(a) Explain whether there is a relationship between inflation and unemployment. Should government interfere and reduce inflation and unemployment? Provide real life examples?
(b) Using your home country ( Vietnam ) as a case study outline and analyse inflation, unemployment and growth trends. Identify what range of the aggregate supply curve your country is operating in?
(c) Explain how monetary policy can influence an economy, including the exchange rate and employment levels?
An economy’s performance is affected by large number of economic indicators and as a result, in order to analyse its performance, these economic indicators must be evaluated. These economic indicators may be classified as the growth rates of the economy, inflation level, and unemployment conditions as prevalent within it, GDP growth etc. There has been certain kind of relations that exists in respect to these economic indicators type which can be crucial in understanding the ways in which they impact the performance of an economy (Moomaw, Olson, McLean and Applegate, 2009). The main focus of this report is mainly towards evaluating the existence of any relations between unemployment levels and the inflation levels. The role of government in achieving reduction over these economic factors of inflation and unemployment would be assessed in this report and also the interference of government in promoting higher growth levels across the economy. The report would also include an analysis of the role played by the monetary policy on the performance of an economy, and based on the findings from analysis; they would be concluded in the conclusion section of this report.
(a) Discussion on the Existence of Relationship between Inflation and Unemployment
This section of analysis is now focused towards evaluating the existence of relationship between the inflation level and the unemployment levels in an economy. However, this relationship can be better understood by way of focusing especially towards analysing these concepts of inflation and unemployment in detail. Inflation is defined in the existing literature as the rise in the general price level of goods and services within an economy and this rise take place over a period of time. As a result of an increase in the level of prices, the purchasing power of people get lowered, as they have to pay more for the same number of goods and services which they have bought earlier. This implies that the monetary value gets reduced and the ultimate effect in the decline in the purchasing power of people. The inflation levels in an economy can have both the positive effect as well as negative effect. In addition to the concept of inflation, unemployment condition is another important economic concept which indicates about the percentage of people that remain unemployed i.e. does not have a job with them. This is a condition whereby people are mostly in search of employment conditions and the lack of any accessibility to any mode of earning to them. This has been a negative factor from the point of view of overall economy’s performance and higher such rates of unemployment would mean that more and more people are looking towards job opportunities and presently, they do not have any access to employment (Tucker, 2010).
Analysis of Linkage between Unemployment and Inflation
The concept of both the inflation and unemployment has been clarified above. This section of analysis is now focused towards assessing the existence of relationship between these two important indicators of economic performance. There has been certain major relation that exists in respect to inflation and unemployment as indicated in the literature. The application of Phillips Curve can be an important tool in this context in performing the analysis of relations between these two important elements. The Philips Curve is known after the name of A.W. Phillips and his biography indicates that he is based in New Zealand and he has introduced this theory in 1958. In explaining this Philips curve, data about unemployment levels and wage levels in UK during the period from 1861 to 1957 have been collected. On the basis of analysis of the collected data, it has been evaluated that there has been stable curve being identified and it explains about the trade off between unemployment conditions and the inflation levels in the economy. The relations as identified between them are regarded as inverse relation and this inverse relation indicate that a decline in the level of unemployment would contribute towards a rise in the inflation rates and vice versa (Abel, 2011). Thus, the discussion indicated about the persistence of negative relationship between the inflation rates and the unemployment rates in the economy. The application of Philips curve in examining the relationship between these two terms is performed as follows:
The inverse relations between the inflation levels and unemployment levels is explained by the Philips curve above as it is quite clear from the chart above that increase in the inflation rates contributes towards decline in the unemployment conditions within the economy and the decrease in the inflation rates on the other hand leads to an increase in the unemployment levels. There can be the application of examples being performed to better evaluate the existence of relations between them. As for example, the decrease in the rates of unemployment provides a kind of empowerment to the employees which in turn allow them in demanding higher wage rates. The period of recession on the other hand leads to decline in the overall activities across the economy, but with the economy back to its normal conditions, there is an increase in the demand being identified and such working conditions allows for good opportunities to workers in demanding higher wage rates (Boyes and Melvin, 2012).
As a result of this increase in the wage rates of workers, the products and services are being costlier and there is higher rates being charged for the same from the customer. This particular practice is being followed mainly to ensure that the higher wage rates as paid to employees are being positively recovered from such higher prices for products and services, and this in turn contributes towards the inflation levels. This is mainly because the higher price levels as maintained for products and services reduces the purchasing power of people and the direct contribution of such practice is towards higher rates of inflation in the economy. This gives an indication of the fact that lower level of unemployment rate is likely to contribute towards higher rate of inflation and vice versa. Although this existence of inverse relationship being identified between the inflation levels and unemployment rates, yet an analysis indicates that this existence of inverse relations is mainly applicable only in the short run. However, in the long run, there are no such kinds of inverse relations being maintained between inflation and unemployment rates. This is justified from the situation that in the long run, unemployment levels return back to their normal rates and this leads to trade off in respect to the inflation and unemployment conditions within the economy (Tucker, 2010).
