Timer Courtesy of Small Group Studies and Adult Sunday School Literature JAGANNATH UNIVERSITY Department of Finance Bachelor Of Business Administration
Welcome To Our Presentation Presented By : Epimetheus
Timer Courtesy of Small Group Studies and Adult Sunday School Literature Serial No:Name of the members of the groupRoll NumberDesignation 01Sultan Ahmed Khan 091597 Group Leader 02Md. Mynul Islam 091633 Coordinator 03Mamunur Rashid 07882747 Member 04Md. Mofazzal Hossen 091615 Member 05Sharjil Ahmed 091623 Member 06Md. Anik Mahmud 091636 Member 07Protiva Talukder 091602 Member 08Md. Mehedi Hasan 091590 Member 09Mohammad Didarul Islam Khan 091613 Member
Timer Courtesy of Small Group Studies and Adult Sunday School Literature
Objectives of the Study The Objective of this case study is given below: To know about Inflation, unemployment, Growth Trend. How inflation, Unemployment and Growth Trend fluctuate. Relationship among the inflation, unemployment and growth trend. Causes behind the inflation, unemployment and growth trend. Historical trend of these macroeconomic factors.
Meaning of inflation Too much money in circulation causes the money to lose value”-this is the true meaning of inflation. The popular opinion about the costs of inflation is that inflation makes everyone worse off by reducing the purchasing power of incomes, eroding living standards and adding, in many ways, to life’s uncertainties In another word “Inflation means that your money won’t buy as much today as you could yesterday”.
General Effect An increase in the general level of prices implies a decrease in the purchasing power of the currency. if one takes a loan where the stated interest rate is 6% and the inflation rate is at 3%, the real interest rate that one are paying for the loan is 3%. It would also hold true that if one had a loan at a fixed interest rate of 6% and the inflation rate jumped to 20% one would have a real interest rate of -14%.
Effect on Economy Negative Effect High or unpredictable inflation rates are regarded as harmful to an overall economy. Uncertainty about the future purchasing power of money discourages investment and saving and inflation can impose hidden tax increases. Inflation can act as a drag on productivity as companies are forced to shift resources away from products and services in order to focus on profit and losses from currency inflation.
Effect on Economy Positive Effect Positive effects include ensuring central banks can adjust nominal interest rates (intended to mitigate recessions), and encouraging investment in non-monetary capital projects. It puts impact on Labor-market adjustments, Room to maneuver, Mundell-Tobin effect, Instability with Deflation etc.
Causes behind Inflation There were different schools of thought as to the causes of inflation. Most can be divided into two broad areas: Quality theories of inflation Quantity theories of inflation The quality theory of inflation rests on the expectation of a seller accepting currency to be able to exchange that currency at a later time for goods that are desirable as a buyer. The quantity theory of inflation rests on the quantity equation of money that relates the money supply, its velocity, and the nominal value of exchanges
Causes behind Inflation (cont.) Excess of money Rise in production cost International lending & national debt Government taxes War
Historical trend analysis To increase investible funds with the banks, the minimum cash reserve requirement and statutory liquidity requirement were reduced gradually from 8 and 23 per cent respectively on 25 April 1991 to 5 and 20 per cent respectively. This decision has reduced the inflation rate. In 1991 the lending rate was 14.99 which was high during 1992 but then it started to be reduced at 14.39 (1993) and 12.22 at 1995 With the flexible use of the monetary instruments, broad money growth (Money Supply) was brought down from high rates of growth (14.1 percent) in the mid-1992 to 10.6 per cent in June 1993 to reduce the rate of inflation.
