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Inflation, Unemployment and Poverty

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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  1. Chapter 3 Inflation, Unemployment and Poverty

  2. 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

  3. 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)

  4. 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)

  5. Multi - period (c) -(3.8) (d) -(3.9) (e) ln Pt = a + bTt + ut -(3.10) t = 1,2,...,n

  6. 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

  7. 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

  8. 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)

  9. 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

  10. Unemployment rate u = -(3.14) • 3. Kinds of unemployment • Voluntary / involuntary • Open • Frictional • Cyclical Structural

  11. 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

  12. 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

  13. 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

  14. 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

  15. 6. Measurement of unemployment • Criteria willingness time income productivity • In practice, only the first two criteria are followed

  16. 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%

  17. NSS Survey: Daily basis Unemployment rate (Percentages) Rural Urban Males Females Males 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

  18. Mis-match of skills between vacancies and unemployed • Bonded labour • Child labour • Domestic servants • Disguised and voluntary U easy to define, hard to measure

  19. 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

  20. 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?

  21. 4. Comprehensive measure of poverty A K Sen P = H { I + ( 1 - I ) GP } (Gp = Gini of poor)

  22. Income inequality • Percentile’s shares in national income • Edgeworth Box diagram: India • 80-20 Rule

  23. 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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