How unemployment rate states the number of jobless people? Consider inflation versus unemployment and answer the following question
How unemployment rate states the number of jobless people
Both the inflation rate and unemployment rate are closely watched aspects of macroeconomic performance metrics of the economy, and they are also among the key variables guiding macroeconomic policy targets. Moreover, the sum of the inflation rate and the unemployment rate is described as the misery index, which purports to measure the health of the economy and welfare.
The existence of a high unemployment rate is a serious problem for households and for a nation at large. National outputs of goods and services decline during the recessionary gap of the business cycle and lead to a high rate of unemployment. On the other hand, inflationary pressure leads to a high inflation rate, which in turn leads to a decline in real income. Thus high inflation rate has an adverse effect on the welfare of citizens, and the general economic well-being of a nation since it reduces effective demand and purchasing power of the people.
Studies indicate that there is a short-run trade-off between the inflation rate and the unemployment rate. Thus, in the short run, the trade-off between the inflation rate and the unemployment rate creates a challenge for macroeconomic policymakers.
Consider inflation versus unemployment and answer the following question
- Official unemployment rate is an imperfect measure of joblessness. Give examples of how the definition of unemployment rate overstates or understates the number of jobless people in the economy.
Overview
The unemployment rate is a vital measure of economic performance. A falling unemployment rate generally occurs alongside rising gross domestic product (GDP), higher wages, and higher industrial production. The government can generally achieve a lower unemployment rate using expansionary fiscal or monetary policy, so it might be assumed that policymakers would consistently target a lower unemployment rate using these policies. Part of the reason policymakers do not revolves around the relationship between the unemployment rate and the inflation rate.
In general, economists have found that when the unemployment rate drops below a certain level, referred to as the natural rate, the inflation rate will tend to increase and continue to rise until the unemployment rate returns to its natural rate. Alternatively, when the unemployment rate rises above the natural rate, the inflation rate will tend to decelerate.
The natural rate of unemployment is the level of unemployment consistent with sustainable economic growth. An unemployment rate below the natural rate suggests that the economy is growing faster than its maximum sustainable rate, which places upward pressure on wages and prices in general leading to increased inflation. The opposite is true if the unemployment rate rises above the natural rate, downward pressure is placed on wages and prices in general leading to decreased inflation. Wages make up a significant portion of the costs of goods and services, therefore upward or downward pressure on wages pushes average prices in the same direction.
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