Unemployment and Inflation in Macroeconomics Explained

‘Unemployment’ and ‘inflation’ are two terms that are seen quite frequently in the news. Now, most of you might know that unemployment refers to a shortage of jobs while inflation refers to goods becoming more expensive over time. But have you ever thought how these two phenomena came into existence and what drives these dynamics?

In this segment, you will learn about the two most important factors in macroeconomics: Unemployment and Inflation. These factors have a strong impact on the economic performance of a country. 
 

In the upcoming video, you will listen to Chris as he explains why unemployment occurs and also discusses the concepts of inflation, including its causes, and explains the relationship between inflation and unemployment.

So, in the video, you learnt about the four types of unemployment, which include the following: 

1. Frictional unemployment: Frictional unemployment occurs when people switch between jobs and are in the process of looking for new jobs.
2. Structural unemployment: Structural unemployment occurs when people lack the skills and qualifications required for the jobs that are available in an economy. It also occurs when an industry or an economy undergoes changes over a period of time. 
3. Cyclical unemployment: Cyclical unemployment occurs when the demand in an economy begins to decrease. In such cases, producers reduce their supply and, in the process, let go of employees.
4. Seasonal unemployment: Seasonal unemployment is prevalent in industries such as tourism, farming and construction, where output and demand change regularly/seasonally.

Now, in the next video, you will learn what inflation is, why it occurs and how it affects businesses.

So, in the video, you learnt that inflation can be explained by the following two major theories:

1. Cost-push theory of inflation: According to this theory, producers push the rising input costs to the customers, thus leading to an increase in the prices of goods and services. For example, an increase in the price of oil in the world market will be studied under the cost-push theory. 
2. Demand-pull theory of inflation: This theory is applicable in a low-supply situation where demand is high but supply is low, and so, producers increase or inflate their prices. 

In the video, you also learnt what the indicators of inflation could be and also understood its implications for an economy. You also learnt how deflation affects businesses.

In the next video, you will learn how the combination of unemployment and inflation can affect the economy. You will learn about a popular economic model for explaining the inter-relation between unemployment and inflation and also learn about its effect on the economy.

So, in the video, you learnt about the relationship between inflation and unemployment by looking at the Phillips Curve, which shows the trade-off between inflation and unemployment.