Question

Analyze unemployment and inflation data for the (1950's-1960's) as to their relation to output and growth.

explain how inflation and unemployment are calculated for the data presented.

Discuss how changes in both are related to changes in GDP growth.

Answer 1

There is a relationship between unemployment and inflation, and they are in inverse correlation. Friedman-phelps Phillips curve represent the relationship between inflation and unemployment. Phillips curve shows the short-term trade-off between unemployment and inflation.

Two key indicators of the economy are inflation and unemployment. Alban Phillips in 1958 contributed to the study of relationship between inflation and unemployment. He analysed data of more than hundred years and come to a conclusion that there is a certain level of unemployment in which the wage level is constant and its increment is none or zero. When unemployment falls below the level there occurs rapid increase in wages and vice versa.

Unemployment has a strong positive effect on poverty rates while inflation has a very little effect. Increase in unemployment rates are associated with increases in the consumption poverty rate and conventional poverty rate.

Inflation can be both beneficial and negative for economy. If inflation becomes too high the economy will suffer and if inflation is controlled in a particular level the economy may prosper . With a controlled level of inflation employment can be increased. So that the consumers will have sufficient money to buy goods and services and the economy grows well.

The three key factors of the economy are inflation, unemployment and GDP. GDP os gross domestic product which is used to measure the economic growth. Inflation can be defined as either an increase in the money supply or an increase in price level. Unemployment os the condition in which individuals are employable but unable to find a job. The growth in GDP causes inflation because if inflation is increasing, people will spend more money. Since people are aware that money will be less valuable in the future. This causes further increase in GDP