GROUP 5

GENERAL ECONOMICS PRESENTATION

GROUP MEMBERS
DAUDI TEDDY OKETCH
BENTAH ODHIAMBO
PIOUS NZIA
BENNITO TUT
NELIUS KURIA
ELIZABETH WANJA
CHARLES MUTHAMA MUATHE
NOEL KIPYEGON

UNEMPLOYMENT AND INFLATION

TYPES OF UNEMPLOYMENT
• Frictional unemployment is caused by the natural process of people moving between jobs.
This type of unemployment is usually temporary, as workers are actively searching for new
jobs.

• Structural unemployment arises when there is a mismatch between the skills of the
workforce and the skills demanded by employers. This mismatch can be caused by
technological changes, globalization, or changes in consumer preferences.

• Cyclical unemployment is caused by fluctuations in the business cycle. During economic

downturns, businesses may lay off workers, leading to higher unemployment rates.

• Seasonal unemployment is caused by seasonal changes in demand for labor. For example,
the tourism industry may experience higher unemployment rates in the winter months.

• Real-wage unemployment is caused by government policies that set minimum wages above
the equilibrium wage rate. At a wage rate that is too high, some businesses may be unable
to afford to hire all the workers who are willing to work at that wage.
 • Discouraged worker unemployment refers to people who have stopped looking for work
because they believe they will not be able to find a job. These workers are not counted in
the official unemployment rate.

• Underemployment is a situation in which workers are employed but are not working full-
time hours or are not using their full skills and abilities.

• Frictional unemployment is caused by the natural process of people moving between jobs.
This type of unemployment is usually temporary, as workers are actively searching for new
jobs.

• Structural unemployment arises when there is a mismatch between the skills of the
workforce and the skills demanded by employers. This mismatch can be caused by
technological changes, globalization, or changes in consumer preferences.

• Cyclical unemployment is caused by fluctuations in the business cycle. During economic

downturns, businesses may lay off workers, leading to higher unemployment rates.

• Seasonal unemployment is caused by seasonal changes in demand for labor. For example,
the tourism industry may experience higher unemployment rates in the winter months.

• Real-wage unemployment is caused by government policies that set minimum wages above
the equilibrium wage rate. At a wage rate that is too high, some businesses may be unable
to afford to hire all the workers who are willing to work at that wage.

• Discouraged worker unemployment refers to people who have stopped looking for work
because they believe they will not be able to find a job. These workers are not counted in
the official unemployment rate.

• Underemployment is a situation in which workers are employed but are not working full-
time hours or are not using their full skills and abilities

TYPES OF INFLATION

• Inflation: The sustained increase in the general price level of goods and services over
time.expand_more It reduces the purchasing power of money, meaning each unit of
currency buys less.expand_more

Types of Inflation:

• Demand-Pull Inflation:

o Caused by an increase in aggregate demand (total spending in the

economy). expand_more

o More money chasing the same amount of goods leads to higher prices.
 o Often associated with economic booms.expand_more

• Cost-Push Inflation:

o Driven by rising production costs for businesses (e.g., raw materials,

wages). expand_more

o Businesses pass on these costs to consumers through higher prices.expand_more

o Can be triggered by supply chain disruptions, rising energy costs, or shortages.

• Built-in Inflation:

o When workers and businesses expect inflation and adjust wages and prices
accordingly, creating a self-fulfilling prophecy.expand_more

o Can become entrenched and difficult to control.

• Stagflation:

o A rare but damaging combination of both inflation and economic stagnation (slow
growth or recession).expand_more

o Creates a double whammy for consumers and businesses.expand_more

• Hyperinflation:

o Uncontrollably rapid inflation, often exceeding 50% per month.expand_more

o Destroys the value of currency, leading to economic collapse.expand_more

Inflation's Impact:

• Reduces purchasing power: Consumers can buy less with the same amount of
money.expand_more

• Hurts fixed-income earners: Salaries and pensions don't keep pace with rising prices.

• Discourages saving: The incentive to save decreases as money loses value.

• Can benefit borrowers: Existing debt becomes easier to repay due to inflation's
devaluation.expand_more

• Uncertainty for businesses: Makes planning and investment decisions difficult.

Understanding various types of inflation helps policymakers develop appropriate strategies to

maintain price stability and promote economic growth.

EFFECTS OF INFLATION
Inflation's impact reaches far beyond the price tag. It has both internal (domestic) and external
(international) consequences.

