EXECUTIVE SUMMARY

Inflation and unemployment are the major factor of macroeconomics. Losing the purchasing
power and increasing the cost of production indicates the high rate of inflation. Unemployment
occurs when people are jobless. Moreover, inflation and unemployment have a negative
relationship. All the factors are interrelated and at the time of analyzing one must consider
each and every factor with equal consideration.

If we analyze the economic condition of our country it is clear that inflation is higher in recent
years comparing with past decade. At the same time unemployment rate is inverse all the time.
Inflation fluctuates all the time because of the fluctuation of the money supply. But in recent
years, we came to know that international affairs are influencing to increase the inflation rate.
Consistent budget deficit and exchange rate deteriorate the economic growth which directly
relates with unemployment & inflation.

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Introduction

“Too much money in circulation causes the money to lose value”-this is the true meaning
of inflation.
“Unemployment occurs when people are without jobs and they have actively looked for work
within the past four weeks”- ILO.
In this report I tried to show that how inflation and unemployment related to each other & how
important it is for economy & how it works in our country.

Rationale of the study

The case study is assigned by our course teacher Md. Mourtuza Ahamed as a part of our
“Macroeconomics” course. The topic of our case study is “A case Study of Bangladesh: Inflation
and Unemployment.”
By conducting this study we can enhance our knowledge and skill to apply various research
methods in professional life on higher educational life. The report has given us a chance to raise
our quality in developing research instrument and its applications. By doing so, we can boost
our acceptability in job market and develop our real life knowledge.

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Objective of the Case Study

Primary objective
The main objective of the study is to know how the factors of macroeconomics work in our
country.
Secondary objective
The case study has the following objectives:
 To know about Inflation and unemployment.
 How inflation and Unemployment fluctuate.
 Relationship among the inflation and unemployment.
 Causes behind the inflation and unemployment.

Methodology
We have used the concept of the course, information of the case study.
Sources of Data
Here the secondary sources of information were used. The secondary sources are:
 Books.
 Website.

Limitations
While conducting the report on “A case Study of Bangladesh: Inflation and Unemployment”,
some limitations were present there:
 Because of time shortage many related area can’t be focused in depth.
 Website in different organization of Bangladesh contains poor information.
 Recent data and information on different activities were unavailable.

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 Inflation

Definition
“Too much money in circulation causes the money to lose value”- this is the true meaning
of inflation. The popular opinion about the costs of inflation is that inflation makes everyone
worse off by reducing the purchasing power of incomes, eroding living standards and adding, in
many ways, to life’s uncertainties. In economics, inflation is a rise in the general level of prices
of goods and services in an economy over a period of time. Inflation refers to a rise in prices
that causes the purchasing power of a nation to fall. Inflation is a normal economic
development as long as the annual percentage remains low; once the percentage rises over a
pre-determined level, it is considered an inflation crisis. In another word “Inflation means that
your money won’t buy as much today as you could yesterday”.

Definition of Inflation rate (consumer prices)

This entry furnishes the annual percent change in consumer prices compared with the previous
year's consumer prices. The inflation rate is the percentage rate of change of a price index over
time.

Effect on the economy

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General Effect
An increase in the general level of prices implies a decrease in the purchasing power of the
currency. That is, when the general level of prices rises, each monetary unit buys fewer goods
and services. Increases in the price level (inflation) erode the real value of money (the
functional currency) and other items with an underlying monetary nature (e.g. loans and
bonds). For example if one takes a loan where the stated interest rate is 6% and the inflation
rate is at 3%, the real interest rate that one are paying for the loan is 3%. It would also hold true
that if one had a loan at a fixed interest rate of 6% and the inflation rate jumped to 20% one
would have a real interest rate of -14%.

Negative Effect
High or unpredictable inflation rates are regarded as harmful to an overall economy. They add
inefficiencies in the market, and make it difficult for companies to budget or plan long-term.
Inflation can act as a drag on productivity as companies are forced to shift resources away from
products and services in order to focus on profit and losses from currency inflation. Uncertainty
about the future purchasing power of money discourages investment and saving and inflation
can impose hidden tax increases. In case of international trade, ‘Higher inflation in one
economy than another will cause the first economy's exports to become more expensive and
affect the balance of trade’

Positive Effect
Positive effects include ensuring central banks can adjust nominal interest rates (intended to
mitigate recessions), and encouraging investment in non-monetary capital projects. It puts
impact on Labor-market adjustments, Room to maneuver, Mundell-Tobin effect, Instability with
Deflation etc.

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Causes behind inflation

In developing countries, in contrast, inflation is not a purely monetary phenomenon, but is

often linked with fiscal imbalances and deficiencies in sound internal economic policies. Beside,
factors typically related to fiscal imbalances such as higher money growth and exchange rate
depreciation arising from a balance of payments crisis dominate the inflation process in
developing countries. There were different schools of thought as to the causes of inflation.
Most can be divided into two broad areas:

 Quality theories of inflation.

