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Inflation, Unemployment and Poverty PowerPoint PPT Presentation


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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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Inflation, Unemployment and Poverty

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Inflation unemployment and poverty

Chapter 3

Inflation,

Unemployment

and

Poverty


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)

    • [ ΣWi = 1], Base year weight


Inflation unemployment and poverty

P

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)


    Inflation unemployment and poverty

    Q

    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)


    Inflation unemployment and poverty

    Multi - period

    (c)-(3.8)

    (d)-(3.9)

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

    t = 1,2,...,n


    Inflation unemployment and poverty

    • 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


    Inflation unemployment and poverty

    • 7. How inflation is measured in India? Why?

    • 8.Which index is used for what purpose in India?

    • 9.Difference in inflation rates under different measures

      • Short run

      • Long run

  • 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


  • Inflation unemployment and poverty

    Employment - Unemployment

    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)


    Inflation unemployment and poverty

    • Economic (involuntary unemployment)

    • 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


    Inflation unemployment and poverty

    • Unemployment rate

    u = -(3.14)

    • 3. Kinds of unemployment

    • Voluntary / involuntary

    • Open

    • Frictional

    • Cyclical

    Structural


    Inflation unemployment and poverty

    • Hidden

    Disguised (work sharing/spreading)

    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


    Inflation unemployment and poverty

    • Lord Beveridge (Full Employment in a Free Society, 1944) estimated that something like 3% of the working population might be unemployed at any one time for “frictional” reasons.

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

    • Potential level of output : u = un


    Inflation unemployment and poverty

    • 5. 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


    Inflation unemployment and poverty

    • b.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


    Inflation unemployment and poverty

    6. Measurement of unemployment

    • Criteria

    willingness

    time

    income

    productivity

    • In practice, only the first two criteria are followed


    Inflation unemployment and poverty

    • Status problem resolution

    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%


    Inflation unemployment and poverty

    NSS Survey: Daily basis Unemployment rate

    (Percentages)

    RuralUrban

    Males FemalesMales 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


    Inflation unemployment and poverty

    • Mis-match of skills between vacancies and unemployed

    • Bonded labour

    • Child labour

    • Domestic servants

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


    Inflation unemployment and poverty

    Poverty

    • 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


    Inflation unemployment and poverty

    • 2. Alternative measures of poverty

      • 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?


    Inflation unemployment and poverty

    4. Comprehensive measure of poverty

    A K Sen

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

    (Gp = Gini of poor)


    Inflation unemployment and poverty

    Income inequality

    • Percentile’s shares in national income

      • Edgeworth Box diagram: India

        • 80-20 Rule


    2 gini coefficient g

    2. 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?


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