Economics 9 Name___________________________________ Score ____________ 2nd Q

MODULE
7 Inflation and Unemployment
Inflation
Inflation is a general INCREASE in all prices. Inflation decreases the purchasing power of the peso. Our parents may have
mentioned that, when they were students, they only needed a few pesos as allowance. Your allowance is much higher than theirs
because the prices of food, school supplies, travel, and all other prices are higher today. The annual percent change in the overall
price level is known as inflation rate.

Effects of Inflation
It is important to study inflation because it effects the flow of money in the economy. If the price increase quickly,
households and firms are forced to change their spending behavior. Therefore, inflation also affects decisions concerning savings
and investment.

Individuals may suffer or benefit from higher rates of inflation. Those with fixed income lose because their income could
buy less goods and services. Lenders and savers lose when inflation rate is greater that interest rate. Real interest rate is measured
as nominal interest rate less inflation rate. So if you lend at an interest rate of 5% and the inflation rate is 15% you will lose because
the interest rate is not corrected for the effects of inflation. They are paid in the future with money that is worth less.
Meanwhile, borrowers could benefit from inflation. If their loans specify a fixed rate of interest, they can pay their loans in
the future with money that is worth less.
Cause of Inflation
There are two cause of inflation.
1. The general price level increases when the increase in the aggregate demand exceeds the increase in the aggregate supply.
Without price changes, sellers would notice that their inventories are being depleted. An excess in aggregate demand will
motivate sellers to increase prices. This is called demand-pull inflation, inflation caused by a general excess demand for
goods.
2. The general price level increases when aggregate supply decreases while aggregate demand remains unchanged. Sharp
increases in the price of imported oil and natural calamities like typhoon and earthquake lead to a decrease in aggregate
supply. This movement commonly increase the costs of production and the level of prices. This inflation is called cost-push
inflation, inflation originating from a sharp increase in costs.
The Consumer Price Index
A price index allows us to track movements of prices in an economy. A price index is a number that represents the overall
prices of goods and services. The consumer price index (CPI) is a widely-used price index. It measures the cost of a representative
basket of goods and services bought by a typical consumer. Inflation figure as reported through CPI is known as headline inflation.

In the fixed labor basket of consumer goods, the weight assigned each commodity is the share of expenditure on that
commodity by a typical consumer. Therefore, as the share of expenditures on a particular commodity increases, the weights
assigned to that commodity also increases.
Suppose that the basket of consumer goods bought by a typical consumer contains ten kilos of rice and five kilos of fish in a
month. Using 2011 as base year, the CPI for 2012 is:
CPI2012= [10 x (price of rice/ kilo in year 2012)] + [5 x (price of fish/ kilo in year 2012)] X 100
[10 x (price of rice/ kilo in year 2011)] + [5 x (price of fish/ kilo in year 2011)]

Suppose that the price of rice per kilo in the base year was P35 and fish P70 per kilo. Suppose further that the price of rice
per kilo in 2012 was P37 and fish, P80 per kilo. In this example, the CPI for 2012 is 110. Note that CPI for 2011 is 100.
CPI2012= [10 x (37)] + [5 x (80)] X 100= 110
[10 x (35)] + [5 x (70)]

CPI2011= [10 x (35)] + [5 x (70)] X 100= 100

[10 x (35)] + [5 x (70)]

Thus, the inflation rate for 2012 is:

