In this article, I will explain it through unemployment, inflation and the Phillips Curve

1. The concept of unemployment

Unemployment: reaching employment age, having the ability to work, The state of seeking employment but not receiving employment opportunities.

Unemployment rate: refers to the proportion of people in the labor force who are unemployed but looking for work, that is, the ratio of the number of unemployed people to the number of labor force.

Labor force: People within a certain age range who are capable of working and willing to work.

Labor force participation rate: The ratio of the labor force to the population.

Natural unemployment rate: The unemployment rate when the labor market is in a stable state of supply and demand without the interference of monetary factors. This steady state is considered neither inflationary nor deflationary.

The economy is in a state of natural unemployment rate, which means that the number of people who find jobs must be equal to the number of people who lose their jobs, that is, fU=lE

The estimation formula of the natural unemployment rate is: U/N=l /(l f)

N: Number of labor force

E: Number of employed persons

U: Number of unemployed persons

l: Turnover rate

f: Employment rate

Formula meaning: The natural unemployment rate depends on the turnover rate (and employment rate). The higher the turnover rate, the higher the natural unemployment rate; the higher the employment rate, the lower the natural unemployment rate.

2. Causes of unemployment

Frictional unemployment: short-term, partial unemployment caused by unavoidable friction in the production process

Structural unemployment : Unemployment caused by the mismatch between labor supply and demand. It is characterized by both unemployment and job vacancies. The unemployed either do not have suitable skills or the place of residence is not suitable, so they cannot fill the existing job vacancies

Cyclic unemployment: Also known as unemployment due to insufficient aggregate demand, it is short-term unemployment caused by insufficient AD and generally appears in the depression phase of the economic cycle

Economic explanation of the causes of unemployment:

In a competitive, market-clearing equilibrium, only voluntary unemployment exists

Wages are rigid and the labor market is not cleared, so involuntary unemployment exists

3. Okun’s Law

Okun’s Law: For every 1 percentage point the actual unemployment rate is higher than the natural unemployment rate, actual GDP will be 2 percentage points lower than potential GDP.

Okun’s law formula: (y -Yf)/yf=-a(u -u*)

y: actual output

Yf: potential Output

u: actual unemployment rate

u*: natural unemployment rate

a: parameter greater than 0

Real GDP must Keep growing as fast as potential GDP to prevent unemployment from rising. If the government wants to reduce the unemployment rate, then the actual GDP growth of the economy and society must be faster than the growth of potential GDP.

4. Description of inflation

Inflation: An economic phenomenon in which the prices of most goods and services in an economy generally rise continuously for a period of time.

The tool to measure inflation is the price index, which mainly includes:

Consumer Price Index (CPI): Indicates the expenditure of ordinary households on the purchase of a representative set of goods. , how much more it costs now than in the past

CPI = the value of a set of fixed goods calculated at the current price / the value of a set of fixed goods calculated at the base price × 100

CPI = current Period price index/base period price index × 100

Producer price index (PPI): A price index that measures the average price level of production raw materials and intermediate inputs. It is an indicator of the cost of a given set of commodities. Measurement is one of the indicative indicators of the business cycle.

GDP conversion index. GDP conversion index = nominal GDP/real GDP, used to reflect the degree of price changes.

Inflation rate: the percentage change in the price level from one period to another, that is?πt=Pt/Pt?1?1

Classification of inflation:

Classification according to the speed of price increase:

Moderate inflation: refers to the annual price increase rate within 10%.

Pentium inflation: refers to the annual inflation rate between 10 and 100.

Hyperinflation: refers to an inflation rate above 100. The economy is out of control, often after war or major political turmoil.

Classified by difference in impact on prices:

Balanced inflation: The price of every good rises by the same proportion.

Unbalanced inflation: The prices of various commodities do not rise in exactly the same proportion.

Classification according to people's expectations:

Unexpected inflation: Prices rise faster than people expected, or people did not expect prices to rise at all.

Expected inflation: Prices change regularly, also called inertial inflation. π=dPP=dMM?dyy dVV=m?y? v?

5. Causes of inflation

5.1 Excess money supply

Each inflation Behind it all is the rapid growth of money supply. An increase in the money supply is the basic cause of inflation.

Trading equation:?MV=Py

According to this equation, the inflation rate formula can be derived:

π=dPP=dMM?dyy dVV=m? y? v?

That is, inflation rate = money growth rate - output growth rate and circulation velocity change rate.

5.2 Demand-pull inflation

Also known as excess demand inflation, it refers to the sustained and significant increase in the general price level caused by aggregate demand exceeding aggregate supply.

