic consequence of excessive (i.e. cyclical) unemployment is underproduction: if the economy is unable to provide enough jobs, some of it will production potential is lost irretrievably. The difference between potential and actual levels of real GDP is called the GDP lag (or output gap).
Sometimes the actual level of GDP may exceed the potential level (for example, during a war, the state may prohibit workers in certain industries from quitting, thereby artificially reducing frictional unemployment).
Okun's Law. American economist Arthur Okun expressed in mathematical form the relationship between the unemployment rate and the GDP gap:
Y - actual GDP, Y* - potential GDP, (Y - Y*)/Y* in percent - output gap, u - actual unemployment rate, u* - natural unemployment rate, (u - u*) - cyclical unemployment rate , is an empirical coefficient, the values of which usually fall in the range from 2 to 3.
The above formula means: if the actual unemployment rate exceeds the natural rate by 1 percentage point, the gap between actual GDP and potential GDP (output gap) will be %.
Y - real GDP in the current year, Y-1 - real GDP last year, (Y - Y-1)/Y-1 in percent - annual growth rate of real GDP, u - actual unemployment rate in the current year, u-1 - actual unemployment rate last year.
The essence of this interpretation of Okun's law is as follows:
If the actual unemployment rate remains at last year's level, then the real GDP growth rate is 3% per year.
A one percentage point increase in the unemployment rate reduces the real GDP growth rate by two percentage points.
5. Inflation and its measurement. Inflation rate
Inflation is an increase in the price level in an economy that continues over a period of time. An increase in the price level, inflation, means a decrease in the purchasing power of money. Being, along with unemployment, a manifestation of macroeconomic instability, inflation is the object of macroeconomic policy.
Annual increases in the price level can be small and gradual (creeping inflation) or large and accelerating (hyperinflation).
Inflation is measured using an indicator called the inflation rate. The inflation rate shows the increase (increase) in the price level and is calculated using price indices.
Inflation rate this year:
p = (P - P-1) : P-1,
One of the serious problems of inflation is the uneven rise in prices for various goods. While prices for some goods can rise significantly, for others they rise more slowly and belatedly. As a rule, wage rates begin to rise with the greatest delay.
If the rate of inflation is known, then using the “rule of 70” you can quickly calculate the number of years during which the price level doubles. For this you need the number “70”.
6. Demand inflation and cost inflation
Demand inflation.
From the last lecture we know that there are two types of inflation generated by different reasons: demand inflation and cost-push inflation.
Demand-pull inflation occurs as a result of an increase in aggregate demand once the potential level of real GDP is reached. Figure 4.4 shows the relationship between aggregate demand growth and demand-pull inflation.
If aggregate demand grows on the Keynesian (horizontal) segment of the aggregate supply curve, that is, the AD1 curve shifts to AD2, the price level will not change and will remain equal to P1. At the same time, the level of real GDP will increase, therefore, the unemployment rate will decrease.
If the growth of aggregate demand continues so that the AD2 curve shifts to position AD3, that is, the equilibrium moves to the border of the ascending and classical segments, the price level will rise to P3. Real GDP will increase, reaching the potential level Qf. Unemployment will reach its natural level. An increase in the price level in an upward segment until reaching potential GDP (Qf) is called premature inflation.
Once aggregate demand exceeds AD3, it becomes excess aggregate demand, and then true demand-pull inflation begins.
Let us consider how the values of nominal and real GDP change due to the growth of aggregate demand.
On the horizontal segment: the price level is unchanged (P = const), therefore, nominal and real GDP grow at the same rate, since there is no inflation and there is no change nominal GDP reflect only changes in real GDP.
In the intermediate period, nominal GDP grows faster than real GDP, since the growth of nominal GDP reflects both the growth of real GDP and the rise in the price level (inflation)
On the vertical segment, true (pure) demand inflation occurs, since the growth of nominal GDP reflects only an increase in the price level, and real GDP remains unchanged.
Thus, the source and cause of true demand inflation is excess aggregate demand.
Rice. 4.4
Cost inflation.
Cost-push inflation occurs as a result of rising resource prices. Faced with rising costs (due to rising resource prices), producers charge higher prices for their products, trying to compensate for increased costs by inflating prices in order to maintain profits.
In Figure 4.5 we see how rising costs shift the aggregate supply curve AS to the left to position AS1. The price level rises from P to P1, real GDP decreases from Q to Q1, therefore, employment decreases - stagflation begins, that is, a situation in which a low level of real GDP is combined with an increase in the price level (inflation).
