Unemployment, Inflation and GDP

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Unemployment, Inflation, GDP and Wages: 

2 Unemployment, Inflation, GDP and Wages GDP INFLATION Wage Rate UNEMPLOYMENT Phillips curve Samuelson-Solow curve Okun’s law Alban William Phillips Keynesian cross John Maynard Keynes Arthur Okun Push any button

Inflation & Wage Rate: 

3 Inflation & Wage Rate INFLATION & WAGE RATE

The growth in wage rate: 

4 The growth in wage rate AD 0 AD 1 P CPI 1 CPI 0 Y Y 0 Y 1 AS 0 AS 1 When the growth in wage rate isn’t accompanied with the growth in labour performance W  Production costs  P  Income  Aggregate Demand  Y  AD 0 AD 1 AS 0 P CPI 0 Y AS 1 Y 1 Y 0 W  AS  P = const Income  AD  Y  Investment AS  AS  Y  When the growth in wage rate is accompanied with the growth in labour performance due to investments Push any button

Inflation rate: 

5 Inflation rate Consumer Price Index Rate Of Inflation

Types of inflation : 

6 Types of inflation a ) demand-pull inflation b ) cost push inflation AD 0 AD 1 AS P CPI 1 CPI 0 Y P Y AS 0 AS 1 AD CPI 1 CPI 0 Y 0 Y 1 Y 0 Y 1 Growth in aggregate demand leads to rise in the price level but ensures also the increase in GDP c ) stagflation P Y AS 0 AS 1 AD CPI 1 CPI 0 Y 0 Y 1 Increasing in the production costs leads to rise the price level and reduce in the equilibrium GDP Stagnation with inflation. When the equilibrium GDP reduces, the production costs always grow up. That is the most dangerous situation, when the price level grows simultaneously with the reducing in production Reducing in production leads to reduction in employment, this means the decrease in income and aggregate demand. The last one stimulates the continuation of reduction in aggregate supply because of reducing the equilibrium GDP. Push any button

Monetary impulse in 2008 in Ukraine: 

7 Monetary impulse in 2008 in Ukraine Monetary impulse - increase in the money supply - can also lead to an increase in the price level, if the aggregate supply grows more slowly than amount of money. It was the IMF loan

Wage rate as the reason of Inflation: 

8 Wage rate as the reason of Inflation Can the growth in wage rate be the reason of inflation?

The wage rate, production costs and price level: 

9 The wage rate, production costs and price level W Y a ) labour supply curve d) aggregate supply & aggregate demand Y L W c) producers costs as the function of the wage rate b ) actual output as the function of employment and labour productivity The growth in wage rate leads to increasing in labour supply… Growth in wage rate provides the increase in the labour productivity ( ) and the amount of labour supply (L). This ensures the growth in potential output …but at the same time this leads to increasing in production costs The wage rate defines the production costs… Production costs Price level (CPI) This leads to shifting the curve of aggregate supply up The curve of aggregate supply The curve of aggregate demand Growth in potential output leads to shifting the curve of aggregate supply to the right Actual output is a function of labour productivity (  ) and the amount of labour used (employment) …and the labour demand… …this, by turn, defines the potential output Amount of labour actually used GDP Growth in employment leads to increment in disposable income (DPI), and to the shift of aggregate demand curve to the right Marginal propensity to consume Push any button

Full employment and growth of wage rate: 

10 Full employment and growth of wage rate AD 0 AD 1 AS 0 P P 1 Y AS 1 P 0 When approaching full employment, a slope angle of the curve L S becomes smaller, and the growth in wage rate gives the insignificant stimulating effect. Thus, if there are no investments to ensure the growth of labour productivity, then the shift of the aggregate supply curve to the right diminishes until it becomes equal to zero, and any growth in wage rate leads only to a rise in the price level (the demand-pull inflation in conjunction with the costs-push inflation)

Autonomous investments: 

11 Autonomous investments Another situation is, when shifting of the aggregate supply curve to the right is a result of autonomous investments (the implementation of resource-saving technologies). In this case, the growth in wage rate with simultaneous decrease in resource consuming of production does not lead to the growth of the producers ' costs. AD 0 AD 1 AS 0 CPI CPI 0 Y AS 1 The price level may remain unchanged, if the growth in aggregate demand (as a result of autonomous investment and growth in wage rate) will be accompanied by a corresponding shift of the curve AS as the result of growth in labour productivity

Pattern of operational costs in Ukraine: 

12 Pattern of operational costs in Ukraine As to production costs, in Ukraine the growth in wage rate doesn't lead to their significant rise because of the low share of labour costs in operational expenditure The share of material costs may be explained by the high degree of depreciation of fixed assets Thus, although in Ukraine there is a cost-push inflation it is not concerned with the growth in wage rate but is the result of insufficient investment

