BIGSUYI SSC 102 (economic systems,Inflation,Unemployment).pdf

 THE BASICS OF ECONOMIC SYSTEMS AND INSTITUTIONS An economic system is a system of production, resource allocation, exchange, and distribution of goods and services in a society or a given geographic area. It includes the combination of the various institutions, agencies, entities, decision-ma...

 THE BASICS OF ECONOMIC SYSTEMS AND INSTITUTIONS An economic system is a system of production, resource allocation, exchange, and distribution of goods and services in a society or a given geographic area. It includes the combination of the various institutions, agencies, entities, decision-making processes, and patterns of consumption that comprise the economic structure of a given community. As such, an economic system is a type of social system. (1) Classifications of the economy according to ownership of resources (2) Classifications of the economy according to decision-making 1) Classifications of the economy according to ownership of resources Capitalism Capitalism is an economic system characterized by private control and ownership of the factors of production. In capitalism, private individuals control the economic resources, as opposed to government-controlled economies where production and prices are determined centrally. Economist Adam Smith likened free markets to an "invisible hand," guiding producers towards goods and services in demand. Capitalism relies on market competition to set prices and allocate resources, with decision-making and investment primarily driven by owners in financial and capital markets. There are different forms of capitalism, including laissez-faire or free market capitalism, welfare capitalism, and state capitalism. It has evolved over time, spreading globally through processes like globalization. The emergence of capitalism can be traced back to early Islamic economic policies that influenced trade partners in Europe, leading to the development of capitalist systems. The transition from feudalism to mercantilism and then to industrialization in England and parts of Europe marked significant stages in capitalism's evolution. By the end of the 19th century, capitalism had become the dominant global economic system, propelled further by globalization. Key features of capitalism include: 1. Private ownership of means of production: Individuals or entities own the resources used for production. 2. Capital accumulation: Wealth and resources are accumulated for investment and growth. 3. High level of wage labor: Workers are employed for wages, contributing to production. 4. Voluntary production exchange on a market: Goods and services are exchanged based on voluntary agreements in markets. 5. Use of the price mechanism: Prices determine resource allocation among competing uses. 6. Competitive markets: Multiple buyers and sellers compete in the market. 7. Maximization of exchange-values: Focus is on the value of goods in exchange rather than their use.  8. Investment for profit: Capital is invested with the goal of generating returns. 9. Free market systems: New entrants can enter markets freely. 10. Exploitative tendencies: Capitalism can lead to exploitation of labor for profit. Consider the List of countries with a trace of capitalism in their economic system are as follows. Asian Countries Bahrain, Georgia, Hong Kong, Japan, Kuwait, Mauritius, Singapore, South Korea, Taiwan, Thailand, United Arab Emirates European countries Albania, Austria, Belgium, Bulgaria, Croatia, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Latvia, Macedonia, Malta, Netherlands, Norway, Portugal, Romania, Slovakia, Slovenia, Spain, United Kingdom African countries Cape Verde, South Africa, Uganda North American countries Barbados, Belize, Canada, El Salvador, Guatemala, Jamaica, Mexico, Panama, United States of America South American countries Chile, Peru Others are Australia and Samoa Socialism. Socialism is a system where the means of production are publicly or collectively owned. It focuses on equality and values workers based on their time input rather than their output. Decisions about production, methods, and distribution are made by a planning authority, making it a planned economy. Individuals rely on the state for necessities like food and healthcare. Examples of socialist societies today include China, Vietnam, North Korea, and Cuba. State capitalism is when the state controls commercial economic activities or owns major businesses. It can combine elements of capitalism with state ownership or control, sometimes acting like a large corporation. Some argue that countries like China and the former Soviet Union practiced forms of state capitalism. Welfare capitalism integrates social welfare policies into capitalism, often seen in Northern and Continental Europe. This model, associated with the Nordic model or social market economy, involves businesses providing welfare services to employees. It peaked in the mid-20th century and continues to exist in various forms globally. (1) Public Ownership: A socialist economy is characterized by public ownership of the means of production and distribution. There is collective ownership whereby all mines, farms, factories, financial institutions, distributing agencies (internal and external trade, shops, stores, etc.), means of transport and communications, etc. are owned, controlled, and regulated by government departments and state corporations. A small private sector also exists in the form of small business units which are carried on in the villages by local artisans for local consumption. 2. Central Planning: A socialist economy is centrally planned, directed by a central authority that sets objectives and targets for production, allocation, and distribution of resources. 3. Definite Objectives: Socialist economies operate with specific socio-economic goals such as full employment, meeting communal demands, equitable income distribution, capital accumulation, and economic development. 4. Freedom of Consumption: Consumers in state-owned industries have some choice based on preferences, but production and distribution are regulated by fixed prices and availability of socially useful commodities. 5. Equality of Income Distribution: Socialism aims for more equal income distribution by eliminating private ownership and profit motives, with state-managed income used for public services like education, healthcare, and social security. 6. Planning and Pricing: Pricing in socialism is controlled by the central authority, with fixed prices for goods and services determined by planning objectives, market prices, and accounting principles guiding production and investment decisions. Merit of Socialism 1. Greater Economic Efficiency: Socialism achieves greater economic efficiency compared to capitalism because the central planning authority regulates production towards chosen goals, ensuring resources are used efficiently. This includes producing essential goods like food, clothing, and housing to meet basic needs effectively. 2. Greater Welfare with Reduced Income Inequality: Socialism reduces income inequality by eliminating private ownership and profit motives. Citizens are compensated based on their abilities, education, and training, with all income going to the state for public welfare. This leads to free education, affordable housing, healthcare, and social security. 3. Absence of Monopolistic Practices: Socialism eliminates monopolies found in capitalism since all means of production are state-owned. This absence of competition and monopoly leads to fairer pricing and higher-quality goods produced for societal benefit. 4. Stability and Reduced Business Fluctuations: A socialist economy experiences economic stability as production and consumption are regulated by the central authority according to the plan's objectives. This control reduces overproduction and unemployment, contributing to a more stable economic environment. Demerit of Socialism 1. Loss of Consumers’ Sovereignty: In a socialist economy, consumers lose their sovereignty as they cannot freely purchase commodities of their choice. They are restricted to goods available in state-run stores, often with fixed quantities determined by the government.  2. No Freedom of Occupation: Individuals lack freedom of occupation in a socialist society. The state assigns jobs, and individuals cannot change or leave them without state approval. Work locations are also determined by the state, with all occupational movements controlled by government sanction. 3. Misallocation of Resources: Socialism can lead to arbitrary resource allocation as decisions are made centrally. The central planning authority may make errors in resource allocation, relying on trial and error methods. 4. Bureaucracy: Socialism is often criticized for its bureaucratic nature, operating like a machine. This system may lack the initiative to motivate individuals to work hard, as people may work primarily due to fear of authority rather than personal gain or interest. Communism and its Features Communism, also known as a command system, is an economic and political ideology where the government owns most factors of production and directs the allocation of resources, as well as determining which products and services will be provided. It is based on communal ownership and the idea of eliminating social classes. In contrast to capitalism, which revolves around private ownership and profit motives, communism seeks to address issues of exploitation and inequality by advocating for a society where each person contributes according to their abilities and receives according to their needs, as encapsulated in the slogan "From each according to his ability, to each according to his need." However, while communism holds a utopian vision of equality and abundance, its practical implementation has often been associated with authoritarian governance, human rights violations, and economic inefficiencies. One of its fundamental challenges lies in the knowledge problem, where central planners struggle to efficiently allocate resources without the guidance of market prices, leading to surpluses and shortages. Communism traces its roots to thinkers like Karl Marx and Friedrich Engels, who aimed to end the exploitation of the working class by the capitalist bourgeoisie. They envisioned a society where class distinctions would be eliminated, and resources would be shared equally among all members. Marx believed that a political revolution was necessary to overthrow the capitalist system, which he saw as inherently oppressive and exploitative. Communist countries, such as Russia and China, often implemented centrally planned economies, where the government had significant control over production, distribution, and pricing decisions. This approach aimed to achieve societal goals through centralized direction, but it also faced criticisms for stifling individual initiative and creativity, as well as leading to economic inefficiencies and shortages. The following are features of communism: 1. Government owns land 2. Government owns capital 3. Government allocates all scarce resources. 