Rice. 4.5
Main sources of cost inflation:
1. an increase in nominal wages (as a rule, due to a change in the minimum wage rate by law), not supported by a corresponding increase in labor productivity.
2. an increase in prices for energy resources and raw materials (either due to a reduction in the supply of these resources on the market, or as a result of the action of cartels, or due to a fall in the country’s exchange rate, which leads to an increase in the cost of imported resources).
In reality, it can be difficult to distinguish between the two types of inflation. However, it is generally accepted that demand-pull inflation continues as long as there is excess aggregate demand. Cost-push inflation automatically limits itself, reducing the demand for resources, and gradually disappears (however, the problem of increasing real output and employment remains).
7. Inflation and real income. The impact of inflation on the redistribution of income and wealth. The impact of inflation on national output
Inflation and real income. The impact of inflation on the redistribution of income and wealth.
One of the most serious consequences of inflation is the redistribution of income. As noted, inflation reduces the purchasing power of money, so many people believe that inflation affects the entire society. To find out whether this is actually so, it is necessary to analyze how inflation, nominal income and real income are related to each other.
Nominal income is the amount of money households receive for factors of production. Real income is nominal income divided by the price level.
If the inflation rate is known, as well as the percentage change in nominal income (= growth rate of nominal income), then
DYreal (in %) = DYnom. (V %) - ,
where Y is income.
In conditions of inflation, real income:
will decrease if nominal income grows at a rate that is lower than the rate of inflation;
will not change if nominal income grows at the same rate as inflation;
will increase if nominal income grows faster than inflation.
Thus, not everyone suffers from inflation.
Recipients of fixed nominal income (government employees, pensioners, welfare recipients), as well as savers and creditors, suffer.
The winners are entrepreneurs whose prices are finished products prices for resources, debtors, and also the state, which pays for its obligations with “cheap” money, are growing faster.
In other words, inflation “taxes” those on fixed incomes. cash income, and “subsidizes” those whose cash incomes grow faster than inflation.
As a result, a redistribution of income and wealth occurs.
The influence of inflation on the volume of national production.
The impact of inflation on national output (real GDP) and employment may vary.
Some demand-side inflation is accompanied by an increase in real GDP and a decrease in unemployment (premature inflation on the upward slope of the aggregate supply curve).
With true demand inflation, real GDP does not change, remains at its potential level, and the economy is at full employment.
If inflation is caused by rising costs, then real GDP declines and unemployment rises.
Hyperinflation (that is, extremely high and rising rates of inflation) has a devastating impact on national output and employment. It is usually preceded by an inflationary spiral (wage-price spiral): for example, an initial increase in the prices of goods and services, caused by rising prices for raw materials, can lead to demands from trade unions for an increase in money wages. If these requirements are met, the increased costs for wages will push producers to raise prices for final goods and services, etc.
Hyperinflation leads to a situation in which people lose confidence in money and turn to barter. In this case, there is a great danger of economic collapse and serious social upheaval.
Hyperinflation is a rare occurrence. Its causes lie in both politics and economics, such as excess money supply to cover government spending during a war, or acute shortages of goods and services coupled with suppressed demand, as is usually the case in the immediate post-war years.
8. Stabilization policy and its methods
Stabilization policy is the management of the level of aggregate demand in the economy through fiscal and monetary policies in order to mitigate or even eliminate fluctuations in the level of economic activity (real GDP and employment) associated with the economic (business) cycle.
The main goal of stabilization policy is to “fine-tune” aggregate demand in order to prevent:
1. insufficiency of aggregate demand compared to potential GDP (to avoid losses in output and unemployment);
2. excess aggregate demand compared to potential GDP (to prevent inflation);
Of course, the ideal policy would be one that would ensure growth in aggregate demand exactly in line with growth in potential GDP (the solid straight line in Figure 4.6). However, the development and implementation of stabilization policy faces a number of problems related to the accuracy of the forecast of economic development, the precise determination of the time and volume of measures taken. The actual results of this policy look more modest: at best, the state manages to mitigate recessions and booms (the dotted curve in Figure 4.6).
The methods of stabilization policy are the instruments of fiscal and monetary policy, which will be analyzed in lectures 6 and 7.
Stabilization policy is one of the aspects of the state's macroeconomic policy. Other important areas are supply policy, which affects the growth rate of potential GDP (Lecture 10), and exchange rate policy, which affects the competitiveness of goods and services supplied to the foreign market (Lecture 11).
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