Causes of inflation: 

13 Causes of inflation Monetary impuls INFLATION Production costs  CAUSES Aggregate demand for goods & services  EMPLOYMENT CPI  Deterioration of fixed assets Insufficient investment Material costs  Labour costs  Full GDP  Cost-push inflation Demand-pull inflation Yes No

Dynamics of real value of fixed assets in Ukraine: 

14 Dynamics of real value of fixed assets in Ukraine

Unemployment & Wage Rate: 

15 Unemployment & Wage Rate UNEMPLOYMENT & WAGE RATE

Interrelation between inflation and unemployment: 

16 Interrelation between inflation and unemployment In 1958, the Professor of the London school of Economics A. Phillips published the results of studies of the interrelation between the unemployment rate and the change in the wage rate in the UK for 1861–1957. Over a period of 52 years (1861–1913) this relationship is described by the equation:

Interrelation between the cycle of conjuncture and the Phillips curve: 

17 Interrelation between the cycle of conjuncture and the Phillips curve W U A B A B t Y W A W B Y A Y B t A t B U A U B

Data for analysis (Ukraine): 

18 Data for analysis (Ukraine) GDP deflator GDP Wage rate, UAH GDP growth rate U, % CPI % to the previous year % to the 1996 Nominal, mln UAH in 1996 prices nominal real % nominal real % to the previous year % to the 1996 1996 166,2 100 81519 81519 126 126 X 72,6 X 5,6 139,7 100 1997 118,1 118,1 93365 79055,9 143 129,88 -3,02 13,49 3,08 7,6 110,1 110,1 1998 112,1 132,4 102593 77493 153 115,8 -1,98 6,99 -10,84 8,9 120 132,12 1999 127,3 168,5 130442 77398,7 178 113,03 -0,12 16,34 -2,4 11,3 119,2 157,49 2000 123,1 207,5 170070 81975,8 230 116,09 5,91 29,21 2,71 11,63 125,8 198,12 2001 109,9 228 204190 89556 311 147,95 9,25 35,22 27,44 10,95 106,1 210,2 2002 105,1 239,6 225810 94232,5 376 179,95 5,22 20,9 21,63 9,63 99,4 208,94 2003 108 ,0 258,8 267344 103300,9 462 210,18 9,62 22,87 16,8 9,06 105,2 219,81 2004 115,1 297,9 345113 115856,4 590 246,14 12,15 27,71 17,11 8,59 109,1 239,7 2005 124,5 370,9 441452 119034,5 806 296,08 2,74 36,61 20,29 7,18 113,6 272,23 2006 114,8 425,7 544153 127811 1041 350,5 7,37 29,16 18,38 6,81 109,1 297 2007 122,7 522,4 720731 137967,2 1351 403,26 7,95 29,78 15,05 6,35 112,8 335,02 2008 129,1 674,4 949864 140843,9 1806 430,57 2,09 33,68 6,77 6,36 125,2 419,44 2009 113,1 762,6 913345 119770,6 1906 392,07 -14,96 5,54 -8,94 8,84 115,9 486,13 2010 113,8 867,4 1082569 124800,9 2239 421 4,2 17,47 7,38 8,1 109,4 531,83 2011 115,6 1002,8 1302079 129842,5 2633 458,41 4,04 17,6 8,89 7,86 108 574,37

Phillips curve for Ukraine (for real Wages): 

19 Phillips curve for Ukraine (for real Wages) CPI 1996 139,7 % 1 00 , 0 % CPI 1997 110,1 % 110,1 % CPI 1998 120,0 % 132,1 % CPI 1999 119,2 % 157,5 % CPI 2000 125,8 % 198,1 % CPI 2001 106,1 % 210,2 % CPI 2002 99,4 % 208,9 % CPI 2003 105,2 % 219,8 % CPI 2004 109,1 % 239,7 % CPI 2005 113,6 % 272,2 % CPI 2006 109,1 % 297,0 % CPI 2007 112,8 % 335,0 % CPI 2008 125,2 % 419,4 % CPI 2009 115,9 % 486,1 % CPI 2010 109,4 % 531,8 % CPI 2011 108,0 % 574,4 % 2001–2010 In 2001-2010, the Phillips curve for Ukraine has the positive slope (if regard the real wages according to the price level in 1996) % to the previous year % to the 1996 Push any button

Phillips curve for Ukraine (for nominal Wages): 

20 Phillips curve for Ukraine (for nominal Wages) The growth rate in nominal wages changes cyclically in 2001-2007, and the Phillips curve for Ukraine has such a form

Unemployment and nominal wages: 

