The Trade-off Between Inflation and Unemployment for the Indian Economy
Introduction
The article by Dr. Vasa Prabhakar, “Trade-off between Inflation and Unemployment in the Short Run: A Case of the Indian Economy,” examines the short-run trade-off between inflation and unemployment for the Indian economy during 2011-2019. In the article, the authors find out what impact unemployment and inflation have. They conclude that population unemployment will be positive when inflation is negative, but the unemployment rate does not affect real GDP. Instead, the former indicator affects the latter.
Discussion
Thus, if states try to eradicate unemployment, there will be a risk of higher inflation. The author confirmed the existence of the Phillips curve in India by pointing out that unemployment and inflation are in an opposite relationship. The author concluded the paper by suggesting possible solutions to the problem, such as restructuring the economy, introducing modern technology to create jobs, ensuring macroeconomic management of price volatility, and increasing infrastructure in the country (Prabhakar, 2020). This article uses the following terms: unemployment, natural unemployment rate, inflation, Phillips curve, the long-run Phillips curve, the short-run Phillips curve, evidence, and expected inflation.
Unemployment is a socio-economic situation in which a portion of the active, able-bodied population cannot find work that these people can perform. This indicator is caused by the excess of the number of people willing to find a job over the number of available jobs corresponding to the profile and qualifications of applicants for these jobs. The unemployed are considered to be non-disabled citizens looking for work, registered at the labor exchange, and having no real opportunity to get a job because of their education, profile, or labor skills. Natural unemployment corresponds to the macroeconomic equilibrium at which expected inflation equals actual inflation, the level to which the economy returns after cyclical recessions and rises. The unemployment rate definition is related to the concept of “full employment. The unemployment rate at full employment includes the unemployed belonging to the frictional and structural forms, which is also called the natural unemployment rate.
Inflation is an increase in the general price level of goods, works, and services (of the country’s population and businesses) for a long time. With inflation, the same amount of money can be used to buy fewer goods, works, and services after a certain period than before. Inflation is a steady increase in the general price level of goods and services (Achúcarro et al., 2022). Some goods may rise markedly in price, others may become cheaper, and others may not change in price. The prices of goods and services mainly depend on supply and demand in the market, and the state regulates some prices.
In macroeconomics, the so-called Phillips curve describes the relationship between inflation and unemployment, which shows the inverse relationship between inflation and unemployment. The AD and AS model explains the menu of possible outcomes described by the Phillips curve. Shifts in AD drive inflation and unemployment in opposite directions in the short run. High inflation and high unemployment cannot exist at the same time. By following the Phillips curve, the government can build its economic policy. By stimulating aggregate demand, the government can increase inflation and decrease unemployment and vice versa. The Phillips curve is used to construct an aggregate supply curve. The aggregate supply expresses the dependence of real output on the price level. Moreover, the output is directly related to the number of people employed in the economy. The greater the number of people employed in the economy, the greater the volume of production and, consequently, supply.
The long-run Phillips curve is a degenerate case of the Phillips curve for the long run, in which the relationship between the unemployment rate and the inflation rate is a vertical line. It is depicted under the assumption that the corresponding short-run Phillips curve leads to higher inflation and that real and expected inflation are equal at each point of the long-run Phillips curve (Hazell et al., 2022). The short-run Phillips curve has a negative slope when price and inflation expectations are fixed. If full information about prices and inflation is available, the equilibrium level of employment, unemployment, and production does not change as the price level changes.
Evidence is the justification for the truth of a proposition: reasoning that establishes the truth of a proposition based on the truth of other propositions within a particular field of knowledge or theory. Expected inflation is a projected price increase that may occur over several years. For the state not to face the problem of deficit of planned budgets in different areas, analysts form forecasts on the expected level of inflation for future financial periods. This work implies the use of special mathematical forecasting models based on statistics.
Conclusion
I agree with the author’s view that inflation and unemployment are closely related. For more people in India to have employment, it is necessary to implement the proposed ways to solve the problem. I want to add that informal employment is a very common phenomenon that needs to be regulated by legal intervention. I agree with the view that inflation and unemployment are massive problems in the economies of nations. These phenomena are a manifestation of the instability of the economy. Although it is almost impossible to avoid them, they can be minimized by the proposed ways.
References
Achúcarro, A., Biagetti, M., Braglia, M., Cabass, G., Castorina, E., Caldwell, R.,… & Wu, W. L. (2022). Inflation: Theory and Observations. arXiv preprint arXiv:2203.08128. Web.
Hazell, J., Herreno, J., Nakamura, E., & Steinsson, J. (2022). The slope of the Phillips Curve: evidence from US states. The Quarterly Journal of Economics, 137(3), 1299-1344. Web.
Prabhakar, V. (2020). Trade-off between Inflation and Unemployment in the Short Run: A Case of the Indian Economy. Mukt Shabd Journal, 9(6).