In the year 1995 government was thinking to increase the money supply which was brought to 16 percent for that reason inflation rate increased. In the year 1995 government liberalized Credit to the private sectors in fiscal year 1995 by reducing lending rates including those in the three selected sectors of agriculture, exports, and small and cottage Industries had to be restrained due to the rise in price levels. For this reason inflation rate has increased With a view to ensuring an adequate flow of finance to productive sectors and to boosting economic activity, Bank rate was gradually lowered from 9.8 per cent on 30 June 1990 to 5.5 per cent on 3 March 1994 to control the inflation rate Historical trend analysis Cont)
In 1996 the lending rate was 13.41 which were accelerated to 14.16 in 1999. Supply shortages in the rural areas originating from political instability in FY96 and disruption due to floods in 1998 caused serious shortfall of food and also hampered all other agricultural production, which ultimately caused higher inflation rates in 1996, 1998 & 1999. Larger depreciation of the exchange rate has accelerated the inflation rate 2.79 (2002) to 4.38 (2004). Exchange rate might have played a significant role in causing inflation in 2005-2006 because of the introduction of flexible exchange rate regime since May 2003. Historical trend analysis (Cont)
A higher growth of money supply (13.84 at 2004 to 19.51 at 2006) added a lot to inflation in 2005-2006. In 2001 the lending rate was 13.75 which were lowered to 10.93 in 2005. In 2001-2006 high inflation in food (more than 5 percent) sector at international market was so much responsible for the fluctuation of inflation. Inflation has emerged as a global phenomenon in recent months largely reflecting the impact of higher food (The IMF food price index was 44.4 percent at June 2008) and fuel prices and strong demand conditions especially in the emerging economies. In line with global trends, Bangladesh also experienced rising inflation with the 12-month average CPI inflation touching 9.94 percent in June 2008. Historical trend analysis (Cont)
In the fiscal year 2009, global oil price has shifted upward dramatically so fast. So that the price of fuel & power has driven very sharp impact on our economy by increasing the price of Industrial product and reduces the output of industry. Though our government has taken needed initiatives to minimize the inflation rate but they have failed up to the expectation. In the fiscal year 2010, global food price has shifted upward dramatically so fast. So that the price of food has driven very sharp impact on our economy. Though the inflation has decreased to a reasonable rate (5.4 percent), the price of food is beyond to the normal people. Because of the insufficiency of credit to productive sectors it is unable to invest money in productive sectors whereas the money are using in less productive sectors which causes a high rate of inflation. Historical trend analysis (Cont)
Inflation in Bangladesh can be explained by money supply growth as money supply has statistically significant power of forecasting the movement in CPI. It might be channeled through either the effects of money supply on GDP or the effects of money supply on exchange rates. The deposit rate of interest is a relatively weak determinant of fluctuations in inflation in Bangladesh, whereas deposit rate of interest is a moderately strong determinant of nominal exchange rate, but only in the short run. Money supply is a moderate determinant of fluctuation in real output, at the same time; money supply is a moderately strong determinant of fluctuation in nominal exchange rate in Bangladesh during the period FY90-FY10. Limitations of Economic system
First, taking into consideration that the inflation rate is not indexed in the wages and salaries, inflation will lead to a decrease in the purchasing power and an increase in the cost of living. Second, given that the country frequently has to balance the credit requirements by the private and public sector against both inflationary and balance of payments pressures, it is not always possible for the monetary authority to increase (or adjust) the nominal interest rate above the expected (or actual) inflation rate through contractionary monetary policy 11. In this regard, the monetary authority can think of an alternative way by working on the expectations channel to reduce inflation. This requires credibility of the monetary authority in following through its monetary program as communicated in advance to the stakeholders. Needed Steps
According to International Labor Organization (ILO), “Unemployment occurs when people are without jobs and they have actively looked for work within the past four weeks”. The percentage of the total labor force that is unemployed but actively seeking employment and willing to work is treated as unemployment rate. A person who simply expresses interest in having a job is classified as unemployed Unemployment Rate
In the year 1999, the rate of unemployment was reduced due to taken some policy decision at 4.3 percent compare to 1996 at 35.2 percent. In the year 2000, labor force survey shows the rate of unemployment rise again at 35.2 percent from 4.3 percent only because female workers. It revels the female underemployment rate is very high, which is 52.8% and male underemployment rate is only 7.4% only because traditional purpose. In the year 1999 to 2000 inflation rate was stable but at 2000 contarctionary policy has taken by government so that unemployment has increased from 4.3 percent to 35.20 percent. In the year 2001 to 2002 inflation was again stable but less than 9 percent (2000). At the same time unemployment rate was increasing from 35.2 percent to 40.0 percent which is aftermath of contarctionary policy. Aftermath & reason behind unemployment in BD