4. Government controls prices for labour and goods. 5. Government determines what, how and for whom to produce. 6. It is authoritarian in nature 7. There is no class in the society Advantages of Communism: 1. Internal Stability: Communism fosters internal stability as it rewards active participation and discourages non-participation, creating an incentive for individuals to contribute to the system. 2. Common Goals and Cooperation: Communism requires common goals and agreed-upon rules for resource allocation, leading to a spirit of cooperation and stronger social communities. This shared sense of purpose can contribute to a stable economy. 3. Efficient Resource Distribution: Healthy communist systems are often efficient at distributing resources within their localized areas, especially during times of need, due to their emphasis on cooperation and collective responsibility. Disadvantages of Communism: 1. Diverse Populations: Large or geographically diverse populations in communist systems can struggle to maintain a common goal or set of rules, leading to challenges in coordinating shared efforts and resources. 2. Hierarchy and Fairness: In diverse societies, hierarchical structures can emerge, leading to perceptions of unfair distribution of work and resources. This can destabilize communist societies by undermining the sense of fairness and cooperation. 3. Cultural Homogeneity and Competition: Communistic systems may block external cultures and competition to maintain homogeneity, but this can weaken their ability to learn from or compete with external economies, limiting their growth and adaptability. Mixed Economy A mixed economy is an economic system that combines elements of both market-based capitalism and government intervention. It involves a mixture of private and public ownership of the means of production and distribution, as well as a blend of free markets and economic planning. In a mixed economy, there is private ownership of businesses and resources, with markets playing a dominant role in economic coordination. However, unlike in a purely free-market economy, the government in a mixed economy wields indirect macroeconomic influence through fiscal and monetary policies. These policies are designed to counteract economic downturns, address issues like unemployment and financial crises, and mitigate growing income and wealth disparities. The government also plays a role in providing public goods and promoting social welfare through various interventions. In some mixed economies, there may be a significant presence of state-run enterprises alongside private businesses. This blend of private and public ownership, along with regulatory oversight and government interventions, aims to strike a balance between market forces and social objectives. Countries like India and Nigeria are examples of mixed economies, where both private enterprise and government initiatives contribute to economic development and social welfare. Features of mixed economy 1. Public Sector: The public sector is under the control and direction of the state. All decisions regarding what, how and for whom to produce are taken by the state. Public utilities, such as rail construction, road building, canals, power supply, means of communication, etc., are included in the public sector projects. They are operated for public welfare and not for profit motive. The public sector also operates basic, heavy, and strategic and defense production industries which require large investment and have long gestation period. But they earn profits like private industries which are utilized for capital formation. 2. Private Sector: There is a private sector in which production and distribution of goods and services are done by private enterprises. This sector operates in farming, plantations, mines, internal and external trade, and in the manufacture of consumer goods and some capital goods. This sector operates under state regulations in the interest of public welfare. In certain fields of production, both public and private sectors operate in a competitive spirit. This is again in the interest of the society. 3. Joint Sector: A mixed economy also has a joint sector which is run jointly by the state i.e public and private enterprises. It is organized on the basis of a joint stock company where the majority shares are held by the state. 4. Cooperative Sector: Under a mixed economy, a sector is formed on cooperative principles. The state provides financial assistance to the people for organizing cooperative societies, usually in dairying, storage, processing, farming, and purchase of consumer goods. 5. Freedom and Control: A mixed economy possesses the freedom to hold private property, to earn profit, to consume, produce and distribute, and to have any occupation. But if these freedoms adversely affect public welfare, they are regulated and controlled by the state. 6. Economic Planning: There is a central planning authority in a mixed economy. A mixed economy operates on the basis of some economic plan. All sectors of the economy function according to the objectives, priorities and targets laid down in the plan. In order to fulfill them, the state regulates the economy through various monetary, fiscal and direct control measures. The aim is to check the evils of the price mechanism. Merits of Mixed Economy: 1. Best Allocation of Resources: Combination of market forces and government intervention leads to optimal resource allocation. 2. Balance between Sectors: Maintains a healthy balance between public and private sectors, leveraging their respective strengths. 3. Welfare State: Prioritizes social welfare through measures like social security and public works programs. 4. Social Security: Provides safety nets for citizens, especially the disadvantaged and vulnerable. 5. Freedom of Criticism: Allows citizens to critique and influence policies, fostering transparency and accountability. Demerits of Mixed Economy: 1. Non-Cooperation Between Sectors: Tensions or lack of cooperation between public and private sectors can hinder progress. 2. Inefficient Public Sector: Public enterprises may face inefficiencies compared to private counterparts. 3. Economic Fluctuations: Mixed economies are susceptible to economic fluctuations and crises. 4. Decision-Making Challenges: Decision-making processes may be slow or hampered by bureaucracy and regulations. 5. Uneven Resource Distribution: Resources and benefits may not be evenly distributed across society, leading to disparities.  (2) Classification of the economy according to decision-making Market Economy A market economy is an economic system guided by the interactions of citizens and businesses, with minimal government intervention compared to a centrally planned economy. In this system, supply and demand largely determine economic decisions and the pricing of goods and services. Market economies emphasize the role of private ownership, competition, and market forces like supply and demand in driving economic activity. Unlike centrally planned economies, where government decisions dominate, market economies allow buyers and sellers to determine "what to produce," "how to produce," and "for whom to produce." This system is prevalent in most developed nations today, often allowing market forces to dictate economic activities while engaging in limited government intervention for stability. The shift towards market economies from command economies has been notable since the late 1970s, with countries like Mexico and Japan increasingly adopting market mechanisms. Features of market economy 1. Free-enterprise: Market economies promote free enterprise, allowing individuals and businesses to operate with minimal government control, encouraging innovation and entrepreneurship. 2. Free-market: These economies operate with a free market system, where prices for goods and services are determined by supply and demand, fostering efficient allocation of resources. 3. Self-adjusting: Market economies have a self-adjusting nature, where market forces automatically respond to changes in supply, demand, and external factors, leading to economic equilibrium. 4. Self-interests: Individuals and businesses in market economies act in their self-interests, seeking to maximize profits and efficiency, which contributes to overall economic growth. 5. Self-regulating economy: The market itself acts as a regulator, adjusting prices, production levels, and resource allocation based on market conditions and consumer preferences. 6. Market rivalry and competition: Competition among businesses in a market economy fosters innovation, quality improvement, and cost-efficiency, benefiting consumers and driving economic progress. 7. Little government intervention: Market economies limit government involvement in economic activities, relying on market mechanisms to allocate resources and determine production and consumption patterns. 8. Private ownership of resources: Private individuals and businesses own the majority of resources, including land, capital, and labor, promoting individual initiative and responsibility.  