Chapter 12

Inflation, unemployment, low growth

 INTRODUCTION
• 3 most important macroeconomic problems:
– Inflation
– Unemployment
– Low growth
• Chapter 12:
– Definition
– Measurement
– Causes
– Possible solutions
for each of these problems are discussed
 INFLATION
• Definition…
– Sustained increase in the average price level (see also
chapter 7)
• Measurement…
– Price indices – see chapter 7
• Causes…
– Keynesian explanation of inflation
• Demand-pull inflation…
• Cost-push inflation…
• Possible solutions…
 Inflation and interest rates

Year Headline inflation % change in CPI Bank rate / Repo rate Prime rate
1976 11,1% 15,9% 8,0% 12,3%
1977 11,3% 12,5% 8,4% 12,5%
1978 10,9% 10,0% 8,3% 12,1%
1979 13,2% 15,2% 5,7% 10,0%
1980 13,8% 16,7% 5,2% 9,5%
1981 15,2% 13,5% 10,6% 14,0%
1982 14,7% 13,9% 16,0% 19,3%
1983 12,4% 10,5% 14,2% 16,7%
1984 11,6% 8,4% 20,8% 22,3%
1985 16,1% 17,0% 13,0% 21,5%
1986 18,7% 19,5% 9,5% 14,3%
1987 16,1% 13,9% 9,5% 12,5%
1988 12,9% 13,1% 11,8% 15,3%
1989 14,7% 15,4% 16,8% 19,8%
1990 14,4% 11,9% 18,0% 21,0%
1991 15,3% 11,5% 17,2% 20,3%
1992 13,9% 8,2% 15,4% 18,8%
1993 9,7% 6,6% 12,8% 16,2%4
Year Headline inflation % change in CPI Bank rate / Repo rate Prime rate
1994 9,0% 8,3% 12,3% 15,8%
1995 8,7% 9,4% 14,5% 17,9%
1996 7,4% 7,0% 15,9% 19,5%
1997 8,6% 7,0% 16,8% 20,0%
1998 6,9% 3,6% 19.4%g 21,8%
1999 5,1% 5,8% 14,8% 18,0%
2000 5,3% 9,2% 11,8% 14,5%
2001 5,7% 8,4% 11,0% 13,8%
2002 9,2% 14,2% 12,1% 15,8%
2003 5,8% 1,7% 11,7% 15,0%
2004 1,4% 0,6% 11,3% 11,3%
2005 3,4% 3,1% 7,1% 10,6%
2006 4,7% 7,7% 7,6% 11,1%
2007 7,1% 10,0% 9,6% 13,1%
2008 11,5% 14,2% 11,6% 15,1%
2009 7,1% -0,1% 8,4% 11,9%
2010 4,3% 5,8% 6,4% 9,9%
2011 5,0% 8,4% 5,5% 9,0%
2012 5,6% 7,0% 5,2% 8,8%5
Causes of inflation…
Demand-pull inflation

AD shifts right due to:

• Increase in total
expenditure
• Expansionary
monetary policy
• Expansionary fiscal
policy
 Cost-Push inflation
• Increase in production cost
– Higher cost leads to lower supply
– ASSR and ASLR shifts to theleft
• 5 main sources
– Increase in wages and salaries
– Increase in imported capital & intermediate goods
– Increase in profit margins
– Decrease in productivity
– Natural disasters
Cost-push inflation (fig. 6.24)
 Cost-Push inflation
• Cost-push inflation has a negative impact on production,
income and employment.
• Stagflation occurs, because increasing prices (inflation) are
accompanied by increased unemployment.
• Monetary and Fiscal Policy cannot combat cost-push
inflation.
 Summary: Causes of inflation:
• Inflation is caused by:
– Initiating factors:
• Substantial exogenous increases in any of the components of aggregate
expenditure (C, I, G, X-M) => AD to the right.
• Substantial increases in the money supply (Ms) => AD to the right.
• Exogenous supply shocks eg. wage hikes, increases in the cost of imported
inputs, a shortage of inputs, a drought, etc. => ASLR and ASSR to the left.
– Propagating factors
• Increase in inflation expectations => negotiate higher wages => increase in
production costs => ASSR shifts to the left (Supply-adjustment process)
• Accommodating fiscal or monetary policy (expansionary policy (increase G,
decrease T, decrease repo, decrease cash reserve requirement… to shift AD
to the right) to increase Y.
 UNEMPLOYMENT…
• Definition…
– Someone who wishes to work and took specific steps to find a job but
cannot find employment.
– More definitions chapter 6 (see next slide)
• Measurement…
– Total number of unemployed persons ÷ total labour force
• Causes and remedies…
– p. 484 – 497
– If output (Y) increases, unemployment decreases
– If output (Y) decreases, unemployment increases
– Effect of different policies and changes in the economy on OUTPUT (Y)
analysed in the
• 45º-diagram (chapter 2)
• IS-LM-BP model (chapters 3 and 4)
• AS-AD model (chapters 6 and 7)
 Employment
2001 2011 2018
Total population 15– 64 years 27 265 000 32 314 000 38 134 000
Total economically active population 16 575 000 17 482 000 22 668 000
Economically active population % of 15– 64 years 60,8% 54,1% 59,4%
population
Total, not economically active 10 690 000 14 832 000 15 466 000
– discouraged workers 1 725 000 2 223 000 2 841 000
– other 8 965 000 12 609 000 12 625 000
Percentage of 15– 64 not economically active 39,2% 45,9% 40,5%

