In the short-run, the relationship between unemployment and inflation is inverse. This means that the change in one will have the opposite effect on the other. So here, a fiscal policy aimed at reducing unemployment will increase the interest rate. For example, if Bartavia decides to lower taxes to increase consumption thru use of consumer’s marginal propensity to consume, and the economy in general thru the multiplier effect, it will increase the aggregate demand for goods and services. Marginal propensity to consume is the idea that that consumers will spend more money if they have more, but increases in income do not lead to equal increases in consumption because people save some of the money.
A government’s two options is either to increase taxes or to redistribute money from within, from one department to another. Of course, it’s also possible to simply print more money, but that will inflate the dollar and is definitely not the correct way to increase a budget (Ahlseen). Either way, money must be borrowed from somewhere else, either from the population or from the economy. When that money is later reinjected into the economy, its effects are not immediate. Instead, it has negative immediate effects on the taxes, the population’s incentive to invest and the private sector.
Inflation can lead to unemployment, as people demand less due to higher prices and therefore demand for labor maybe decreased. Inflation also creates uncertainty for entrepreneurs, cost curves increase and revenue can decrease thus squeezing profits. Also when inflation is in the mind of the entrepreneur it can escalate easily as they will take inflationary actions like automatically increase prices and therefore it is imperative government spending/borrowing is controlled. Although government borrowing does increase the money supply, the monetarist view of a direct link between money supply and inflation is wrong, as proved when Britain experienced recession under Margaret Thatcher. In order to control the money supply the government cut borrowing and spending, which in theory would reduce the money supply, inflation and unemployment but interest rates had to rise to stop consumer borrowing, which in turn increased the exchange rate.
Conclusion Unemployment is inversely related to changes in GDP. When GDP rises Unemployment goes down and when GPD falls Unemployment goes up. Striking a balance between these two is important. If unemployment increases too high then the economy is in jeopardy because too many people are without employment and cannot put money back into the economy, because there is not enough money in the system for employers to be able to hire new workers. Striking a balance between these three factors is vital to the functionality and growth of the U.S economy.
The weak headline data captured an inventory correction, but, even so, real final sales grew a paltry +0.7%. The desire to cut inventory in Q1 is understandable, given the recent uptick in the inventory-to-sales ratio to its highest level since 2009. Headline GDP data in Q2 is expected to be more robust, but it is unlikely to be a game changer for the Fed. The FOMC is no longer attempting to achieve faster growth, as testified by its decision to pursue tapering. Has the Fed lowered long-term US growth expectations?
Raw materials may be imported at a low tariff rate but both the nominal and effective tariff rates increase at every stage of production. Tariffs often rise with the level of processing in industrial countries. To the developing nation, it must seem it is better off not industrializing (116). • Distin... ... middle of paper ... ... deadweight loss of the tariff. If it is assumed that a nation plans for a small portion of international trade, then collecting an import tariff will lower its national welfare.
Nevertheless, wider more meaningful indicators of development are often correlated with GDP per capita, such as The ... ... middle of paper ... ... toll on the quality of life of citizens. Thus it is evident that economic development does not always lead to an improvement in living standards, due to its limited scope and inability to impact the non materialistic aspects of human life. Bibliography: - http://www.questia.com/PM.qst?a=o&d=5000372316 - http://www.bized.ac.uk/learn/economics/development/growth/index.htm - http://www.msu.edu/user/smythdav/growth.htm - Morris, Arthur, (1998).Geography and Development, London, UCL Press, LTD. - http://www.chiptaylor.org/notes/2004/05/flammang_1979_economic_growth_vs_ economic_development.html - http://en.wikipedia.org/wiki/Standard_of_living - http://www.bized.ac.uk/virtual/dc/farming/theory/th3.htm - http://www.nobel.se/economics/laureates/1998/sen-autobio.html - http://www.bized.ac.uk/virtual/dc/copper/theory/th8.htm
In modern industrial economics, it is still assumed that to gain economic efficiency from production, the economy would get so at the cost of an increase in income inequality. Greater equality is believed to reduce investment and work incentive, so system of rewards and penalties can encourage effort and channel it into socially productive activity. This reflects the living standards and material wealth of families in the economy, but this pursuit of efficiency necessarily compromises with inequalities and hence, the society faces a tradeoff between equality and efficiency. Not only can more equal distribution of income reduce incentives to work and invest, but the efforts to redistribute through tax system and other transfer programs can themselves be costly. Although, when growth is looked at over the long term, the trade-off between efficiency and equality may not be as prominent and equality may appear to be an important ingredient in promoting and sustaining growth.
Due to the reduced investment in education and health, the access to these services can be more restrained. Simply because the money is reinvested back into the economy for economic growth instead of being used to increase the overall welfare of the population (How does HDI relate to GDO? (n.d.)). The human development index was traditionally measured by using a set of fixed minimum and maximum values for life expectancy, knowledge and education measured by adult literacy rate with the combination of primary, secondary, and tertiary gross enrollment ratio, and standard of living (Noorbakhsh, 1998).
Limitations of consumer price index as a measure of inflation Few households are average, the published figure for inflation is rarely the actual rate of inflation experienced by different peoples. 1) The CPI is not fully representative, it will be inaccurate for the “non-typical” households. 2) Spending patterns. 3) Changing quality of goods and services, although the price of goods and services may rise or increase. 4) New products should be increase because the Texas on new products from CPI is very slow.