Internal Effects:
 • Reduced Purchasing Power: As prices rise, the value of a nation's currency weakens.
Consumers can buy less with the same amount of money, impacting their standard of living.

• Income Inequality: Inflation disproportionately affects low-income earners. Essential goods

rise faster than wages, squeezing their budgets.

• Investment Discouragement: Inflation creates uncertainty about future prices. This

discourages investment, hindering economic growth.

• Erosion of Savings: The value of saved money diminishes with inflation. People might delay
saving or spend more, hindering long-term financial planning.

• Wage-Price Spiral: Workers demand higher wages to keep up with inflation. Businesses raise
prices to cover increased wages, creating a self-perpetuating cycle.

• Social Unrest: High inflation can lead to social discontent and protests, especially if it
disproportionately affects certain segments of society.

External Effects:

• Trade Imbalances: Inflation can make a country's exports more expensive, leading to a trade
deficit. Imports become cheaper, further impacting domestic producers.

• Currency Devaluation: High inflation weakens a nation's currency in the foreign exchange
market. This makes imports more expensive and reduces the purchasing power of citizens
traveling abroad.

• Foreign Investment Fluctuations: Volatile inflation discourages foreign investors, impacting

a nation's access to capital and potential for economic growth.

• International Competitiveness: Inflationary pressures can make a country's exports less

competitive in the global market, leading to a loss of market share.

• Global Inflationary Spiral: High inflation in one country can spill over to its trading partners
due to interconnectedness in the global economy.

Inflation's consequences highlight the need for governments and central banks to manage
inflation effectively. By understanding its internal and external effects, policymakers can
implement strategies to maintain price stability and foster sustainable economic growth.

INDEXING OF INFLATION
• What is Indexing?

o Linking a value (wages, pensions, tax brackets) to a price index, typically the
Consumer Price Index (CPI).

o As the CPI rises, the indexed value increases automatically.

• Benefits of Indexing:
 o Preserves Purchasing Power: Protects incomes, benefits, and tax brackets from
inflation's devaluation.

o Reduces Uncertainty: Provides predictability for individuals and businesses planning

for the future.

o Promotes Fairness: Ensures that wages and benefits keep pace with the cost of
living.

o Simplifies Adjustments: Eliminates the need for frequent, complex manual

adjustments to maintain value.

• Challenges of Indexing:

o Lag Effect: There might be a delay between price changes and the adjustment based
on the CPI.

o Indexing Spiral: If wages and benefits are fully indexed, it could contribute to built-in
inflation.

o Administrative Costs: Implementing and maintaining indexing systems can incur

some administrative costs.

o Limited Application: Not all economic factors are captured by the CPI, potentially
leading to some inaccuracies.

• Examples of Indexing:

o Social Security Payments: Adjusted annually based on CPI changes.

o Tax Brackets: May be indexed to prevent inflation from pushing taxpayers into
higher brackets.

o Wages: Collective bargaining agreements sometimes include cost-of-living

adjustments (COLA) based on inflation.

• Indexing Strategies:

o Full Indexing: Values increase exactly by the CPI change.

o Partial Indexing: Values increase by a proportion of the CPI change.

o Capped Indexing: Limits the maximum adjustment to prevent excessive increases.

The decision to implement indexing requires careful consideration of its benefits and challenges. It
can be a valuable tool to mitigate the negative effects of inflation, but policymakers must weigh
its potential impact on the broader economy.

REMEDIES OF INFLATION
Inflation, the persistent rise in prices, disrupts economies and erodes purchasing power. Fortunately,
various strategies can be employed to combat it:
Monetary Policy:

• Interest Rate Hikes: Central banks raise interest rates to discourage borrowing and
spending, reducing aggregate demand and inflationary pressures.

• Quantitative Tightening: The central bank sells government bonds, reducing the money
supply in circulation and dampening inflation.

Fiscal Policy:

• Government Spending Cuts: Reducing government spending decreases demand for goods
and services, helping to cool inflation.

• Tax Increases: Raising taxes reduces disposable income in consumer hands, leading to less
spending and lower inflationary pressures.

Supply-Side Measures:

• Increase Productivity: Policies encouraging business investment, innovation, and workforce

skills development can increase production and reduce costs, mitigating inflation.

• Reduce Trade Barriers: Opening up trade allows for cheaper imports, increasing competition
and potentially lowering domestic prices.

• Address Supply Chain Disruptions: Policies promoting efficient transportation, logistics, and
access to raw materials can help prevent supply shortages that fuel price increases.

