Wednesday, July 7, 2010

Higher Inflation for Lower Unemployment

Many people wants the government to resolve the issue of Higher Inflation - Increase in domestic prices of commodities and the issue of Unemployment in the country. But many people may not be aware that both Inflation and Unemployment are inversely proportional to each other.

When economists look at inflation and unemployment in the short term, they see a rough inverse correlation between the two. When unemployment is high, inflation is low and when inflation is high, unemployment is low. This has presented a problem to regulators who want to limit both. This relationship between inflation and unemployment is the Phillips curve.

British Economist Phillips has collected the data of the British economy from the year 1869 to 1957, the study was the most empirical one then been theoretical. The Study clearly shows that whenever unemployment is high, inflation is lower and when inflation is higher, unemployment is low.

You may be wondering why this happens, why both of them cant be mutually achieved by any government, so the reason behind it is that more jobs will be created where there is more money supply in the economy. More money supply in an economy leads to higher inflation. So the government in any country has to choose between inflation and unemployment.

Economically speaking i think government should focus on declining unemployment rate in an economy then stopping inflation. Lower unemployment rate will be more beneficial for the economy in the long run.



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