Inflation rate 2012 = CPI2012 – CPI2011 x 100 = 110 – 100 x 100 = 0.10 x 100 =10%
CPI
2011 100
This means that the overall cost of the goods and services bought by a typical consumer rose by ten percent.
Other Price Indices
The producer price index (PPI) is also used to measure inflation. PPI is also as wholesale price index. It measures the cost
of a basket of goods and services bought by a typical firm. Increases in the producer price index eventually result increases in the
CPI because firms eventually pass on their costs to consumers.
Unemployment Index
 Unemployment could result in a substantial loss in production. Its presence indicates that the use of one of the most
important factors of production is inefficient. An individual without a job may have face financial problems. Some studies show
that unemployment may lead to criminal activity.
Econ 9 -page 2 of 2- 2nd Q
In the Philippines, the measures of unemployment are provided by the NSO through its Labor Force Survey. The
computation starts by determining how many individuals belong to the labor force, LF. Included in the labor force are individual 15
years and above who are either employed or unemployed. Individuals 15 years and above comprise the economically active
population, EP. The economically active population are either employed, unemployed, or out of the labor forces.
The labor force participation rate is the percentage of the economically active population that are in the labor force.
Labor force participation rate= (LF / EP) x 100

The employment rate is the percentage of the labor force that are employed: N= Employed
Employment rate= (N / LF) x 100

A person is considered underemployed, UN, if he or she has been working at a paid job but is willing to work for more hours or is
willing to have another job with longer work hours.
Underemployment rate= (UN / N) x 100

A person is considered unemployed, U, if he or she is without a job and is looking for a job, or is waiting for the start of a new job,
or is on temporary layoff.
The unemployment rate is the percentage of the labor force that is unemployed:
Unemployment rate= (U / LF) x 100 = (LF – N)/ LF) x 100

FT1. Write DP if the statement has some direct or indirect implication on demand-pull inflation. Write CP if the statement has some
direct or indirect implication on cost-push inflation.
DP 1. In celebrating Christmas, many families buy food for noche Buena.
DP 2. The government increased minimum wage for worker in the National Capital Region.
CP 3. Rosalinda owns a small ready-to-wear clothes shop. The price of thread used in making clothes increased.
CP 4. Caltex increased its gasoline price due to the increase in oil prices in the international market.
DP 5. Many are lured in purchasing fire crackers as the New Year’s Day celebration approaches.
DP 6. It was only November, but the 13th month pay for sardine workers had already been given.
DP/CP 7. More and more people buy new models of television due to their high quality.
CP 8. The price of sardines increased as a result of the increase in the price of cans.
CP 9. As the price of flour increases, expect the price of bread to also increase.
DP 10. Many people purchase round fruits as the New Year arrives because of the belief that they bring wealth.
FT2. Calculate the consumer price index and the inflation rate of the goods in each year. Base year= 2005
Year Weighted Goods CPI Inflation Rate
2005 10kls. of Pechay (34 pesos) 100 -
5kls. of Gabi (15 pesos)= 415
2006 10kls. of Pechay (42 pesos) 121.69 21.69 or 22%
5kls. of Gabi (17 pesos)= 505
2007 10kls. of Pechay (50 pesos) 144.58 44.58 or 45%
5kls. of Gabi (20 pesos)= 600
2008 10kls. of Pechay (53 pesos) 159.04 59. 04 or 59%
5kls. of Gabi (26pesos)= 660
2009 10kls. of Pechay (55 pesos) 168.67 68.67 or 69%
5kls. of Gabi (30 pesos)= 700
2010 10kls. of Pechay (63 pesos) 206.02 106.02 or 106 %
5kls. of Gabi (45 pesos)= 855
2011 10kls. of Pechay (70 pesos) 228.92 128.92 or 129%
5kls. of Gabi (50 pesos)= 950
FT3. Use the data below to answer the questions.
Employed= 12, 000 Unemployed= 5, 000 Not in labor force=1, 000

a. What is the total labor force? = 17, 000

b. What is the employment rate? = 70.59 or 71%
c. What is the underemployment rate? = none
d. What is the unemployment rate? = 29.41 or 29%
e. What is the labor force participation? = 17, 000 / 18, 000 = 94.44 %
LF- unemployed and employed EP= employed, unemployed, and not in the labor force
FT4. Choose and circle the most accurate among the three statements that follow. Explain why it is the most accurate.
1. As money increases, many workers will be motivated to look for additional work.
2. As money increases, the ability of individuals to purchase will increase which may result to price increase.
3. As money increases, household consumption for imported products will increase.

END