Income Policies:

• Wage and Price Controls: Government-imposed limits on wages and prices can be a blunt
instrument, potentially leading to shortages and inefficiencies. (Used with caution)

• Social Safety Net Adjustments: Increasing minimum wages or social benefits can help low-
income earners cope with inflation, but needs careful management to avoid fueling a wage-
price spiral.

Communication and Public Trust:

• Transparency from Policymakers: Clear communication about inflationary causes and

planned measures fosters public trust and helps manage expectations.

• Long-Term Economic Planning: Policymakers focusing on long-term economic growth and

stability can create a more resilient economy less susceptible to inflationary shocks.

The effectiveness of these remedies depends on the specific cause and severity of inflation. A
combination of approaches is often most successful.

POLICIES TO REDUCE UNEMPLOYMENT

Inflation, the persistent rise in prices, disrupts economies and erodes purchasing power. Fortunately,
various strategies can be employed to combat it:
Monetary Policy:

• Interest Rate Hikes: Central banks raise interest rates to discourage borrowing and
spending, reducing aggregate demand and inflationary pressures.

• Quantitative Tightening: The central bank sells government bonds, reducing the money
supply in circulation and dampening inflation.

Fiscal Policy:

• Government Spending Cuts: Reducing government spending decreases demand for goods
and services, helping to cool inflation.

• Tax Increases: Raising taxes reduces disposable income in consumer hands, leading to less
spending and lower inflationary pressures.

Supply-Side Measures:

• Increase Productivity: Policies encouraging business investment, innovation, and workforce

skills development can increase production and reduce costs, mitigating inflation.

• Reduce Trade Barriers: Opening up trade allows for cheaper imports, increasing competition
and potentially lowering domestic prices.

• Address Supply Chain Disruptions: Policies promoting efficient transportation, logistics, and
access to raw materials can help prevent supply shortages that fuel price increases.

Income Policies:

• Wage and Price Controls: Government-imposed limits on wages and prices can be a blunt
instrument, potentially leading to shortages and inefficiencies. (Used with caution)

• Social Safety Net Adjustments: Increasing minimum wages or social benefits can help low-
income earners cope with inflation, but needs careful management to avoid fueling a wage-
price spiral.

Communication and Public Trust:

• Transparency from Policymakers: Clear communication about inflationary causes and

planned measures fosters public trust and helps manage expectations.

• Long-Term Economic Planning: Policymakers focusing on long-term economic growth and

stability can create a more resilient economy less susceptible to inflationary shocks.

The effectiveness of these remedies depends on the specific cause and severity of inflation. A
combination of approaches is often most successful.

MEASUREMENT OF UNEMPLOYMENT RATE

The unemployment rate, a key economic indicator, reflects the health of a job market. Here's a
breakdown of how it's measured:

• Labor Force: The total number of people actively working (employed) or actively seeking
work (unemployed).

• Labor Force Participation Rate: The percentage of the working-age population (usually 16+)
that is in the labor force (working or unemployed).

Identifying the Unemployed:

• Labor Force Survey: Government surveys conducted regularly (e.g., monthly) ask individuals
about their work activity in the past week.

• Eligibility: To be counted as unemployed, individuals must be without a job, available for

work, and actively searching for work in the past four weeks.

Calculating the Unemployment Rate:

• Formula: Unemployment Rate = (Unemployed People) / (Labor Force) x 100

• Interpretation: The rate indicates the percentage of the labor force that is unemployed.

Limitations to Consider:

• Discouraged Workers: Individuals who have stopped searching for work due to
discouragement may not be counted as unemployed, potentially underestimating the true
unemployment rate.

• Underemployment: People working part-time who desire full-time work or those whose
skills are not fully utilized in their current jobs are not captured in the unemployment rate.

• Informal Sector: Workers in the informal economy (e.g., street vendors) may not be
included in official surveys.

Additional Unemployment Measures:

• U-6 Rate (Underemployment Rate): A broader measure encompassing the official

unemployment rate, discouraged workers, and part-time workers seeking full-time jobs.

• Youth Unemployment Rate: The unemployment rate specifically for young people (e.g., 15-
24 years old).

• Long-Term Unemployment Rate: The percentage of unemployed individuals who have been
jobless for more than six months.

Understanding unemployment goes beyond the headline rate. Analyzing various measures and
interpreting them with their limitations in mind provides a more comprehensive picture of the job
market's health.