Inflation and

Unemployment in
Pakistan
 Inflation
• General Rise in price level

• Reduced purchasing power of money

• Inflation also known as CPI (Consumer Price Index)

CPIBY - CPICY
Inflation = x 100 = %
CPICY
 Types Of Inflation
• Demand Pull Inflation
o Spending is excess compared to output
o Causes producers to rise prices
o Real GDP rises, unemployment falls
o Central bank issues too much money
• Cost Push Inflation
o Increase in per unit production cost
o Decreased supply of goods
o Prices rise, causing inflation
 Redistribution Effects
• Nominal Income
o Not adjusted for inflation

• Real income
o Adjusted for inflation

Percentage Percentage Percentage

change in ≈ change in change in
real income nominal income price level
 Who is effected by
inflation
• Fixed Income Receivers
o Real incomes fall

• Savers
o Value of savings deteriorate

• Creditors
o Lenders are paid back in cheaper dollars
 Who is unaffected by
Inflation
• Flexible income receiver's
o Union members

o Social Security recipients

• Debtors
o Loans paid back in cheaper dollars
 Does Inflation affect
output?
• Cost Push Inflation
o Reduce real output
o Redistributes decreased income

• Demand Pull Inflation

o Zero inflation or mild inflation is best
o Interests rate will be positive
o Provide incentive for investment
 Unemployment
Unemployment Rate=
Total Population= 307 million
no. of unemployed/Labor force Under 16 = 71.4 million
x 100 Not in Labor force = 81.7 million
Employed =139.9 million
Unemployed = 14.3 million
Labor force = 154.2 million

Unemployment rate= 14.3/154.2x100 =

9.3%
Rate of unemployment from 2007 to 2017 in
Pakistan
 Types of Unemployment
Structural Unemployment:
Form of involuntary unemployment caused by mismatch
between the skills workers in the economy can offer.

Frictional Unemployment:
It is time spent between jobs when a worker is searching
for a job or transitioning from one job to another

Cyclical Unemployment:
When business cycles are at their peak, it will tend to be
low. This occurs within the business cycle
 Misunderstandings
People working as part time
workers are considered
employed
Discouraged workers are also
counted as employed
 Definition of full
employment
• Natural rate of Unemployment:
Full level of employment, it is the the combination of
frictional and structural unemployment.
• It can vary over time
• Actual unemployment can be above or fall below the
NRU
 Economic causes of
unemployment
• GDP gap: it’s the forgone output

• GDP Gap= actual GDP – potential GDP

• Okun’s Law:
o Every 1% of unemployment above the natural rate
creates a 2% GDP gap.
 Non-economic causes of
unemployment

• Increased population

• Rapid technological change

• Lack of education and skills

• Heightened racial and ethnic tensions