21 Unemployment and nominal wages We can see strict correlation between the number of unemployed people and the nominal wages. But this curve may be explained from the point of labour demand lack

Unemployment rate and rate of growth in wages: 

22 Unemployment rate and rate of growth in wages The links between the annual growth rate of wage and the level of unemployment in the short-term periods in Ukraine Stagflation

Unemployment & Inflation: 

23 Unemployment & Inflation UNEMPLOYMENT & INFLATION

Modified Phillips curve: 

24 Modified Phillips curve P. Samuelson and R. Solow had modified Phillips curve by replacing the indicator of the growth rate in wages with the indicator of the price level The interdependence between the unemployment rate and the price level

Samuelson-Solow curve for Ukraine: 

25 Samuelson-Solow curve for Ukraine But if we look at the actual data for Ukraine this interdependence is not obvious.

Short-term Samuelson-Solow curves for Ukraine: 

26 Short-term Samuelson-Solow curves for Ukraine In 1996-2000 there was a growth in price level on the background of rising unemployment (Phillips curve has a positive slope) At that period, the unemployment rate growth occures at the background of reduce in the number of economically active population In 2001-2004, the Phillips curve takes the negative slope - the unemployment rate begins to reduce, and the price level is growing. For this period there is no quite accurate description of the link between the price level and the unemployment rate (coefficient of determination equals 0,657) In 2005-2007, the Phillips curve takes strictly negative slope (coefficient of determination equals 0,9996) Push any button

Samuelson-Solow curve for Ukraine: 

27 Samuelson-Solow curve for Ukraine In 2009-2011, the Phillips curve takes strictly positive slope (coefficient of determination equals 0,994) Thus, there are another factors influencing on the price level and unemployment rate. Push any button

GDP deflator (annual %): 

28 GDP deflator (annual %)

Another countries of the World: 

29 Another countries of the World Data of World Bank Group

Correlation between CPI and Unemployment: 

30 Correlation between CPI and Unemployment Correlation coefficients (for 246 countries of the World)

Phillips curve – Macao SAR, China: 

31 Phillips curve – Macao SAR, China Correct correlation

Phillips curve - Turkey: 

32 Phillips curve - Turkey Correct correlation

Panama: 

33 Panama Correct correlation

Japan: 

34 Japan Correct correlation

Upper middle income countries: 

35 Upper middle income countries Correct correlation

El Salvador: 

36 El Salvador Incorrect correlation

Quest for self-study: 

37 Quest for self-study http://data.worldbank.org/indicator You should enter the name of indicator here …and press this button Push any button

Work with World Bank indices: 

38 Work with World Bank indices Then press this button Push any button

Uploading World Bank indices: 

39 Uploading World Bank indices …and select this

Open the downloaded file: 

40 Open the downloaded file You’ll receive such a file Go to this sheet Push any button

Organizing the working space: 

41 Organizing the working space Select this ceil and go to menu ‘Window’ You should divide the window

Providing the visibility of top line and left column while scrolling: 

42 Providing the visibility of top line and left column while scrolling The result of window division …and then you should fix the division (menu ‘Window’) It’s necessary to provide the visibility of top line and left column when scrolling the table Push any button

Grouping data: 

43 Grouping data You may group unnecessary data to hide them by clicking this button

Hide and show grouped data: 

44 Hide and show grouped data You may show hidden data by clicking this button

Step 1: 

45 Step 1 You should download the data on inflation, GDP, unemployment from the site of World Bank Group There will be three files

Step 2: 

46 Step 2 You should move the sheets with data from this files to one common file (menu ‘Edit’  ‘Move / Copy the Sheet’) Alternate way: you may select all the content of source sheet, copy selection (Ctrl + C), then select the blank sheet in target file and insert selected data (Ctrl + V)

Step 3: 

47 Step 3 1) the growth rate in wages The growth rate is: The sample of formula: =(AM9-AL9)*100/AL9 For any country (for your choice) calculate: 2) the real wage rate 3) the growth rate of GDP To calculate the real value of some parameter you should divide it’s actual (nominal) value by the CPI value For example: =AN39/'Consumer prices'!AN39 You should insert the line below the line of the selected country's data and enter the formula in each ceil of new line.

Step 3: 

48 Step 3 Define the correlation coefficients: Microsoft Excel provides the set of statistical functions between CPI and unemployment; between CPI and growth rate of wages; between unemployment rate and the growth rate in wages.

Step 4: 

49 Step 4 Build the dot diagrams: Select necessary data and call the Excel diagrams master CPI / Unemployment rate; CPI / growth rate of wages; Unemployment rate / growth rate in wages.

Additional sources of information: 

50 Additional sources of information http://www.minimum-wage.org/international/ THE END