Inflation & Unemployment – Concise Notes
Inflation
- General rise in prices → purchasing power falls.
- Linked to Irwin Fisher’s Money Illusion; formula MV = PT (money supply relation).
- Context: Shows how money supply affects prices.
Who Benefits?
- Debtors benefit more than lenders during inflation.
- Context: They repay in cheaper money.
Causes of Inflation
Demand-Pull Inflation
- “Too many dollars chasing too few goods.”
- Driven by excess demand.
Cost-Push Inflation
- Prices rise due to increased production/input costs.
- Supply-side problem.
Measurement of Inflation
WPI – Wholesale Price Index
- Higher weight on manufactured goods; does not include services.
- Base Year: 2011–12
- Published by OEA, Ministry of Commerce & Industry.
CPI – Consumer Price Index
- Higher weight on food items; measured from consumer’s view.
- Base Year: 2011–12
- Published by NSO (MoSPI).
- RBI uses CPI (Combined) for inflation targeting.
Types of Inflation
- Creeping: 3–4%
- Walking: 4–10%
- Running: 10–20%
- Galloping: 20–100%
- Hyperinflation: 100%+
- Disinflation: Inflation rising at a slower rate.
- Deflation: Fall in price levels → purchasing power increases.
IIP – Index of Industrial Production
- Measures industrial output.
- Base Year: 2011–12, published by NSO (MoSPI).
8 Core Industries (40% weight)
- Refinery products, Electricity, Steel, Crude oil,
Natural gas, Cement, Fertilizer, Coal.
Philips Curve
- Shows inverse relation: inflation ↑ → unemployment ↓.
Stagflation
- Inflation ↑ + Unemployment ↑
- Economy becomes stagnant.
- Examples: Great Depression (1929–39), Great Recession (2007–09).
Types of Unemployment
Structural Unemployment
- Skills do not match job needs (e.g., tech replacing labour).
Educated Unemployment
- Degrees without jobs; common in urban India.
Frictional Unemployment
- Temporary, during job search/move (urban).
Disguised/Hidden Unemployment
- People appear employed but productivity = zero (agriculture).
Cyclical Unemployment
- Due to economic recessions; improves when economy revives.
- Example: Great Recession.
Seasonal Unemployment
- Occurs in season-based activities (mostly rural).
- Example: Fireworks sellers during Diwali.
Memory Tricks
- W–M, C–F → WPI = Manufactured; CPI = Food.
- DP = Demand Pressure, CP = Cost Problem.
- CWRGH = Creeping → Walking → Running → Galloping → Hyper (order of inflation).
- D–D: Deflation = Demand Down.
- Agriculture = Disguised (A–D link).
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