INFLATION

• Inflation refers to a situation in which the economy’s

overall price level is rising.
• The inflation rate is the percentage change in the price
level from the previous period.
– Not all prices rise at the same rate during inflation.
– Not everyone suffers equally from inflation.
– Although inflation makes some people worse off, it makes
some people better off
• Hyperinflation is an extraordinarily high rate of inflation such as
Germany experienced in the 1920s.
• Hyperinflation is inflation that exceeds 50% per month
 Types of Inflation
• Demand-Pull Inflation
– Demand-pull inflation results from excessive pressure
on the demand side of the economy.
– “Too much money chases too few goods” enabling
producers to raise prices.

• Cost-Push Inflation
– The pressure on price could also originate on the
supply side.
– Higher production costs put upward pressure on
product prices
 Effects of Inflations [on..]
Consumers Producers Economy
Zero Not affected at all No incentive to Stagnant for
inflatio produce more, almost same
n Same production level of
production

Mild Affected but not Have incentive to Economy

Inflatio much, produce more, expands as
n Demand may be Higher production production
same increase

High Affected much, Producers of inelastic Economy

Inflatio Demand may be products affected, squeezes as
n lower in many Production lower for production falls
products lower demand
 Unemployment:
• Unemployment is the macroeconomic
problem that effects the individuals most
directly and severely.
• For most of the people loss of a job means
reduced living standard and psychological
distress. It is therefore unemployment is
the frequent topic of political debate.
 Unemployment is a great concern in Bangladesh. Every
year hundreds of thousands student are coming out from
college and university. Only a tiny fraction of total jobless
is managed by different government offices and private
organization but a majority remain unemployed.
According to an estimate, every year some 2.7 million
young persons are becoming eligible for jobs whereas
only about 0.7 million of them are getting employment.
The way the rate of unemployment is increasing, it is
feared that at this rate unemployment would soar to some
60 million by 2015.
 UNEMPLOYMENT
A distribution of Total Population to
Labor Force, Employment, and Unemployment

Under 16 years
(70.5 Million)

Disable or Not in
Labor Force
(76.8 Million)
Total
Population
(296.6 Million)
Employed Labor Force
(141.7 Million) (149.3 Million)

Unemployed
(7.6 Million)
Labor force is the sum of the employed and unemployed
people able to work.
Unemployment rate is defined as the percentage of the
labor force that is unemployed.
Labor force participation rate is the percentage of the
adult population who are in the labor force.

Unemployment Rate = Number of Unemployed  100

Labor Force

Labor-Force Participation Rate = Labor Force

 100
Adult Population
 Types of Unemployment
• Structural Unemployment:
– Unemployment caused as a result of the decline of
industries. The economic structure is not adequately
developed to provide jobs.
• Frictional Unemployment:
– Unemployment caused when people move from job to
job. People can get a job but don’t work because they
want to get a better job.
• Disguised Unemployment:
– People claim that they are working but they really are
not needed in the job place.
• Which type of unemployment is the worst?
 Cntd…
• Cyclical unemployment:
The Unemployment that arises as a result
of economic downturn is called Cyclical
unemployment.
 Public Policy and Job Search

• Why is there Structural Unemployment?

– Minimum-wage laws
– Unions
– Efficiency wages
 MINIMUM-WAGE LAWS

• When the minimum wage is set above the

level that balances supply and demand, it
creates unemployment.
 Unemployment from a Strict Wage Above Equilibrium

Wage

Labor
Surplus of labor =
supply
Unemployment
Minimum
wage

WE

Labor
demand

0 LD LE LS
Labor
UNIONS AND COLLECTIVE BARGAINING

• A union is a worker association that

bargains with employers over wages and
working conditions.
• In the 1940s and 1950s, when unions
were at their peak, about a third of the
U.S. labor force was unionized.
• A union is a type of cartel attempting to
exert its market power.
UNIONS AND COLLECTIVE BARGAINING

• The process by which unions and firms

agree on the terms of employment is
called collective bargaining.
UNIONS AND COLLECTIVE BARGAINING

• A strike will be organized if the union and

the firm cannot reach an agreement.
• A strike refers to when the union organizes
a withdrawal of labor from the firm.
UNIONS AND COLLECTIVE BARGAINING

• A strike makes some workers better off

and other workers worse off.
• Workers in unions (insiders) reap the
benefits of collective bargaining, while
workers not in the union (outsiders) bear
some of the costs.
UNIONS AND COLLECTIVE BARGAINING

• By acting as a cartel with ability to strike or

otherwise impose high costs on
employers, unions usually achieve above-
equilibrium wages for their members.
• Union workers earn 10 to 20 percent more
than nonunion workers.
Are Unions Good or Bad for the Economy?

• Critics argue that unions cause the

allocation of labor to be inefficient and
inequitable.
– Wages above the competitive level reduce the
quantity of labor demanded and cause
unemployment.
– Some workers benefit at the expense of other
workers.
 THE THEORY OF EFFICIENCY WAGES

• Efficiency wages are above-equilibrium

wages paid by firms in order to increase
worker productivity.
• The theory of efficiency wages states that
firms operate more efficiently if wages are
above the equilibrium level.
 THE THEORY OF EFFICIENCY WAGES

• A firm may prefer higher than equilibrium

wages for the following reasons:
– Worker Health: Better paid workers eat a
better diet and thus are more productive.
– Worker Turnover: A higher paid worker is less
likely to look for another job.
 THE THEORY OF EFFICIENCY WAGES

• A firm may prefer higher than equilibrium

wages for the following reasons:
– Worker Effort: Higher wages motivate workers
to put forward their best effort.
– Worker Quality: Higher wages attract a better
pool of workers to apply for jobs.
– Shirking can be minimized by offering workers
a wage higher than their reservation wage.
 Impacts of unemployment [on…]
• Individuals
– Livings
– Health
– Education
– Physically

• Society
– Non-productive groups became burden for the society
– Illegal works and restlessness
– Violence by the non-working people

• Nation
– Lower level of production and hampers GDP growth (Okun’s law)
– Vicious cycle of underdevelopment
– Less infrastructural development because lower government tax
The negative relationship between unemployment and GDP is
described in Okun’s Law, named after Arthur Okun, the
economist who first studied it.
It is defined as:
Percent change in Real GDP =
3% - 2  Change in Unemployment rate

If the unemployment rate remains the same, real GDP grows by

about 3 percent. For every point of unemployment rate rises, real
GDP growth typically falls by 2 percent. Hence, if the
unemployment rate rises from 6 to 8 percent, then real GDP
growth would be:
Percentage Change in Real GDP = 3% - 2 (8% - 6%) = -1%
 EXERCISE
1. The BBS reported that the population of the country
in 2004 was 142 million (142,000,000) of which 50%
are adult. If the number of people unemployed in
that year was 15,000,000, and the adults NOT in the
labor force was 30,000,000, find out the
unemployment rate in that year?

2. If other things remain same and your unemployment

rate changes from 24% in 2007 to 27% in 2008, then
what will be your GDP growth rate for 2008 as per
Okun’s Law?