Total employed 12 494 000 13 118 000 16 529 000

– formal sector (non-agric) 6 984 000 9 219 000 11 346 000
– agriculture (formal and informal) 968 000 603 000 849 000
– informal sector (non-agric) 3 353 000 2 179 000 3 001 000
– private households 1 188 000 1 118 000 1 332 000
Total unemployed 4 081 000 4 364 000 6 139 000
Percentage of 15– 64 unemployed 15,0% 13,5% 16,1%
Unemployment rate (official definition) 24,6% 25,0% 27,1%
Unemployment rate (broad definition) 31,7% 36,5% 43,3%
Labour force participation rate 60,8% 54,1% 59,4%
 Unemployment rate, 1994–2011
Black Coloured Indian White Total
1994 24,7% 17,6% 10,2% 3,0% 20,0%
1995 20,7% 16,5% 8,3% 2,8% 16,9%
1996 27,4% 13,1% 12,1% 4,0% 21,0%
1997 29,3% 16,0% 10,2% 4,6% 22,9%
1998 32,0% 15,8% 14,7% 4,4% 25,2%
1999 29,2% 15,2% 15,6% 4,7% 23,3%
2000 31,6% 20,4% 19,9% 6,8% 26,7%
2001 31,1% 21,2% 16,7% 6,9% 26,4%
2002 35,2% 24,1% 20,1% 6,5% 29,7%
2003 37,3% 22,4% 22,4% 6,5% 31,2%
2004 34,2% 18,0% 16,5% 4,9% 27,9%
2005 31,6% 19,8% 18,0% 5,1% 26,5%
2006 30,7% 18,9% 11,2% 4,7% 25,6%
2007 30,2% 19,8% 13,8% 4,3% 25,5%
2008 27,7% 19,1% 11,8% 5,3% 23,5%
2009 27,7% 19,5% 12,7% 9,2% 23,5%
2010 29,6% 21,9% 9,4% 6,0% 25,2%
2011 29,0% 22,6% 11,7% 5,9% 25,0%
2018 30,4% 21,6% 12,4% 7,6% 27,1%
 LOW ECONOMIC GROWTH…
• Definition: Economic growth
– Sustained, recurring annual increases in real GDP per capita
(Y/N).
• Measurement…
– Economic growth ratet = real GDPt – real GDPt-1 / real GDPt-1 x
100
• Causes and remedies…
– p. 506 -513
– See chapter 8
• Solow model: Continual increase in productivity / labour efficiency
will cause continual (sustained, recurring) increases in GDP per
capita (Y/N)
 -4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
10.0%

8.0%
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
Real GDP growth rate

1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
20

2012
 12.3.4 New views – deeper dimensions of
growth (for your own reading)
• The role of human capital…
– See chapter 8
• Income inequality and growth…
– See chapter 1
• The role of institutions…
– Part of definition of A (labour efficiency)
• Culture…
• Trust, ethnicity, social division…
– Higher degrees of trust reduces costs (legal / admin) of economic transactions
• Geography…
– climate, water, natural resources
• Growth and the environment…
– See chapter 1 - Pollution…
END CHAPTER 12