The article discusses the impact of unemployment and inflation on the economy. Also, the article attempts to relate the both unemployment and inflation in two different ways. The relationship can either be regarded as short term or long term. With regards to the short term, the two are inversely correlated. This means that when the rate of unemployment increases, inflation reduces and vice versa. The relationship between unemployment and inflation is referred to as the Philips curve. When viewed on a short term basis, the Philips curve appears to be declining whereas when it is viewed on a long term basis, it is different from the short term curve. Economists have observed that unemployment and inflation are not related when seen in the long run (Unemployment and Inflation).
The article goes ahead to assert that inflation is as a result of alterations in the money supply. When the money supply increases, the value of various commodities also tends to be on the rise. The increase in the prices of goods is known as inflation. Economists say that there exists a natural rate of unemployment referred to as the equilibrium level of unemployment. This is what makes the long term Philips Curve. Here, the Philips curve is vertical because inflation does not have any effect on unemployment in the long term perspective (Unemployment and Inflation).
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It is assumed therefore that unemployment remains at a fixed point regardless of the inflation status. The Keynesians relate inflation as an aftermath of the money supply that keeps going up. The Keynesians argue that company owners keep increasing the salaries of their workers to please them. The effect is that money supply increases so that the economy can remain functional. The government on its part will have to meet these demands by also providing extra money to counter the rates of inflation.
Both unemployment and inflation rate are functions of the gross domestic product and therefore have a relationship. As described, inflation is the increase in money supply or rather an increase in the level of prices. Increase in the provision of money will increase the urge to spend therefore the result is that the demands for goods and services will rise. However, inflation can be regarded to be good on the surface because the high demand for goods and services will increase the level of production which will consequently improve the GDP. When the GDP grows, the stock market will also strengthen because the investors will be pleased with the profitability of the company. When the GDP raises so much, inflation is also likely to set in hence eroding the stock market by devaluating the local money.
The GDP has a positive effect on the rate of unemployment. According to Shiblee (2009), when the GDP rises, it means that the economic sustainability of the country has improved due to increased production. Therefore, more job opportunities will increase in the production sector. However, when inflation sets in, employers will likely to be paid more hence increasing money supply into the economy. This will hurt the GDP as demand will be higher than supply.
With regards to the United States economy, the GDP is used as one of the main indicators to determine the health of the nation’s economy. It depicts the total dollar value of commodities produced over a given period as asserted by Costanza et al . (2009). Measuring the GDP of the U.S. is a complicated process as it may involve either adding the earnings of everyone in a year referred to as the income approach or by adding the expenditure of everyone known as the expenditure report. When done, both measures are supposed to arrive at the same value. The income approach involves the addition of factors such as compensation to employees, profits accrued from the incorporated and non-incorporated firm, and taxes among others. The expenditure method, on the other hand, is calculated by the addition of total consumption, government spending, investment, and net exports.
The growth of the GDP has a significant impact on the United States economy. When the economy is sustainable, the rates of unemployment will go down, and the wage value will be on an uprising trend as the production industries and businesses will require labor to meet the demands of the growing economy. The GDP also has an impact on the stock market. A lowered GDP translates into lower earnings for organizations and companies resulting in lower stock prices. Therefore, the United States uses the GDP to determine whether the economy is recessing or rising.
I agree with the article concerning the relationship between inflation and unemployment using Philip's curve model. It asserts that in the short term, inflation and unemployment are inversely proportional. This is true because when unemployment increases, inflation will go down because of a reduced amount of money in the system. When the unemployment rates go down, there will be plenty of money circulating in the economy hence resulting in inflation as the demands for goods will be higher than the supply. I also agree with the article when it states that an increase in the money supply will lead to increased prices of commodities, this can still be explained using the demand-supply model. However, on a long term basis, the concepts of unemployment and inflation cannot be related due to other conditions that might set in such as the GDP, political factors, and other environmental factors that affect production. In conclusion, GDP, inflation, and unemployment are interrelated factors that affect the economy of any given country.
References
Costanza, R., Hart, M., Talberth, J., & Posner, S. (2009). Beyond GDP: The need for new measures of progress. The Pardee papers .
Shiblee, L. S. (2009). The Impact of Inflation, GDP, Unemployment, and Money Supply on Stock Prices.
Unemployment and Inflation, October 13, 2010, by Economic Watch http://www.economywatch.com/unemployment/inflation.html
