Overview on Inflation, Unemployment:

In economics, inflation refers to a general increase in the prices of goods and services in an

economy. When the general price level rises, each unit of currency buys fewer goods and
services; consequently, inflation corresponds to a reduction in the purchasing power of
money. The opposite of inflation is deflation, a sustained decrease in the general price level
of goods and services. The common measure of inflation is the inflation rate, the annualized
percentage change in a general price index. As prices do not all increase at the same rate,
the consumer price index (CPI) is often used for this purpose.

The term unemployment refers to a situation where a person actively searches for

employment but is unable to find work. Unemployment is considered to be a key measure of
the health of the economy.

The Relationship between Inflation and unemployment:

Phillips curve demonstrates the relationship between the rate of inflation with the rate of
unemployment in an inverse manner. If levels of unemployment decrease, inflation increases.
The relationship is negative and not linear. When unemployment rises, the inflation rate will
possible to fall. This is because:

1. If the unemployment rate of a country is high, the power of employees and unions will be
low. Then, it is hard for them to demand their labor power and wages because employers
can rent other workers instead of paying high wages. Thus, wage inflation is likely to be
subdued during the period of rising unemployment. This will reduce the cost of production
and reduce the price of goods and services. This causes a decrease in the demand-pull
inflation and cost push inflation.
2. High unemployment is a reflection of the decline in economic output. thus, businesses
experience an increase in increase in volume goods not sold and spare capacity. In a
recession, businesses will experience a greater price competition. Therefore, a lower output
will definitely reduce demand pull inflation in the economy.

 Inflation:

Inflation is the rate of increase in prices over a given period of time. Inflation is typically a
broad measure, such as the overall increase in prices or the increase in the cost of living in a
country. There are three primary types of inflation:
 1. Demand-pull inflation: Demand-pull inflation shows how the demand for goods and
services can raise their prices. If something is in short supply, the economy can generally
get people to pay more for it.

2. Cost-push inflation: Cost-push inflation often boosts in when demand-pull inflation is

going strong. When raw materials costs increase for businesses, the businesses in turn must
raise their prices, regardless of demand.

3. Built-in inflation: Built-in inflation occurs when workers expect their salaries or wages to
increase when prices of goods and services increase to help maintain their living costs.

 Unemployment:

Unemployment is a key economic indicator because it signals the ability (or inability) of

workers to obtain gainful work and contribute to the productive output of the economy. It
occurs when someone is willing and able to work but does not have a paid job.
The unemployment rate is the percentage of people in the labor force who are unemployed.
There are three types of unemployment that are main.

1. Cyclical Unemployment: Cyclical unemployment is the variation in the number of

unemployed workers over the course of economic upturns and downturns, such as those
related to changes in oil prices.
 
2. Structural Unemployment: Structural unemployment comes about through a
technological change in the structure of the economy in which labor markets operate.

3. Frictional Unemployment: Frictional unemployment is a natural result of the fact that

market processes take time and information can be costly. Searching for a new job,
recruiting new workers, and matching the right workers to the right jobs all take time and
effort. This results in frictional unemployment.