9. Private and public resource allocation: While most resources are privately owned, some sectors may involve public ownership or partnership, such as infrastructure projects or essential services. 10. Consumer Sovereignty: Market economies prioritize consumer sovereignty, where consumer preferences and choices drive production decisions, leading to a wide range of goods and services to meet diverse needs and wants. 11. Price mechanism: Prices in a market economy are determined by the interaction of supply and demand, serving as signals for resource allocation, production levels, and consumer behavior. Command economy. A command economy, also known as a planned economy, is a system where the government makes decisions about what goods should be produced, how much should be produced, and the prices at which goods will be sold, rather than relying on the free market. This system is a characteristic of communist societies like China, Cuba, North Korea, and the former Soviet Union. Unlike free-market economies where prices signal producers on what to create and in what quantities, command economies face challenges in efficiently allocating goods due to the knowledge problem, leading to shortages and surpluses. In a command economy, the government determines production plans annually, specifying details like the quantity and types of products to be produced. Penalties and rewards are often tied to meeting or exceeding production quotas. One notable example of a command economy was seen in the former Soviet Union, where detailed plans governed production, including resource allocation and production methods. However, discrepancies often arose between planned production and actual feasibility, leading to unintended consequences and inefficiencies. Despite the central planning of production and resources, command economies typically did not directly address the "for whom" question, often resulting in queuing for goods and services. In some aspects, command economies can be observed in certain sectors of market economies. For instance, the military operates as a command economy within the United States, where commanders make decisions that others are expected to follow. Additionally, government control over land in certain regions involves command economy principles, dictating activities like grazing rights, timber cutting, and access to natural resources. Features of command economy 1. Public Ownership 2. Central Planning 3. Definite Objectives 4. Freedom of Consumption 5. Equality of Income Distribution 6. Planning and same pricing process 7. Government owns land 8. Government owns capital 9. Government allocates all scarce resources. 10. Government controls prices for labour and goods. 11 Government determines what, how and for whom to produce. 12. It is authoritarian in nature 13 There is no class in the society Planned and Unplanned Economy Our discussion here is centered on new nomenclature given to command and market economies known as planned and unplanned economies. Globalisation, market competitions, efficient allocation of resources among citizens as well as taken economic decision has forced many countries of the world to adjust their economic system to suite their taste and as such given it names. This is also a refection as to the contributions of reputable scholars in the field of economics. Hence our discussion shall be on planned and unplanned economy. Under a Planned economy which sometimes referred to as a command economy, governments own all of the factors of production such as land, capital and resources, and government officials determine when, where and how much is produced at any one time. The most famous contemporary example of a command economy was that of the former Soviet Union, which operated under a Communist system. Since decision-making is centralized in a planned economy, the government controls all of the supply and sets all of the demand. Prices cannot rise naturally like in a market or unplanned economy, so prices in the economy must be set by government officials. In a planned economy, macro-economic and political considerations determine resource allocation, whereas in a market economy, the profits and losses of individuals and firms determine resource allocation. Therefore, in a planned economy, the factors of production are owned and managed by the government. Thus the Government decides what to produce, how much to produce and for whom to produce. The following are the features of planned economy. Features of planned economy: 1. All resources are owned and managed by the government. 2. There is no Consumer or producer sovereignty. 3. The market forces are not allowed to set the price of the goods and services. 4. Profit is not the main objective. 5. The government aims to provide goods and services to everybody. 6. Government decides what to produce, how much to produce and for whom to produce. Advantages of planned economy 1. Prices are kept under control and thus everybody can afford to consume goods and services. 2. There is less inequality of wealth. 3. There is no duplication as the allocation of resources is centrally planned. 4. Low level of unemployment as the government aims to provide employment to everybody. 5. Elimination of waste resulting from competition between firms. Disadvantages of planned economy 1. Consumers cannot choose and only those goods and services are produced which are decided by the government. 2. Lack of profit motive may lead to firms being inefficient. 3. Lot of time and money is wasted in communicating instructions from the government to the firms. Examples of Planned economies are; North Korea, Cuba, Turkmenistan, Myanmar, Belarus, Laos, Libya, Iran In some instances, the term planned economy has been used to refer to national economic development plans and state-directed investment in market economies. Unplanned economy An unplanned economy on the other hand is an economy where economic decisions regarding production, investment and resource allocation are not linked together through conscious economic planning. This may refer to subsistence-level economies, systems of barter or to more complex arrangements such as market economies, although there may be a significant amount of planning within firms in market and mixed-market economies., Market economies and command economies occupy two polar extremes in the organization of economic activity. The primary differences lie in division of labor or factors of production and the mechanisms that determine prices. The activity in a market economy is unplanned; it is not organized by any central authority and is determined by the supply and demand of goods and services. Alternatively, a command economy is organized by government officials who also own and direct the factors of production. The two fundamental aspects of market economies are: 1. Private ownership of the means of production 2. Voluntary exchanges of values The most common title associated with a market economy is capitalism. Individuals and businesses own the resources and are free to exchange and contract with each other without decree from government authority. The collective term for these uncoordinated exchanges is the "market." Prices arise naturally in a unplanned economy based on supply and demand. Consumer preferences and resource scarcity determine which goods are produced and in what quantity; the prices in a market economy act as signals to producers and consumers who use these price signals to help make decisions. Governments play a minor role in direction of economic activity. Therefore the central thought of this system is that it should be the producers and consumers who decide how to utilize the resources. Thus, the market forces decide what to produce, how much to produce and for whom to produce. Let us now look at the features, merits and demerits of Unplanned economy. Features of unplanned economy 1. All resources are privately owned by people and firms. 2. Profit is the main motive of all businesses. 3. There is no government interference in the business activities. 4. Producers are free to produce what they want, how much they want and for whom they want to produce. 5. Consumers are free to choose. 6. Prices are decided by the Price mechanism i.e. the demand and supply of the good/service. Advantages of unplanned economy 1. Free market responds quickly to the people‘s wants: Thus, firms will produce what people want because it is more profitable whereas anything which is not demanded will be taken out of production. 2. Wide Variety of goods and services: There will be wide variety of goods and services available in the market to suit everybody‘s taste. 3. Efficient use of resources encouraged: Profit being the sole motive, will drive the firms to produce goods and services at lower cost and more efficiently. This will lead to firms using latest technology to produce at lower costs. Disadvantages of unplanned economy 1. Unemployment: Businesses in the market economy will only employ those factors of production which will be profitable and thus we may find a lot of unemployment as more machines and less labour will be used to cut cost. 2. Certain goods and services may not be provided: There may be certain goods which might not be provided for by the Market economy. Those which people might want to use but don‘t want to pay may not be available because the firms may not find it profitable to produce. For example, Public goods, such as, street lighting. 3. Consumption of harmful goods may be encouraged: Free market economy might find it profitable to provide goods which are in demand and ignore the fact that they might be harmful for the society. 