In the year 2003-2005 unemployment rate was stable at 40.0 percent but inflation rate was increasing from 3.1 percent to 6.0 percent. This is the aftermath of expansionary policy In the year 2006-2008 unemployment rate was stable at 2.5 percent but inflation was increasing from 7.0 percent to 9.1 percent. So this is the aftermath of expansionary policy. In the year 2009 unemployment rate was stable but inflation rate decreased a little bit. So we are considering it as an aftermath of contractionary policy. In the year 2010 unemployment rate increased at 5.10 percent & inflation rate decreased at 5.4 percent. So it is clear that it is contarctionary policy Aftermath & reason behind unemployment in BD
We are experiencing the present inflation primarily because of external reasons. It is not the inflation due to increase in aggregate demand only. This inflation has occurred for the upward movement of the production cost. The exchange rate will usually decrease as an effect of expansionary monetary policy. As a result, we will not be able to buy foreign goods easily. At this situation, we should increase the foreign exchange rate of our currency and control it strictly. If it is possible to mix and coordinate appropriate fiscal and monetary policies effectively, the country might be able to decrease unemployment problem to some extent. Again, we want to adopt the expansionary monetary policy to decrease unemployment problem. We shall adopt either expansionary monetary policy or expansionary fiscal policy or both. It will help increase the income and production, import of everyday essential commodities, and buying capacity of the citizens & reduce the rate of unemployment. Needed Steps
Economic growth is the increase of per capita gross domestic product (GDP) or other measures of aggregate income, typically reported as the annual rate of change in real GDP. The trend of the growth of the real GDP is called Growth Trend. Economic growth is primarily driven by improvements in productivity. The topic of economic growth is primarily concerned with the long run Growth Trend
Classical growth theory The neoclassical growth model Endogenous growth theory Creative destruction and economic growth Negative effects of economic growth Various theory of Growth
In this connection, Mundell (1965) and Tobin (1965) predict a positive relationship between the rate of inflation and the rate of capital accumulation, which in turn, implies a positive relationship to the rate of economic growth. They argue that since money and capital are substitutable, an increase in the rate of inflation increases capital accumulation by shifting portfolio from money to capital, and thereby, stimulating a higher rate of economic growth (Gregorio, 1996). Conversely, Fischer and Modigliani (1978) suggest a negative and nonlinear relationship between the rate of inflation and economic growth through the new growth theory mechanisms (Malla, 1997). They mention that inflation restricts economic growth largely by reducing the efficiency of investment rather than its level. Relationship with Inflation
Mallik and Chowdhury (2001) examine the short-run and long-run dynamics of the relationship between inflation and economic growth for four South Asian economies: Bangladesh, India, Pakistan, and Sri Lanka. Therefore, these four countries are on the turning point of inflation- economic growth relationship First, the relationship between inflation and economic growth is positive and statistically significant for all four countries. Second, the sensitivity of growth to changes in inflation rates is smaller than that of inflation to changes in growth rates Relationship with Inflation
Historical trend of inflation & Economic Growth Our economy has experienced accelerated economic growth during the early 1990s in comparison with the 1980s. However, after that period, the economy experienced most severe exigency states like increasing inflationary pressures, deteriorating government’s budgetary balances and decreasing foreign exchange reserves. Throughout the first half of the 1990s, inflation rate was, on average, 5.37 percent, while GDP growth rate was 4.06 percent. Inflation rate increased, on average, to 5.52 percent in the second half of the 1990s, the growth rate of GDP continued to increase. The beginning of the new decade after 1990s and inflation was observed at 4.14 percent, on average, during 2001 to 2005, when growth rate of GDP was, on average, 5.19 percent. What the average GDP growth rate is when inflation rates are 3 percent or less during the period from 1981 to 2005 and so on. Illustrates a positive relationship between inflation and GDP growth up to the inflation rate of 7 percent (approximately) and a negative relationship is observed after that level of inflation rate.
Our first and foremost concern is to keep the inflation rate under 7 percent cause with this inflation rate growth is positive. Our government should take initiative to reduce deterioration of budgetary balance because budget deficit is the major obstacle to growth trend. Our government should take steps to increase foreign exchange reserve which will add a lot to growth. Needed Steps
Executive Summary Inflation, unemployment and growth trend are the major factor of macro economics. Economic growth is primarily driven by improvements in productivity. However, inflation & growth rate have both positive & negative relationship depending on situation. Moreover, inflation and unemployment have a negative relationship. All the factors are interrelated and at the time of analyzing one must consider each and every factor with equal consideration. If we analyze the economical condition of our country it is clear that inflation is higher in recent years comparing with past decade. Growth trend is upward till the inflation rate is 7 percent. After that the trend gets downward. At the same time unemployment rate is inverse all the time with inflation rate maintaining contractionary & expansionary policy. Inflation fluctuates all the time because of the fluctuation of the money supply. But in recent years, we came to know that international affairs are influencing to increase the inflation rate. Consistent budget deficit and exchange rate deteriorate the economic growth which directly relates with unemployment & inflation.