 Quantity theories of inflation.

The quality theory of inflation rests on the expectation of a seller accepting currency to be able
to exchange that currency at a later time for goods that are desirable as a buyer.
The quantity theory of inflation rests on the quantity equation of money that relates the money
supply, its velocity, and the nominal value of exchanges.
Adam Smith and David Hume proposed a quantity theory of inflation for money, and equality
theory of inflation for production. After analyzing two theories of causes we have got here
some physical cause to face which cover both theories depending on a number of factors.
These are given below-

Excess of money
Inflation can happen when governments print an excess of money to deal with a crisis. As a
result, prices end up rising at an extremely high speed to keep up with the currency surplus.
This is called the demand-pull, in which prices are forced upwards because of a high demand.

Rise in production cost

Another common cause of inflation is a rise in production costs, which leads to an increase in
the price of the final product. For example, if raw materials increase in price, this leads to the
cost of production increasing, which in turn leads to the company increasing prices to maintain
steady profits? Rising labor costs can also lead to inflation. As workers demand wage increases,
companies usually chose to pass on those costs to their customers.

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International lending & national debt

Inflation can also be caused by international lending and national debts. As nations borrow
money, they have to deal with interests, which in the end cause prices to rise as a way of
keeping up with their debts. A deep drop of the exchange rate can also result in inflation, as
governments will have to deal with differences in the import/export level.

Government taxes

Finally, inflation can be caused by federal taxes put on consumer products such as cigarettes or
fuel. As the taxes rise, suppliers often pass on the burden to the consumer; the catch, however,
is that once prices have increased, they rarely go back, even if the taxes are later reduced.

War

Wars are often cause for inflation, as governments must both recoup the money spent and
repay the funds borrowed from the central bank. War often affects everything from
international trading to labor costs to product demand, so in the end it always produces a rise
in prices.

Lists of Inflation Rate from 2013-2017

YEAR JAN FEB MAR APR MAY JUNE JULY AUG SEP OCT NOV DEC AVERAGE

2017 5.15 5.31 5.39 5.47 5.94 5.57 5.89 5.76 6.12 6.04 5.91 5.83 5.70%

2016 6.07 5.62 5.65 5.61 5.45 5.53 5.40 5.37 5.53 5.57 5.38 5.03 5.52%
2015 6.04 6.14 6.26 6.32 6.19 6.25 6.36 6.17 6.24 6.19 6.05 6.10 6.19%

2014 7.50 7.44 7.48 7.46 6.97 7.48 7.04 6.91 6.84 6.60 6.21 6.11 7.00%

2013 6.62 7.84 7.71 8.37 7.98 8.05 7.85 7.39 7.13 7.04 7.15 7.35 7.54%

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 Inflation Rate

7.54 7.00
6.19 5.70
5.52

2013 2014 2015 2016 2017

Steps to be taken
These results have important policy implications for both domestic policy makers and the
development partners. First, taking into consideration that the inflation rate is not indexed in
the wages and salaries, inflation will lead to a decrease in the purchasing power and an increase
in the cost of living.
Second, given that the country frequently has to balance the credit requirements by the private
and public sector against both inflationary and balance of payments pressures, it is not always
possible for the monetary authority to increase (or adjust) the nominal interest rate above the
expected (or actual) inflation rate through contradictory monetary policy 11.

In this regard, the monetary authority can think of an alternative way by working on the
expectations channel to reduce inflation. This requires credibility of the monetary authority in
following through its monetary program as communicated in advance to the stakeholders.

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 Unemployment

Definition
The percentage of the work force that is unemployed at any given date is known as
unemployment rate. In another word, “An economic condition marked by the fact that
individuals actively seeking jobs remain unemployed is known as unemployment”

According to International Labor Organization (ILO), “Unemployment occurs when people are
without jobs and they have actively looked for work within the past four weeks”.

Definition of Unemployment Rate

The percentage of the total labor force that is unemployed but actively seeking employment
and willing to work is treated as unemployment rate. A person who simply expresses interest in
having a job is classified as unemployed. The unemployment rate represents the number
unemployed as a percent of the labor force. It is a serious social evil & the rate of
unemployment is an indicator of the health of an economy"

Effect of unemployment
It is believed that unemployment is a serious social evil & the high rate of unemployment
indicates unhealthy situation of an economy. If the full level of employment can be used then it
is possible for a country to enrich itself. Each and every country in this world is trying to reduce
the rate of unemployment for their betterment. During unemployment, it puts great effect on
the economy that is given below:-

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Effect of unemployment on the economy

Wasted production

Unemployed workers represent wasted production capability. This means that the economy is
putting out less goods and services than it could be producing.

Unemployment financial costs

The government and the nation suffer. The greater the number of the unemployed or the
longer they are without work the more money the government has to shell out. Because they
are out of production & may produce output for the nation. Therefore, the nation not only has
to deal with the lost income and decreased production but also with additional cost.