The application of production bottlenecks can also be performed to analyse the existence of such relationship between the unemployment levels and the inflation rates. The levels of production that are maintained in an economy are also an important indicator of the unemployment rates as prevalent within it. It is not only the unemployment rates, but such production levels also indicate about the inflation rates in an economy. In the instances of lower output and higher rates of unemployment, there exist higher capacity levels and as a result, the incentives as available with respect to price increases are significantly lower. But with the aggregate demands picking up, the levels of output also increase and this accounts for significant level of decline in the unemployment levels. This also leads to reduction in the excess capacity levels and with the increase in such capacity levels, businesses achieve a limit with regard to how much they can produce in the short run. The price level gets increased as a result of such rise in the demand and production limits. As a result of this situation, there has been decline being witnessed in respect to the unemployment rates and the major contribution of this condition is the increase in the inflationary trend across the economy (Hall and Lieberman, 2009).
The aggregate demand and aggregate supply levels can also be positively utilised for the purpose of explaining the existence of such relations between the inflation levels and the unemployment rates. The nation’s price level in respect to the real output levels is being explained by the aggregate demand and aggregate supply model. This model suggests that the increase in the price level is similar to that of inflation condition in an economy. However, a decrease in the level of output in considered same as that of unemployment condition in an economy, and this is mainly because a decrease in the output level is considered similar to that of unemployment levels in an economy. The demand and supply curve can better explain the trade off between the inflation and unemployment levels. The price level for products and services gets increased with the rise in the demands and this reduces the unemployment condition. This can be regarded as similar to that of the situation of rise in the inflation rate as a result of lower unemployment condition (Tucker, 2010).
Thus, the analysis as performed in respect to the relationship between unemployment levels and inflation levels above has indicated that there is the existence of inverse relation within them, and this suggests that when unemployment increases, inflation rate decreases and vice versa.
(b) Inflation, Unemployment and Growth Trends in Vietnam
This section of analysis is now focused towards assessing the inflation levels, unemployment rates and the growth trends that are prevalent in respect to the home country i.e. Vietnam. The analysis above has indicated about the concept of inflation, unemployment and growth in particular, and also the relationship between them. This section is now focused towards analysing these aspects as applicable in the context of Vietnam. As for instance, the analysis above has indicated that there is the existence of inverse relations between inflation rate and unemployment levels and this particular trend is also evident in the given case of Vietnam economy. The analysis of inflation levels in respect to Vietnam economy indicates that the economy is performing in a better way towards achieving decline over the inflation levels over the years. The inflation rate as recorded in respect to Vietnam economy in January 2015 is 0.94% and this has been the lowest rate being achieved over last few years. The analysis indicates about the average inflation rates that are prevalent across Vietnam and it is identified as 7.13% over the period ranging from 1996 to 2015. The statistics with respect to the inflation rate across Vietnam is provided by the General Statistics Office of Vietnam and the performance of such inflation rates over the years is indicated as follows:
The graph above indicates about the performance of inflation levels across Vietnam economy and it is evident above that there have been upswings and downswings with respect to inflation performance across the economy. It has increased significantly in 2009 and the end of 2011 has also witnessed a rise in the inflation levels across the economy. However, the recent performance of inflation condition across the economy suggests that the inflation rate is at all time low (Vietnam Inflation Rate, 2015). Contrary to this, unemployment rate is also identified as a crucial factor affecting the performance of an economy, and it is also an important indicator to analyse an economy’s performance levels. As in respect to Vietnam economy, an analysis of the unemployment rate signifies that there has been a rise in the inflation rate being witnessed in 2014. The unemployment rate is nearby 2.14% in the first quarter of 2014. It was around 3% in 2010 and thereafter declined heavily in 2012. This lower unemployment rates in particular implies that the performance of the Vietnam economy has been stronger, as most of the people are employed and they are contributing in a positive manner towards the development of the economy. The performance of unemployment across the economy over years is indicated in the graph below:
The unemployment rate across Vietnam economy since 2008 till 2014 is indicated in the chart above and it is clarified from the chart that the rate has witnessed a significant decline in 2014 as compared to 2010-2011. Thus, from the point of view of performance of Vietnam economy by measuring the inflation rate and unemployment rate, it is evident that the performance of economy is efficient as these economic indicators have reached lowest levels which are positive aspect from the point of view of performance of the entire economy conditions. The analysis of inverse relationship between the unemployment rate and the inflation level can be possible from the charts as provided above in relation to the inflation and unemployment performance in respect to Vietnam economy. As for instance, the unemployment performance from the chart above indicates that it has been significantly higher in 2010 whereas the analysis of the inflation rate indicates that it has reached the lowest rate in 2010 in the chart above. This signifies that a rise in the unemployment rate negatively affects the inflation rate, as it has decreased significantly in 2010 (Vietnam Unemployment Rate, 2015).