4. Ignore Social cost: In the desire to maximized profits businesses might not consider the social effects of their actions. Countries like the USA, Canada, UK, Germany, France, Japan, China, South Korea, South Africa, Singapore, Malaysia, Hong Kong, Egypt, Nigeria, to mention but few, are few examples of economies with an unplanned system  Inflation Inflation is the sustained increase in the general price levels of goods and services over time. during the period of inflation, there is a continuous fall in the purchasing power of money – that is the quantity of goods and services which a unit of money can buy gets smaller and smaller. Inflation describes a persistent and appreciable increase in the general price level. The Inflation rate is measured as a percentage change in a price index, such as the consumer price index. Inflation can also be refers to a high and persistent rise in the general prices of goods and services which is due mainly to the large volume of money in circulation relative to goods and services produced. From these definitions, it means that inflation can occur if: - There in an increase in the supply of money not matched with a corresponding increase in goods and services. - There is a lower increase in the production of goods and services than money supply. - There is a greater increase in demand for goods and services than physical production of goods and services. Types of Inflation a) Demand Pull Inflation: it describes a sustained increase in general price level that is caused by a permanent increase in nominal aggregate demand. Simply, is can be viewed as an inflation that occurs as a result of increase in aggregate demand. When aggregate demand exceeds aggregate supply at current prices, prices are pulled upwards to equilibrate aggregate supply and demand. b) b) Cost Push or Supply Inflation: it is a situation where the process of increasing price level is caused by increasing costs of production which push up prices. Cost push inflation is also referred to as supply inflation. Price level in this case increases due to an increase in business costs. These increases in prices occur in the face of high unemployment and slacken resource utilization. The increase in cost of production causes supply of final goods and services to fall. This creates excess aggregate demand and a new equilibrium is attained at a higher price level. c) Creeping Inflation: when the rise in prices is very slow like that of a snail, it is called creeping inflation or a sustained rise in prices of annual increase of less than 3% per annum is characterised as creeping inflation and it essential for economic growth. d) Hyper Inflation: This is the extreme form of inflation in which the value of money loses its purchasing power. Money thereby loses its function as a store of value. The increase in the economy‟s output is impossible because of the breakdown in monetary mechanism. It is associated by an increase in the supply of money. It is usually experienced during war when labour and other resources are channelled towards the persecution of war. Measurement of Inflation Three main measures of inflation are: Consumer price index (CPI), Wholesale Price Index (WPI), and GNP implicit price deflator. Consumer price index (CPI) This is an index designed to measure the average change over time in the prices paid by the final consumers for a specified basket of goods and services. The CPI measures changes in the cost of living of people resulting from changes in the retail prices. There are a number of approaches to the calculation of the CPI, we employ the Laspreyre’s formula. It is a base year weighted price index in which the expenditure in the current year is calculated at the current year prices, but with reference to the base year quantities. The general formula for constructing the CPI using the Laspeyre’s approach is  PQ 1 0 CPI = P0Q0  = The sum of P1 = prices of the various goods and services in the current year t P0 = prices of the various goods and services in the base year Q0 = quantities of the various goods and services in the base year Consumer price indices are frequently quoted by labour unions in wage negotiations and are used by the government in formulating prices and income policy, taxation policy as well as for deflation of income and value series in national accounts. The CPI is alternatively refered to as the retail price index and the cost of living index. The Wholesale price index (WPI): This index is calculated from the raw material prices and the manufacturer’s output price. The WPI provide a guide on what is likely to be the trend of the consumer price index in the future. The GNP implicit price deflator: This measures changes in the prices of all goods and services produced in the economy between one year and the other. It is the most accurate measure of inflation because it considers the economy as a whole given the difference between nominal GDP and real GNP. CAUSES, EFFECTS AND CONTROL OF INFLATION Causes of Inflation Inflation is the result of disequilibrium between demand and supply forces and is attributed to (a) an increase in the demand for goods and services in the country, and (b) a decrease in the supply of goods in the economy. Factors Causing Increase in Demand Various factors responsible for an increase in aggregate demand for goods and services are as follows. 1. Increase in Money Supply. An increase in the money supply leads to an increase in money income. The increase in money income raises the monetary demand for goods and services. The supply of money increases when (a) the government resorts to deficit financing i.e. printing of more currency or (b) the banks expand credit. 2. Increase in Government Expenditure. An increase in government expenditure as a result of the outbreak of development and welfare activities causes an increase in aggregate demand for goods and services in the economy. 3. Increase in Private Expenditure. An expansion of private expenditure (both consumption and investment) increases the aggregate demand in the economy. During the period of good business expectations, businessmen start investing more and more funds in new enterprises, thus increasing the demand for factors of production. This results in an increase in factor prices. The increased factor incomes raise the expenditure on consumption goods. 4. Reduction in Taxation. Reduction in taxation can also be an important cause for the generation of excess demand in the economy. When the government reduces taxes, it  increases the disposable income of the people, which, in turn, raises the demand for goods and services. 5. Increase in Exports. When the foreign demand for domestically produced goods increases, it raises the earnings of exporting industries. This, in turn, will increase demand for goods and services within the economy. 6. Increase in Population. A rapid growth of population raises the level of aggregate demand in the economy because of the increase in consumption, investment, government expenditure, and net foreign expenditure. This leads to an inflationary rise in prices due to excessive demand. 7. Paying off Debts. When the government pays off its old debts to the public, it results in an increase in purchasing power with the public. This will be used to buy more goods and services for consumption purposes, thus increasing the aggregate demand in the economy. 8. Black Money. Black money means the money earned through illegal transactions and tax evasion. Such money is generally spent on conspicuous consumption, while raising the aggregate demand and hence the price level. Factors Causing Decrease in Supply Various factors responsible for reducing the supply of goods and services in the economy are given below: 1. Scarcity of Factors of Production. On the supply side, inflation may occur due to the scarcity of factors of production, such as labor, capital equipment, raw materials, etc. These shortages are bound to reduce the production of goods and services for consumption purposes and thereby the price level. 2. Hoarding. At a time of shortages and rising prices, there is a tendency on the part of traders and businessmen to hoard essential goods for earning profits in the future. This causes scarcity and a rise in prices of these goods in the market. 3. Trade Union Activities. Trade union activities are responsible for inflationary pressures in two ways: (a) Trade union activities (i.e. strikes) often lead to stoppage of work, decline in production, and rise in prices (b) If trade unions succeed in raising wages of the workers more than their productivity, this will push up the cost of production and lead the producers to raise the prices of their products. 4. Natural Calamities. Natural calamities also create inflationary conditions by reducing the production in the economy. Floods and droughts adversely affect the supply of products and raise their prices. 5. Increase in Exports. An increase in exports reduces the stock of goods available for domestic consumption. This creates a situation of shortages in the economy giving rise to inflationary pressures.  6. Law of Diminishing Returns. The law of diminishing returns operates when production is increased by employing more and more variable factors with fixed factors and given technology. As a result of this law, the cost per unit of production increases, thus leading to a rise in the prices of production. 7. War. During the war period, economic resources are diverted to the production of war materials. This reduces the normal supply of goods and services for civilian consumption and this leads to the rise in the price level. 