Inflation, Unemployment and Macroeconomic Policy
Domain 8 tests the causes and consequences of inflation and unemployment, and the policy tools used against them.
Inflation
Inflation is a sustained rise in the general price level, measured by the consumer price index. Demand-pull inflation comes from excess aggregate demand; cost-push from rising input costs, wages or import prices. Effects include redistribution from savers and fixed-income earners to borrowers, menu costs and loss of export competitiveness. Deflation is falling prices; disinflation is a fall in the inflation rate.
Unemployment
Frictional unemployment arises while people search for work; structural unemployment from mismatches of skills or location; cyclical from deficient demand; seasonal from weather or tourism patterns. Namibia's unemployment is high on both narrow and broad definitions, with much of it structural and long-term.
Policy
Fiscal policy uses government spending and taxation; monetary policy uses interest rates, reserve requirements and open market operations; supply-side policy improves education, infrastructure and labour market flexibility. Namibia's monetary policy is constrained by the rand peg.
Worked example
The CPI rises from 150 to 162. Inflation = (162 - 150) / 150 x 100 = 8%. If nominal wages rise 5%, real wages fall about 2.8%, because 1.05 / 1.08 = 0.972.
Traps that cost marks
- Treating every price rise as inflation; it must be sustained and general.
- Confusing deflation with disinflation.
- Labelling all unemployment cyclical when much of it is structural.
- Forgetting that fiscal policy is constrained by the SACU revenue cycle in Namibia.