Question

1）Compare Demand pull inflation and Cost push inflation

2）Is a long term discouraged worker officially classified as employed, unemployment or not in labor force? If so, dose it underestimate or overestimate rate of unemployment?

3) During inflation, which one between(nominal) GDP and real GDP is rising faster? Why?

Answer 1

Inflation is general increase in the price levels . It reduces the value of the goods and services. Too much much money chasing too few goods is inflation. IT is due to various reasons, important ones are 1) cost push factors and 2) demand pull factors. Let us distinguish the both.

1) Cost push Inflation : The inflation caused due to increase in the price of factors of production is called cost push inflation.

a) land,labour, raw material cost increase causes increase in final goods and services.

b) decrease in the aggregate supply of the products due to increase in cost of production increased. so the additional cost passed on to customer raising price levels.

2) Demand pull inflation : it is caused due to increased supply of money in the economy,so as people have more money , the demand for goods increase there by risisng the cost of products.

a) The availability of money in the economy increases the demand for consumption. ex: people chasing goods while the availability of goods is limited. so the price rises owing to the increased demand.

b) Aggregate demand of the goods and services increase in the economy increasing the prices.

2) discouraged worker :

Discouraged worker is the one who doesnt find employment for more than 12 month and who gives up finding it. He/she is considered not as actively seeking employment , so could not be considered as a part of labour force.

however the discouraged worker is a able bodied person, who was not employed for various reasons. As he.she was not considered as labour force, the unemployment rate is underestimated . The reason being

a) unemployment rate = unemployed/ labour force . since discoraged worker is not considered the numerator will be less and so the unemployment rate will be less.

b) The discouraged worker has needs and requirements, which are not met by the economy, so by not considering him/her in labour force will underestimate the unemployment rate. it may skew the policy decisions.

3) Real Gdp = The economic output or the GDP adjusted for the inflation is real gdp.

while Nominal Gdp = the GDP at nominal rates which are not adjusted to the inflation.

since the inlation is general increase in the price levels with out increasing the production. The Nominal GDP will rise faster compared to the real GDP .

FOR example : if base year inflation is 4 % , but present year inlfation is 8 %,

real gdp calculations are adjusted to the infaltion of base year , so only 4% rate in considered.

nominal gdp is calcuated at current year rate. so the rate is higher in inlfation years.