8. International Causes. In modern times, a major cause of inflationary rise in prices in most of the countries is the international rise in the prices of basic materials (e.g. petrol) used in almost all the industrial materials. Effects of Inflation Inflation is good so long as it is well under control and increases output and employment. It becomes harmful once it goes out of because then it robs Peter to pay Paul and takes not account of the basic control principle of social equality. According to C.N. Vakil, "Inflation may be compared to robber. Both deprive the victim of some possession with the difference that robber is visible, inflation in invisible; the robber's victim may be one or few at a time, the victim of inflation is the whole nation, the robber may be dragged to a court of law, inflation is legal". Inflation has wide-ranging influence on economic, social, moral, and political life of the country. Its various effects are discussed below. A) Effects on Product According to Keynes, moderate or creeping inflation has favorable effect on production particularly when there are unemployed resources in the country. Rising prices increase the profit expectations of entrepreneurs because the prices increase more rapidly than the cost of the production. They are induced to step up investment, and, as a result, output and employment increase. Hyper or galloping inflation, on the other hand, creates the uncertainty which is inimical to Thus, while mild inflation is favorable to production and employment production particularly before full employment, hyperinflation is generally harmful for the economy. The adverse effects of inflation on production stated below are: 1. Disrupt Price System. Inflation disrupts the smooth working of the price mechanism, creates rigidities and results in wrong allocation of resources. 2. Reduces Saving. Inflation adversely affects saving and capital accumulation. When prices increase, the purchasing power of money falls which means more money is required to buy the same quantity of goods. This reduces saving. 3. Discourages Foreign Capital. Inflation not only reduces domestic saving, it also discourages the inflow of foreign capital into the country. If the value of money falls considerably, it may even drive out the foreign capital invested in the country.  4. Encourages Hoarding. When prices increase, hoarding of larger stocks of goods becomes profitable. As a consequence of hoarding, the available supply of goods in relation to increasing monetary demand decreases. This results in black marketing and causes further price-spiral. 5. Encourages Speculation Activities. Inflation promotes speculative activities on account of uncertainty created by continually rising prices. Instead of earning profits though genuine productive activity, the businessmen find it easier to make quick profits through speculative activities. 6. Reduces Volume of production. Inflation reduces the volume of production because (a) capital accumulation has slowed down and (b) business uncertainty discourages entrepreneurs from taking business risks in production. 7. Affects Pattern of Production. Inflation adversely affects the pattern of production by diverting the resources from the production of essential goods to that of non-essential goods or luxuries because the rich, whose incomes increase more rapidly demand luxury goods. 8. Quality Fall. Inflation creates a sellers market in which sellers have command on prices because of excessive demand. In such a market, any thing can be sold. Since the producer's interest is only higher profits, they will not care for the quality. B) Effects on Distribution Inflation results in redistribution of income and wealth because the prices of all the factors of production do not increase in the proportion. Generally, the flexible income groups, such as businessmen, same traders, merchants, speculators gain during inflation due to windfall profits that arise because prices rise faster than the cost of production. On the other hand, the fixed income groups, such as workers, salaried persons, teachers, pensioners, interest, and rent earners, are always the losers during inflation because their incomes do not increase as fast as the prices. Inflation is unjust because it puts an economic burden on those sections of society who are least able to bear it. The effects of inflation on different groups of society are as follows. 1. Debtors and Creditors. During inflation, the debtors are the gainers and the creditors are the losers. The debtors stand to gain because they had borrowed when the purchasing power of money was high and now return the loans when the purchasing power of money is low due to inflation. The creditors, on the other hand, stand to lose because they get back less in terms of goods and services than what they had lent. 2. Wage and Salary Earners. Wage and salary earners usually suffer during inflation because (a) wages and salaries do not rise in the same proportion in which the prices or the cost of living rises and (b) there is a lag between a rise in the price level and a rise in wage and salary. Among workers, those who have formed trade unions, stand to lose less than those who are unorganized.  3. Fixed Income Groups. The fixed-income groups are the worst sufferers during inflation. Persons who live on past saving, pensioners, interest and rent earners suffer during periods of rising prices because their incomes remain fixed. 4. Business Community. The business community, i.e., the producers, traders, entrepreneurs, speculators, etc., stand to gain during inflation, (a) They earn windfall profits because prices rise at a faster rate than the cost of production (b) They gain because the prices of their inventories go up, thus increasing their profits, (c) They also gain because they are normally borrowers of money for business purposes. 5. Investors. The effect of inflation on investors depends on in which asset the money is invested. If the investors invest their money in equities, they are gainers because of the rise in profit. If the investors invest their money in debentures and fixed-income-bearing securities bonds, etc, they are the loser because income remains fixed. 6. Farmers. Farmers generally gain during inflation because the prices of the farm products increase faster than the cost of production, thus, leading to higher profits during inflation. Thus inflation redistributes income and wealth in such a way as to harm the interests of the consumers, creditors, small investors, laborers, middle class, and fixed income groups and to favor the businessmen, traders, debtors, farmers etc. Inflation, is society unjust because it makes the rich richer and the poor poorer; it transfers wealth from those who have less of it to those who have already too much of it. C) Non-Economic Consequences Inflation has far-reaching social, moral, and political consequences: 1. Social Effects. Inflation is socially unjust and inequitable because it leads to redistribution of income and wealth in favor of the rich. This widens the gap between haves and have- nots and creates conflict and tension in society. 2. Moral Effects. Inflation adversely affects business morality and ethics. It encourages black marketing and enables the businessmen to reap windfall gains by undesirable means In order to increase the profit margin, the producers reduce the quality by the introduction of adulteration in their products. 3. Political Effect. Inflation also disrupts the political life of a country. It corrupts the politicians and weakens the political discipline. Again, social inequality and moral degradation resulting from inflationary pressures lead to general discontentment in the public which may result in the loss of faith in the government. Control of Inflation The cumulative nature of the inflationary process and its socio-economic effects clearly indicate that appropriate measures should be taken to control inflation in its early stage. If it is not checked in the beginning, it may develop into hyperinflation with its dangerous effects on the economy. Since inflation is mainly caused by an excess of effective demand for goods and services at the full employment level compared to the available supply of goods and services, measures to control inflation involve reduction in total demand on the one hand and increasing output on the other hand. Broadly, the measures against inflation can be divided into: (a) Monetary policy, (b) Fiscal policy, (c) Direct controls, and (d) Other measures. A) Monetary Policy Monetary policy is adopted by the monetary authority or the central bank of a country to influence the supply of money and credit by changing interest rate structure and availability of credit. Various monetary measures to control inflation are explained below: 1. Increasing Bank Rate: The bank rate is the rate at which the central bank lends money to the commercial banks. An increase in the bank rate leads to an increase in the interest rate charged by commercial banks, which, in turn, discourages borrowing by businessmen and consumers. This will reduce the money supply with the public and thus control the inflationary pressure. 2. Sale of Government Securities: By selling government securities in the open market, the central bank directly reduces the cash reserves of the commercial banks because the central bank must be paid from these cash reserves. The fall in the cash reserves compels the banks to reduce their lending activities. This will reduce the money supply and hence the inflationary pressures in the economy. 3. Higher Reserve Ratio: Another monetary measure to check inflation is to increase the minimum reserve ratio. An increase in the minimum reserve ratio means that the member banks are required to keep larger reserves with the central bank, reducing the deposits of the banks and thus limiting their power to create credit. Restrictions on credit expansion will control inflation. 