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Spending power

The spending power of an unemployed person and his/her family decreases drastically and they
would rather save than spend their money, which in turn affects the economy adversely.

Reduced spending power of the employed

Increased taxes and the insecurity about their own work may affect the spending power of the
working people as well and they too may start to spend less than before thus affecting the
economy and also the society in a negative manner.

Recession

With the increase rates of unemployment other economy factors are significantly affected,
such as: the income per person, health costs, quality of health-care, and standard of leaving and
poverty which may cause recession.

Effect of unemployment on the society

Standard of living

Most people rely on their income to maintain their standard of living. The loss of a job will
often directly threaten to reduce that standard of living. This creates a number of emotional
problems for the worker and the family.

Tension over taxes rise

Unemployment also brings up discontent and frustration amongst the taxpaying citizens. In
order to meet the demands of the unemployment fund the government many a times may
have to increase the taxes thus giving way to restlessness amongst the taxpaying citizens.

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Insecurity amongst employees

The prevailing unemployment and the plight of the unemployed people and their families may
create fear and insecurity even in the currently employed people.

Crime and violence

Increase in the rate of crime due to unemployment.

Employment gaps

To further complicate the situation the longer the individual is out of job the more difficult it
becomes to find one. Employers find employment gasps as a negative aspect. No one wants to
hire a person who has been out of work for some time even when there’s no fault of the
individual per say.

Causes behind unemployment

Minimum wages

If there are unemployed workers who want jobs, the price of labor or the wage will simply drop
until all of the labor force is employed. This helps the employers to keep the wages level
sustainable. On the other hand, raising the minimum wage therefore also increases
unemployment.

Labor union

Another closely related cause of unemployment lies with the actions of labor unions. These
unions force firms to spend more money on each worker, some in the form of wage and some
in the form of benefits. This raises the wages of workers above the market clearing level and
creates a situation in which there are more people who want to work at the wage than firms.
Labor unions increase the wages and benefits of workers who are employed, but may
simultaneously increase the number of workers who are unemployed.

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Efficiency wages

The basic idea behind efficiency wages is that firms benefit by paying their workers above the
equilibrium wage, since higher wages produce happier, healthier, and more productive
workers, and may even increase worker loyalty. But, when the firms pay efficiency wages that
are above the equilibrium level, they also create an excess in the labor supply, more people
want to work for the wage. Efficiency wages, like the minimum wage and labor unions,
therefore increase the wages for workers who are employed but also increase overall
unemployment.

Job search

When a person decides that he wants to work, he cannot simply become employed. During the
process of looking for the right job, the person is considered as an unemployed member of the
labor force.

Economic growth

The greater the amount of goods and services produced, the greater the labor required for
production. But strong regulation in standard economy that discourages the operation
of business will reduce the demand for labor & will create unemployment.

List of unemployment in Bangladesh are given below:

2017 4.00
2016 4.10
2015 4.20
2014 4.20

2013 4.30

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 Unemployment Rate

4.3

4.2

4.1
4.3
4.2 4.2
4
4.1
4
3.9

3.8
2013 2014 2015 2016 2017

Steps to be taken
We are experiencing the present inflation primarily because of external reasons. It is not the
inflation due to increase in aggregate demand only. This inflation has occurred for the upward
movement of the production cost. The exchange rate will usually decrease as an effect of
expansionary monetary policy.

As a result, we will not be able to buy foreign goods easily. At this situation, we should increase
the foreign exchange rate of our currency and control it strictly. If it is possible to mix and
coordinate appropriate fiscal and monetary policies effectively, the country might be able to
decrease unemployment problem to some extent.

Again, we want to adopt the expansionary monetary policy to decrease unemployment

problem. We shall adopt either expansionary monetary policy or expansionary fiscal policy or
both. It will help increase the income and production, import of everyday essential
commodities, and buying capacity of the citizens & reduce the rate of unemployment

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 Findings and conclusion

Findings of the study

The intension of this study is to know how to work with digital information system. The major
findings of the overall study are discussed below:
 Importance of inflation & unemployment.
 How they are interrelated with each other.
 Reason behind the factors (inflation & unemployment).
 The overall economic & monetary scenario of Bangladesh.

Conclusion
After completing this study we have learnt that inflation & unemployment are highly
correlated. Authority cannot overlook factor individually. In our country inflation rate is highly
relying on supply side and exchange rate. Inflation is positively related with growth rate up to 7
percent after that it gets negative. In our country, labor factor cannot be counted so effectively
to calculate inflation.

Bibliography
Books
 Rudiger Dornbusch, Stanley Fischer & Richard Startz; ‘Macroeconomics’; 9th
Edition. (United States of America: McGraw Hill Book Company, 2011-2012).
Web Sites
 www.bb.org.bd
 www.mol.gov.bd
 www.economywatch.com
 www.en.wikipedia.org

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