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LEARNING OUTCOMES 6 & 7 INFLATION & EMPLOYMENT. INFLATION This is an important performance indicator. It measures the rate of change in the general level.

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Presentation on theme: "LEARNING OUTCOMES 6 & 7 INFLATION & EMPLOYMENT. INFLATION This is an important performance indicator. It measures the rate of change in the general level."— Presentation transcript:

1 LEARNING OUTCOMES 6 & 7 INFLATION & EMPLOYMENT

2 INFLATION This is an important performance indicator. It measures the rate of change in the general level of prices. It indicates changes in the purchasing power of the pound. It is calculated using the Consumer Prices Index. This index features the most common items purchased by average families (basket of goods) and monitors each month, changes in their prices. It is calculated as follows: CPI = cost of basket of goods this month _____________________________ cost of basket of goods in the base year X 100

3 CALCULATION OF THE INFLATION RATE Between any 2 years, one of which is the base year, the rate of inflation is the difference in the 2 index numbers. Between any 2 years, neither of which is the base year, the rate of inflation is the difference in the 2 index numbers divided by the earlier index number X 100. The base year is given the index 100 and is used as a reference point for comparison. The Consumer Prices Index (CPI) is prepared monthly by the Department of Employment. The annual inflation rate is: _________________________ last year’s CPI X100 this year’s CPI – last year’s CPI

4 WHY IS INFLATION BAD? It reduces the power of your money to make purchases. It causes people on fixed incomes to experience a fall in their real incomes. It causes money tied up in savings to lose real value if the rate of interest earned is not at least equal to the rate of inflation. It makes our exports less competitive and may cause people to buy the comparatively cheaper imports rather than pay rising prices.

5 WHAT CAN CAUSE INFLATION? When the demand for goods and services outstrips the economy’s capacity to produce them (ie excess demand over supply) then demand will pull up prices. Excess demand over supply can arise at times of rising general income levels. Increases in the cost of factor inputs eg raw materials, wages etc, when passed on to the consumer will push up prices. A growth in the money supply eg through excessive lending by the financial sector will reduce the value of the currency circulating round the economy.

6 STRATEGIES FOR TACKLING INFLATION Dampen down the level of demand by making borrowing and credit more expensive. Encourage increased capacity by encouraging business to expand and new business to set up eg Enterprise Allowances, Grants etc. Keep tight control of the money supply through reduced lending, increasing reserve asset ratio and higher interest rates. Ensure wage rises are accompanied by productivity agreements.

7 UNEMPLOYMENT The rate of unemployment is another important economic indicator. It measures the number of people claiming unemployment benefit as a percentage of the workforce. It is calculated as follows: Unemployment Rate = Number of claimants __________________ Workforce X100 It will not necessarily give a true picture of unemployment since not all unemployed claim benefit and the definition of the workforce changes from time to time. represents wasted human resources

8 CAUSES OF UNEMPLOYMENT These fall into 2 categories: Demand factors (relate to the employer) and Supply factors (relate to the employee) Demand for labour is derived from demand for products and services they produce – could therefore be an elastic demand The Business Cycle Structural changes Substitutability Level of skills possessed Financial incentive to work Level of wages commanded Power of the Trades Union

9 TYPES OF UNEMPLOYMENT Seasonal work which fluctuates with the time of year eg unemployment during the winter months in the tourist industry Frictional caused by delays in moving from job to job Structural caused by changes in the different sectors of the economy eg shrinking manufacturing sector Real Wage some employers may not be prepared to afford as many non-skilled workers who now must be paid at least the legal minimum wage Technological jobs unfilled because demand for new skills is not being matched by up-to-date training schemes leading to a skills shortage

10 PROBLEMS CAUSED BY UNEMPLOYMENT Individuals lose income, motivation, skills and confidence Firms lose output and therefore profit Communities suffer decline and increasing crime Governments lose tax revenues while having to finance increased spending on benefits, training schemes, community improvement schemes and policing. The Economy will contract ie falling National Income, and cheaper imports may be sucked in

11 STRATEGIES FOR TACKLING UNEMPLOYMENT Introduce more flexible work patterns ie job sharing, part-time Increase incentive to work ie bigger financial gap between being on benefits and the minimum wage Increase the availability of training schemes Encourage growth in the economy eg aid to small businesses Regional Policy benefits to attract work to hard hit areas of the country Import controls to protect UK firms Reduce employer’s marginal cost of employing workers

12 UNEMPLOYMENT AND INFLATION THE LINKS It was generally thought that there was an inverse relationship between inflation and unemployment. ie when unemployment was high, inflation was low and when unemployment was low inflation was high This stems from a study done by Phillips and illustrated by his Phillips Curve. There have however been periods of time during which this is not the case eg mid 70s with high inflation and unemployment and the lat 90s with low inflation and low unemployment so Phillips’ theory has broken down.


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