4. Selective Credit Control: The purpose of selective credit control measures is to influence a specific type of credit while leaving other types of credit unaffected. Such selective measures are particularly important for developing economies in which there is an increasing need for credit expansion for growth purposes and also a need for checking inflationary tendencies. In such a situation, selective credit control measures can direct the flow of credit from unproductive and inflation-prone sectors towards the productive and growth-oriented sectors. The main selective credit control measures to control inflation are: i. Consumer Credit Control: This method is adopted during inflation to curb excessive spending by consumers. In advanced countries, most durable consumer goods, such as radios, televisions, refrigerators, etc., are purchased by consumers on installment credit. During inflation, loan facilities for installment buying are reduced to a minimum to check consumption spending. This is done by (a) raising the initial payment, (b) covering a large number of goods, and (c) reducing the length of the payment period. ii. Higher Margin Requirements: Margin requirement is the difference between the market value of the security and its maximum loan value. A bank does not advance a loan equal to the market value of the security but less. For example, it may lend 600 Naira against the security worth 1000 Naira; thus, the margin requirement in this case is 40%. During inflation, the margin requirement can be raised to reduce the loan one can get on a security. Limitations of Monetary Policy: During inflation, a dear money policy is recommended, which aims at restricting the credit creation activities of the commercial banks. But such an anti-inflationary policy suffers from many limitations: i. Prof. Galbraith mentions three reasons for the ineffectiveness of the dear money policy during inflation: (a) In times of high earnings, i.e., when the marginal efficiency of capital is high, both long as well as short-period investments become relatively insensitive to changes in interest rates, (b) The government fails to come to grips with real investment, (c) Very often, the monetary policy applied is so soft that it has little impact on inflation. ii. Excess reserves possessed by the commercial banks can make the monetary measures of the central bank to control inflation ineffective. Excess reserves enable the bank to lend more credit even when the credit control measures have been adopted by the central bank. iii. Monetary measures alone will not be sufficient when there are cost-push inflationary pressures. Along with monetary policy, fiscal policy and income policy are also needed. iv. If the inflationary price rise is due to scarcity of output, then the monetary policy will not be of much use. In this case, appropriate output policy is required. v. Monetary policy will also not help in controlling inflation if the inflation is due to deficit financing. vi. In modern economies, large amounts of near moneys (in the form of securities, bonds, etc.) are in existence, which are highly liquid in nature. In such circumstances, it is not so easy to control the rate of spending merely by controlling the money supply. There is no direct relationship between money supply and the price level. In short, however, judicious use of monetary policy as a secondary measure has an important role in checking inflationary pressures. The greatest merit of monetary policy is its flexibility. Monetary restrictions, along with other measures, are necessary to quickly and efficiently control inflation. B) Fiscal Policy Fiscal policy is the budgetary policy of the government relating to taxes, public expenditure, public borrowing, and deficit financing. The major anti-inflationary fiscal measures include (a) increase in taxation, (b) reduction in public expenditure, (c) increase in public borrowing, and (d) control of deficit financing. 1. Increase in Taxation: Anti-inflationary tax policy should be directed towards restricting demand without restricting production. Excise duties and sales tax on various goods, for example, take away the buying power from the consumer goods market without discouraging the expanding productive capacity of the economy. Some economists, therefore, prefer progressive direct taxes because such taxes on the one hand, reduce disposable income of the people and, on the other hand, are justified on the basis of social equity. 2. Reduction in Public Expenditure: During inflation, effective demand is very high due to the expansion of public and private spending. In order to check unregulated private spending, the government should first of all reduce its unproductive expenditure. In fact, during inflation, at the full employment level, the effective demand in relation to the available supply of goods and services is reduced to the extent that expenditure is curtailed. Public expenditure, being autonomous, leads to an initial reduction in it that will lead to a multiple reduction in the total expenditure of the economy. But for certain limitations of this measure: (a) It is not possible to reduce public expenditure related to defense needs, particularly during wartime, (b) Heavy reduction in government expenditure may come into clash with the planned long-run investment programs in a developing economy. 3. Public Borrowing. Public borrowing is another method of controlling inflation. Through public borrowing, the government takes away excess purchasing power from the public. This will reduce aggregate demand and hence the price level. Ordinarily, public borrowing is voluntary, left to the free will of individuals. Voluntary public borrowing may not bring sufficient funds to effectively control the inflationary pressures. In such conditions, compulsory public borrowing is necessary. Through compulsory public borrowing, a certain percentage of wages or salaries is compulsorily deducted in exchange for savings bonds which become redeemable after a few years. In this way, purchasing power can be curtailed for a definite period to curb inflation. Compulsory public borrowing has certain limitations, (a) It involves the element of compulsion on the public, (b) It results in frustration if the government borrows from the poorer sections of the public who cannot contribute to this scheme, (c) The government should avoid paying back the past loans during an inflationary period; otherwise, it will generate further inflation. 4. Control of Deficit Financing. Deficit financing means financing the deficit budget (i.e., excess of government expenditure over its revenue) through printing. Limitation of Fiscal Policy: Fiscal policy, as an anti-inflationary policy, also has certain limitations: (a) Through fiscal measures, various welfare schemes are curtailed to control inflation, which adversely affects the poor people, (b) For the proper implementation of fiscal policy, efficient administration is needed, which is normally found lacking, (c) For fiscal measures to become effective, a stable political setup, political will of the government, and public cooperation are required, (d) Even if these limitations are removed, fiscal policy alone is not sufficient. What is, in fact, needed is the proper coordination of fiscal and monetary measures for controlling inflation. C) Direct controls refer to the regulatory measures undertaken with the objective of converting open inflation into suppressed inflation. Direct control on prices and rationing of scarce goods are the two such regulatory measures. 1. Direct Controls on Prices. The purpose of price control is to fix an upper limit beyond which the price of a particular commodity is not allowed, and to that extent, inflation is suppressed. 2. Rationing. When the government fixes the quota of certain goods so that each person gets only a limited quantity of the goods, it is called rationing. Rationing becomes necessary when the essential consumer goods are relatively scarce. The purpose of rationing is to divert consumption from those goods whose supply needs to be restricted for some special reason, e.g., to make such commodities available to a large number of people. According to Kurihara, "rationing should aim at diverting consumption from particular articles whose supply is below normal rather than at controlling aggregate consumption". Thus, rationing aims at achieving the twin objectives of price stability and distributive justice. Limitations of Direct Controls: Various limitations of direct controls are mentioned below: i. Direct controls suppress individual initiative and enterprise: ii. They discourage innovations, i.e., new techniques and new products. iii. They encourage speculative tendencies and create artificial scarcity through large-scale hoardings. If it is expected that a particular commodity is going to be rationed due to scarcity, people tend to hoard large stocks of it, thus making it scarce. iv. The implementation of direct control requires efficient and honest administrative machinery. Generally, direct controls lead to evils like black marketing, corruption, etc. v. As soon as direct controls are removed, great economic disturbance appears. vi. Direct controls have limited applicability. They are considered useful when applied to specific scarcity areas and in extraordinary emergency situations. Serious objections are raised against direct controls during peacetime. vii. According to Keynes, "rationing involves a great deal of waste, both of resources and of employment." Despite these shortcomings, direct controls are considered superior to monetary and fiscal measures. They seem inevitable in modern times to contain inflationary pressures in the economy because of the following reasons: (a) They can be applied easily and quickly and hence produce rapid effects, (b) They are more selective and discriminatory than monetary and fiscal controls, (c) there can be variations in the intensity of operations of direct controls from time to time in the different sectors. D) Other Measures besides monetary, fiscal, and direct measures, there are some other measures that can be taken to control inflation: 1. Expansion of Output. Inflation arises partly due to the inadequacy of output. But, it is difficult to increase output during an inflationary period because the productive resources have already been fully utilized. Under such conditions when output as a whole cannot be increased, steps should be taken to increase the output of those goods which are sensitive to inflationary pressures. This requires the reallocation of resources from the production of less inflation-sensitive goods (i.e., luxury goods) to the production of more inflation-sensitive goods (i.e., food, clothing, and other essential consumer goods) Such reallocation of resources will keep the prices of essential consumer goods under check by raising their output. 2. Proper Wage Policy. In order to check inflation, it is necessary to control wages and profits and to adopt an appropriate wage and income policy. Wage increases should be allowed to the workers only if their productivity increases; in this way, higher wages will not lead to higher costs and hence higher prices. 