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# Inflation, Unemployment and Poverty - PowerPoint PPT Presentation

Chapter 3. Inflation, Unemployment and Poverty. Price Indices and Inflation. 1. What is inflation? Continuous increase in general price 2 . What is general (macro) price? -(3.1) -(3.2) [ Σ Wi = 1], Base year weight. P. t. =. PI. t. P. o. æ. ö. å. Q. P. ç. ÷. ). (.

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Presentation Transcript

Inflation,

Unemployment

and

Poverty

• 1. What is inflation?

• Continuous increase in general price

• 2. What is general (macro) price?

• -(3.1)

• -(3.2)

• [ ΣWi = 1], Base year weight

t

=

PI

t

P

o

æ

ö

å

Q

P

ç

÷

)

(

io

it

=

L

PI

ç

÷

t

ç

÷

å

Q

P

ç

÷

io

io

è

ø

• 3. What is/why price index?

• Relative to base value (1 or 100)

• -(3.3)

• Choice of base year

• Two alternative measures

-Laspeyres: takes pre- price

change quantities

• -(3.4)

P

)

(

it

it

=

PI

P

å

t

Q

P

it

io

-

P

P

-

t

t

1

&

P

=

´

100

t

P

-

t

1

P

æ

ö

t

ç

÷

&

=

´

P

ln

100

ç

÷

t

P

ç

÷

-

t

1

è

ø

• - Paasche’s : takes post- price

• change quantities

• Which measure is the better one?

• 4.How to measure inflation rate?

• One period

• (a)-(3.6)

• (b) -(3.7)

• -(3.5)

(c) -(3.8)

(d) -(3.9)

(e) ln Pt = a + bTt + ut -(3.10)

t = 1,2,...,n

• 5. Price indices in India

• GDP deflator

• WPI /Producers price index

• CPI – IW

• CPI – UNME

• CPI – AL

• 6. Differences in price indices

• Inclusive/exclusive

• Wholesale vs. retail price

• Weights

• Indexing method

• 10.Which index is the best?

• 11. Limitations of price index

• Base/final year weights

• New products

• Quality changes

• Sample bias

• 12.Inflation rates across countries

• High-low inflation countries

• Trend over time

• 1. Relationship between employment and output (income)

• Output = f (employment, ...)

• Okun’s law/transformation

2. Meaning of unemployment (U)

• Physical

U = Population (P) - Employed people (E)

-(3.12)

• U = Workforce (WF) - Employed people (E)

• -(3.13)

• Where, WF = P - People not in workforce (NWF)

• NWF= kids + retired + students + sick + voluntary

• Labour participation (activity) (p) rate:

• p =

p varies with the state of the economy

u = -(3.14)

• 3. Kinds of unemployment

• Voluntary / involuntary

• Open

• Frictional

• Cyclical

Structural

Seasonal

Underemployment (time/skill)

4. Natural rate of unemployment (un)

(speed limit)

• Un = non-augmented inflation rate of u

• = rate of unemployment arising from

• normal labour market frictions that

• exist when the labour market is in equil.

• = frictional u + structural u + voluntary u

= full employment

 3-5% in developed countries

• If u<un , the economy is said to be over-heated- unsustainable growth

• Potential level of output : u = un

• 5. estimated that something like 3% of the working population might be unemployed at any one time for “frictional” reasons. Full Employment

• Ambiguous concept

• Alternative meanings

a. Total demand for labour = total

supply of labour

• Not OK, for labour is not perfectly mobile across places and occupations

• b. estimated that something like 3% of the working population might be unemployed at any one time for “frictional” reasons.Demand for labour = Supply of labour in every market

• Not tenable definition, for market interdependence

• c.Numbers unemployed - unfilled vacancies

Not tenable, gaps in skills

• d. u = frictional unemployment

e. u = voluntary unemployment

6. Measurement of unemployment estimated that something like 3% of the working population might be unemployed at any one time for “frictional” reasons.

• Criteria

willingness

time

income

productivity

• In practice, only the first two criteria are followed

• Status problem resolution estimated that something like 3% of the working population might be unemployed at any one time for “frictional” reasons.

Priority rule: E-U-Not in workforce

• Three reference period : usual,

• weekly, and daily

• Three sets of estimates for unemployment

• in India by NSSO

1977-78 1987-88

Usual status 3.8%

Weekly status 4.8%

Daily status 8.2% 6.0%

NSS Survey: Daily basis Unemployment rate estimated that something like 3% of the working population might be unemployed at any one time for “frictional” reasons.

(Percentages)

Rural Urban

Males Females Males Females

1993-94 5.6 5.6 6.7 10.5

1999-2000 7.2 6.8 7.2 9.8

* Puzzle: urich courtiers > upoor countries

7. Indian labour market

• Low open, high hidden unemployment

• Poor mobility across places and occupations (distress migration)

• Interlocked with capital and land

• Bonded labour

• Child labour

• Domestic servants

• Disguised and voluntary U easy to define, hard to measure

Poverty estimated that something like 3% of the working population might be unemployed at any one time for “frictional” reasons.

• Poverty line: Defined in terms of the cost of minimum caloriesrequirement from the cheapest edible basket :

• Rural India : 2400 calories/day/person = Rs. 229 at 1993-94 prices

• Urban India : 2100 calories/day/person

• = Rs. 264 at 1993-94 prices

• International definition = US\$ 1-2-4 / day / person (arbitrary)

• Country specific definition

• 2. Alternative measures of poverty estimated that something like 3% of the working population might be unemployed at any one time for “frictional” reasons.

• Poverty /Head count ratio (H)

• % of population below the povertyline

• Poverty (income) gap (I)

I = 1 -

• Squared poverty index

• Sen index

3. Is absolute poverty so rampant?

4. Comprehensive measure of poverty estimated that something like 3% of the working population might be unemployed at any one time for “frictional” reasons.

A K Sen

P = H { I + ( 1 - I ) GP }

(Gp = Gini of poor)

Income inequality estimated that something like 3% of the working population might be unemployed at any one time for “frictional” reasons.

• Percentile’s shares in national income

• Edgeworth Box diagram: India

• 80-20 Rule

2. estimated that something like 3% of the working population might be unemployed at any one time for “frictional” reasons.Gini coefficient(G)

G =

Min. : 0 (no inequality)

Max. : 1 (max. inequality)

Area of graph under OWXYZB (shaded part) Area of Δ OCB

3. Income inequality across countries

4. Pareto Law

Could re-distribution remove poverty?