Apart from the performance of inflation and unemployment conditions across Vietnam, the growth trends are crucial to evaluate in order to analyse the performance of the economy in a complete manner. In terms of analysis of the growth rates across Vietnam economy, an analysis indicates that Vietnam has witnessed a significant rise in its growth rate over the last decade as it has achieved growth at an average rate of 6.4% in the last decade. Although such massive growth rates have been noted especially in respect to the performance of Vietnam economy as a whole, yet the recent performance of Vietnam economy indicates that there has been slight level of decline being evident in respect to the GDP growth rate of the economy. The economy of Vietnam also indicated that the economy managed to improve its macroeconomic stabilisation. The external sector has become an important factor for the attainment of higher level of growth in respect to Vietnam economy in particular. Overall, there has been higher level of growth being achieved across Vietnam economy in the past decade (Vietnam Overview, 2015).
Aggregate Supply Curve Vietnam is Operating
The aggregate supply curve in respect to Vietnam economy indicates that it has been at a rising level especially with respect to the supply of coal and gas, as the economy is known as the producer of these natural resources at a significant level. This factor has created opportunities in terms of an increasing line of supply curve with respect to coal and gas production across the economy.
(c) Impact of Monetary Policy on an Economy’s Performance
This section of analysis is now focused towards assessing the importance of monetary policy over the performance of an economy. An analysis of monetary policy of an economy suggests that it directly affects the growth rate of the economy in terms of affecting certain important factors including the availability of credit, balance of payment, inflation levels and also the equilibrium conditions (Rabin, 2001). Monetary policy is aimed at achieving control over the inflationary pressures that are prevalent in an economy and it is also quite crucial in allowing for achieving stability with respect to price levels across the economy. Monetary policy also plays an important role in contributing positively towards achieving positive level of economic performance conditions. Monetary policy for example can be utilised in bridging the balance of payment deficit across the economy. This suggests that there can be positive level of control that could be accomplished over the important economic indicators from the application of monetary policy in particular (Rochon and Olawoye, 2011).
Monetary Policy Role over Exchange Rates and Employment Levels
The role of monetary policy over the exchange rates and employment levels is also crucial. There can be expansionary or contractionary monetary policy. The monetary policy in an economy is mainly governed by the central bank and this is usually applied with a view to achieving higher level of exchange rates within the economy. Monetary policy also affects the employment levels in a direct way, as restrictive monetary policy is likely to dampen the growth of an economy, and force firms in performing redundancy of their workers, and this would contribute in a direct manner towards a rise in the unemployment levels across the economy. Thus, the analysis above indicates that there has been direct level of impact of monetary policy over the exchange rates and the employment conditions within an economy (Galí, 2009).
This report included the performance of a critical analysis especially in respect to analysing the relationship between the unemployment levels and the inflation rates in an economy and based on the performance of critical analysis, it has been evaluated that there has been the existence of inverse relationship between these two important economic indicators. An analysis suggests that when the inflation rates increases, it contributes towards a decline in the performance of unemployment rates in the economy. This has also been examined through the application of Philips Curve and also by way of applying relevant examples. Apart from this, there has also been analysis being carried out with respect to the performance of Vietnam economy as against these important indicators of economic performance, and the performance of analysis has resulted into identification that the inflation rate and the unemployment rate has been efficient enough at Vietnam from the point of view of entire economy’s performance and they are contributing in a positive manner towards accomplishing higher level of growth of the entire economy’s performance. The analysis of the growth trends across Vietnam economy has also indicated that there is positive growth being supported over the performance of the economy in the last decade but the recent performance level has showed a slight decline in the overall performance level of the Vietnam economy. Finally, an assessment has been carried out especially in respect to the role of monetary policy over the performance of economy, exchange rates and the employment levels and the carry out of analysis has indicated that monetary policy has been quite significant in affecting these important performance indicators in an economy.
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