3. Encouragement to Saving. An increase in private savings has a disinflationary impact on the economy. Private savings lead to the reduction of expenditure and income of the people, which, in turn, curtails inflationary pressures. The government should, therefore, take steps to encourage private savings. 4. Overvaluation. Overvaluation of domestic currency in terms of foreign currencies also serves to control inflation in three ways: (a) It will discourage exports and thus increase the availability of goods and services in the domestic market (b) It will encourage imports from abroad and thus add to the domestic stock of goods and services, (b) by reducing the prices of foreign materials which are needed in domestic production, it will control the upward cost-price spiral. 5. Population Control. In an overpopulated country like India, measures to check the growth of the population also produce anti-inflationary effects. Effective family planning programs ultimately reduce the increasing pressures on the general demand for goods and services, thus helping to keep the rising prices under control. 6. Indexing. Economists also suggest indexing as an anti-inflationary measure. Indexing refers to monetary corrections by periodic adjustments in money incomes of the people and in the value of financial assets, saving deposits, etc., held by the public in accordance with changes in prices. For example, if the annual price rise is 10%, the money incomes and the value of financial assets should be increased by 10% under the system of indexing. It is important to note that while these measures can help control inflation to some extent, no single measure alone is sufficient. A combination of monetary, fiscal, direct controls, and other measures, along with proper coordination, is necessary for effective inflation control.  Unemployment The meaning of unemployment Types of unemployment Causes of unemployment in Nigeria Effects of unemployment Measures to remove unemployment Full employment Inflation and unemployment The meaning of unemployment Unemployment is defined as the condition of being unemployed, or, it refers to the number or proportion of people in the working population who are unemployed (have no jobs). An unemployed person is one who is an active member of the labour force and is able to and seeks work, but is unable to find work during a specified reference period (a week or a month or a year). Unemployment simply refers to the condition of one who is capable of working, actively seeking work, but unable to find any work. It is important to note that to be considered unemployed a person must be an active member of the labour force and in search of remunerative work. The term unemployment refers to a situation where a person actively searches for employment but is unable to find work. Unemployment is considered to be a key measure of the health of the economy. Unemployment is a key economic indicator because it signals the ability (or inability) of workers to obtain gainful work and contribute to the productive output of the economy. More unemployed workers mean less total economic production. The unemployment definition does not include people who leave the workforce for reasons such as retirement, higher education, and disability. Let us divide the total population of a country into four categories: Category I is comprised of all those economically active people, say between 15 and 65 years, who are currently employed during a specified reference period (a week, or a month, or a year). Category II represents all those economically active people, say between 15 and 65 years, who are currently unemployed during a specified reference period (a week, or a month, or a year), but are capable of, and are looking for employment. Category III represents all those people say, between 15 and 65 years, who are neither employed nor are seeking any employment, in other words, those who are not in the labour force. Category IV represents all those people aged below 15 years and above 65 years, and other people excluded from the above mentioned three categories for any reason. The total population of a country is the sum of all these four categories: I + II + III + IV; and labour force is defined as I + II. The unemployment rate is defined as the percentage of the labour force that is unemployed, which can be represented as: Rate of Unemployment = (II/ I+II) X 100 Simply put, the rate of unemployment equals the ratio of the number of people registered as unemployed and the total labour force multiplied by 100. Difficulty in measuring unemployment 1. How to determine the accurate number of those who are unemployed 2. How to determine the accurate number of those who are unemployed. Types of unemployment Broadly, unemployment can be divided into two types: voluntary, and involuntary, unemployment. Voluntary unemployment arises due to reasons that are specific to an individual, while involuntary unemployment is caused by a large number of socio-economic factors such as structure of the market, level and composition of aggregate demand, government intervention, and so on. Thus, there are different kinds of unemployment depending on the nature, causes, and duration of unemployment. Let us now discuss various types of unemployment. Unemployment is broadly classified in following categories. Structural unemployment: This kind of unemployment occurs when there is any change in consumer demand and technology in the economy. For instance, when computers were introduced, many workers were dislodged because of a mismatch between the existing skills of the workers and the requirement of the job. Although jobs were available, there was a demand for a new kind of skill and qualification. So, persons with old skills did not get employment in the changed economic regime, and remain unemployed. This is called structural unemployment. Cyclical unemployment: When there is an economy-wide decline in aggregate demand for goods and services, employment declines and unemployment correspondingly increases. Therefore, it is sometime referred to as ’demand deficient unemployment‘. For instance, during the recent global slowdown, in late 2008, many workers around the globe lost their jobs. Frictional unemployment: This type of unemployment refers to a transition period of looking for a new job, for different reasons, such as seeking a better job, being fired from a current job, or having voluntarily quit a current job. The period of time between the current to a new job is referred to as frictional, or temporary unemployment. Seasonal unemployment, a type of frictional unemployment, occurs in specific activities or occupations which are characterized by seasonal work. An example of seasonal unemployment is joblessness during non-cultivation in rural areas. Residual unemployment: This refers to those who are out of work due to reasons of physical and mental disabilities. This class of unemployed also includes those who are lazy and do not want to work. They fake illness or injury seizing the opportunity of government social security facilities as unemployment benefits. Natural rate of unemployment: The sum total of frictional and structural unemployment is referred to as the natural rate of unemployment. Open unemployment: Open unemployment arises when a person, voluntarily or involuntarily, keeps himself or herself out of consideration for certain jobs. It is important to note that the type and nature of unemployment differ significantly in developing and developed countries. Unemployment in developed countries arises due to the lack of effective demand and/or economic slowdown, recession, or depression. In developing countries, unemployment occurs largely due to lower demand for labor and/or inadequate employment opportunities in the economy. Such a situation occurs due to the subsistence nature of agriculture, a low industrial base, and the small size of the tertiary sector. All developing countries, including Nigeria, suffer from structural unemployment, which exists both in open and disguised forms. The problem in developing countries can better be summarized as underemployment - a partial lack of work, low employment income, and underutilization of skills or low productivity rather than unemployment as discussed above. Thus, underemployment describes the condition of those who work part-time because full-time jobs are unavailable or are employed on a full-time basis but the services they render may actually be much less than full time (disguised underemployment) or who are employed in occupations requiring lower levels of skills than they are qualified for (hidden underemployment). A related concept is that of the working poor - those who actually work long hours but earn only a low income below the poverty line. In other words, working poor is defined as a situation when individuals or households, in spite of being employed, remain in relative poverty due to low levels of wages and earnings. Causes of unemployment in Nigeria 1. Rapid population growth. The Nigerian population is one of the fastest-growing populations in the world. The growth rate of the Nigerian population is due to a high fertility rate, a declining mortality rate, and increasing migration of foreigners from neighboring countries for job purposes. The population growth rate is far in excess of the labour-absorptive capacity of the economy. 2. Dependence on inappropriate foreign technology. The demand for labour is low in the country’s manufacturing sector given the reliance of these industries on foreign technologies designed for labour-scarce industrialised economies. 3. Rural-urban income differential: the wide gaps between rural and urban incomes account for mass rural-urban migration in excess of job opportunities in the urban areas leading to a high urban unemployment. In spite of high and rising levels of urban unemployment, masses of people continue to migrate from rural areas into crowded and congested cities such as Lagos, Ibadan, Kano, Kaduna, and Enugu. 