Specific performance: The supply curve is established, and the aggregate demand curve continues to shift to the right due to impact. In the Keynesian region, an increase in aggregate demand leads to an increase in output and prices remain unchanged; in a conventional region, due to the existence of a supply bottleneck, an increase in aggregate demand leads to an increase in output and an increase in the price level; in the classical region, full employment is reached and output Without an increase, the expansion of aggregate demand will only cause price increases and cause inflation.

Bottleneck phenomenon: a phenomenon in which costs increase due to shortages of labor, raw materials, production equipment, etc., thus causing price increases. The price increase at this time is called bottleneck inflation.

5.3 Cost-push inflation

A sustained and significant increase in the general price level caused by an increase in supply-side costs in the absence of excess demand.

Wage-driven inflation: An increase in the general price level caused by excessive wages caused by an imperfectly competitive labor market (union organization).

Wage-price spiral: Wage increases cause prices to rise, and price increases cause wages to rise

Wage increases and price increases form an upward spiral movement

Profit-driven inflation: An increase in the general price level caused by monopolies and oligopolies using market power to seek exorbitant profits.

5.4 Structural inflation

Structural inflation: a sustained increase in the general price level due to changes in economic structural factors.

Specific manifestations: There are two major sectors in the economy

The demand-expanding sector and the demand-decreasing sector

The sector with faster productivity growth and the sector with slower productivity growth

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Emerging sectors and declining sectors

Open sectors and non-open sectors

The former sector indicates better economic prospects, so wages and prices will rise faster. However, the particularity of the labor market requires that wages in the two sectors should rise at the same rate, so the latter sector will be in line with the former sector, resulting in inflation.

5.5 Continuation of Inflation

If most people in the economy expect the same inflation rate, they will have negative expectations about their future nominal income (wages, interest, rent, etc.) ) have higher requirements, which will make this inflation expectation become an economic reality.

6. Cost of inflation

1. The cost of expected inflation.

a. Menu cost: the cost of adjusting prices.

b. Sole cost: In order to keep the cash on hand no less than the amount without inflation, people must sacrifice time and convenience.

c. Tax distortion: Since the tax rate remains unchanged, inflation expands the scale of capital gains and increases the tax burden on taxpayers.

d. Improper allocation of resources: Inflation distorts the actual prices of products and services at different points in time, leading to inefficiency in resource allocation.

e, confusion and inconvenience: Inflation changes the standard of currency as a unit of account.

Second, the cost of unexpected inflation.

a. Increased uncertainty: Unanticipated inflation leads to many costly decisions, including savings, investment, employment, etc., which will lead to reduced economic efficiency.

b. Undesirable redistribution of wealth: Unanticipated inflation redistributes wealth in the economy in ways that are neither talent nor need related.

c. Increase in relative price variability: Unanticipated inflation may lead to misallocation of resources to a greater extent.

7. Phillips Curve

1. The original Phillips Curve

A curve that represents the substitution relationship between unemployment rate and money wage growth rate. When the unemployment rate is low, the money wage growth rate is high; conversely, when the unemployment rate is high, the money wage growth rate is low or even negative.

2. Neoclassical synthesis Phillips curve

A curve that represents the substitution relationship between the unemployment rate and the inflation rate. The formula is expressed as: ?π=?ε(u?u?)?, where ?π? represents the inflation rate, ?u? represents the unemployment rate, ?u? represents the natural unemployment rate, and the parameter ?ε? measures the price for unemployment rate of response.

a. The meaning of the curve: when the unemployment rate is high, the inflation rate is low; when the unemployment rate is low, the inflation rate is high.

b. Policy implications: Policymakers can choose different combinations of unemployment and inflation rates. They can exchange a certain increase in the inflation rate for a certain decrease in the unemployment rate, or use the latter. increase to reduce the former.

3. The short-term Phillips curve

Also known as the expected-added Phillips curve, it refers to the relationship between the inflation rate and the unemployment rate when the expected inflation rate remains unchanged. curve. The formula is expressed as:?π=πe?ε(u?u?)?. ?πe? represents the expected inflation rate.

Properties of the short-run Phillips curve:

When actual inflation equals expected inflation, unemployment is at the natural unemployment rate, so the natural unemployment rate can be defined as non-accelerating inflation. unemployment rate.

In the short term when the expected inflation rate is lower than the actual inflation rate, there is still a substitution relationship between the unemployment rate and the inflation rate.

Policy implications:

Expansionary fiscal policies and monetary policies that cause inflation to rise in the short term can play a role in reducing unemployment, that is, macroeconomic regulation of aggregate demand The policy is effective in the short term.