4. Low Foreign Direct Investment (FDI): Any public policy designed to encourage the inflow of foreign capital is capable of generating employment opportunities within the domestic economy. Policies like the Nigerian Enterprises Promotion (NEP) decree of 1972 restricted foreign investment, impacting job creation. 5. Defective educational system. The Nigerian educational system is white-collar oriented. And there is the proliferation of tertiary institutions-universities, polytechnics, and colleges of education that are turning out thousands of graduates whose skills are, in most cases, not applicable to the manpower requirements of the economy. 6. Immobility of the typical Nigerian worker. The phenomenon of geographical immobility of labour is partly responsible for the incidence of involuntary or frictional unemployment in Nigeria. Some Nigerians remain unemployed because of the prejudice they hold against working in certain parts of the country. Effects of unemployment. 1. Effect on National Output and General Standard of Living: Unemployment has a direct impact on national output (GDP) as it reduces the overall productivity of the economy. When people are unemployed, they contribute less to the production of goods and services, leading to a decrease in output. This can result in lower economic growth rates and hinder the country's ability to reach its full potential. Furthermore, unemployment affects the general standard of living. Individuals and families who are unemployed face financial difficulties, struggle to meet basic needs, and may experience a decline in their quality of life. This can lead to increased poverty rates, inequality, and social tensions within society. 2. Effect on Government: Unemployment places a burden on government resources and finances. When people are unemployed, they often rely on social welfare programs such as  unemployment benefits, welfare assistance, and healthcare subsidies. These programs require government funding, which can strain public budgets and lead to deficits or increased public debt. Additionally, high unemployment rates can reduce tax revenues for the government, as fewer people are earning income and paying taxes. This limits the government's ability to invest in public services, infrastructure, education, and healthcare, further impacting economic development and societal well-being. 3. Social Implications: Unemployment has significant social implications, affecting both individuals and communities. Unemployed individuals may experience psychological stress, loss of self-esteem, and feelings of social isolation. This can lead to mental health issues, substance abuse, and family problems. At the community level, high unemployment rates can contribute to social unrest, crime, and urban decay. It can also create divides between different socio-economic groups, leading to social inequalities and tensions within society. 4. Implications for Political Office Holders: Political office holders face challenges related to unemployment, as it is a key issue that impacts public opinion and political support. High unemployment rates can lead to dissatisfaction among voters and criticism of government policies and actions. Political leaders are often under pressure to address unemployment through job creation initiatives, economic reforms, and social welfare programs. Failure to effectively tackle unemployment can result in electoral consequences, loss of public trust, and political instability. Measures to Remove Unemployment 1. Population Control: Population control measures aim to manage population growth rates, which can have an impact on unemployment. High population growth can strain job markets and lead to higher levels of unemployment. Governments may implement policies such as family planning programs, education on birth control methods, and incentives for smaller families to control population growth. 2. Emphasis on Labour-Intensive Techniques: Emphasizing labor-intensive techniques in industries can create more job opportunities. This approach focuses on using human labor rather than automated or capital-intensive methods. Government policies and incentives can encourage businesses to adopt labor-intensive practices, especially in sectors with high unemployment rates. 3. Discouraging Urbanization: Discouraging rapid urbanization can help distribute job opportunities more evenly across rural and urban areas. Policies that promote investment in rural infrastructure, agricultural development, and rural industries can attract people to stay or return to rural areas, reducing the strain on urban job markets. 4. Encourage Foreign Direct Investment (FDI): Encouraging FDI brings in new capital, technology, and expertise, which can stimulate economic growth and create job opportunities. Governments can create a favorable investment climate by offering tax incentives, streamlined regulations, infrastructure development, and political stability to attract foreign investors. 5. Promote Full Utilization of Production Capacity: Promoting full utilization of production capacity in industries ensures efficient use of resources and maximizes output. This can be achieved through investment in modern technology, training programs for workers to enhance skills, and market expansion strategies to increase demand for goods and services. 6. Fiscal Policy: Expansionary fiscal policies, such as increased public spending on infrastructure projects, healthcare, education, and job training programs, can boost economic activity and create jobs. 7. Restructuring the Educational System: Restructuring the educational system is vital to aligning skills with market demand. This includes updating curricula to match industry needs, providing  vocational training and apprenticeships, promoting entrepreneurship and innovation, and enhancing access to higher education for a skilled workforce. The meaning of full employment Full employment is said to occur in a country where about 95 percent of the entire labour force is fully employed while the remaining 5 or 4 percent is frictionally unemployed. The full employment also called the (full employment real output) is the amount of output that is produced in an economy when that economy is using all of its resources efficiently; the full employment output would be a combination of output that is on that country’s PPC. The natural rate of unemployment is determined by comparing, at any given time, the number of available jobs with unemployed workers in the economy. The unemployment rate that exists when an economy is producing the full employment output; when an economy is in a recession, the current unemployment rate is higher than the natural rate. During expansions, the current unemployment rate is less than the natural rate. The labor force participation rate (LFPR) The labor force participation rate (LFPR) is another measure of labor market activity in the economy. The LFPR is the percentage of the adult population that is in the labor force. The labor force includes everyone who is either employed or unemployed. The adult population is defined as anyone who is over the age of 15 who potentially could be part of the labor force. Anyone who is less than 15 years old, is in the military, or is institutionalized is not considered to be potentially part of the labor force and is excluded from this calculation. When people enter the labor force the LFPR increases, and when people exit the labor force the LFPR decreases. A decrease in the LFPR that occurs at the same time as a decrease in the unemployment rate can signal that there are more discouraged workers. LF LFPR = Total Population ( LF + NLF ) LF = the number in the labour force NLF= the number not in the labour force LFPR is the ratio of economically active population (employed or unemployed) to the total population. David W. Pearse (1986) shows that LFPR is interpreted as the probability that a person will be in the labour force. Inflation and Unemployment Relationship In economic literature, various schools of thought have proposed different explanations for labor market outcomes, particularly regarding the problem of unemployment. The classical, neoclassical, and institutional schools of labor economics each offer distinct perspectives based on the interplay of market forces, institutional factors, and sociological aspects. The neoclassical school, for instance, places primary emphasis on market forces like demand and supply in determining wages and labor allocation. It considers institutional and social factors as given or secondary in influencing labor market outcomes. On the other hand, the institutional school highlights the significance of institutional forces such as internal labor markets and unions, alongside sociological factors like class, discrimination, segmentation, and stratification. This school underscores the unique features of the labor market and how these forces mitigate the influence of market mechanisms. Regarding unemployment, different theoretical explanations have been proposed by these schools. Keynesian economics, a significant departure from classical and neoclassical theories, attributes unemployment to a lack of effective demand for goods and services. Keynes argued for government intervention through monetary and fiscal policies to stimulate demand, thereby reducing unemployment and deflation. Classical and neoclassical theories, however, focus on labor market rigidities like minimum wage laws and regulations as causes of unemployment. These perspectives may not fully capture the complexity of unemployment due to its diverse nature, patterns, causes, and impacts. In exploring the relationship between unemployment and inflation, A.W. Phillips introduced the Phillips curve, illustrating an inverse relationship between unemployment and inflation in the figure below. This curve suggests a trade-off where reducing unemployment could lead to increased inflation, highlighting the challenges governments face in addressing both issues simultaneously. Assignment Discuss the term stagflation