Indian Economy Quiz: Inflation & Unemployment |20 Feb, 2021

A graph showing the degree of inequality in income and wealth in a given population or an economy. It is a rigorous way to measure income inequality.

· In this method (for example), personal incomes in an economy are arranged in increasing order; the cumulative share of total income is then plotted against the cumulative share of the population.

· The curve’s slope is thus proportional to per capita income at each point of the population distribution.

· In the case of complete equality of income, the Lorenz curve will be a straight line and with greater curvature the inequality rises proportionally–the Gini Coefficient measures this inequality.

Source: TMH Ramesh Singh

Recession is somewhat similar to the phase of ‘depression’ — we may call it a mild form of depression — fatal for economies as this may lead to depression if not handled with care and in time.

· The financial crises which followed the US ‘sub-prime crises’ in almost the whole Euro-American economies has basically brought in ‘severe recessionary’ trends there.

Major traits of recession, to a great extent, are similar to that of depression – ‘may be summed up as follows:

· There is a general fall in demand as economic activities take a downturn;

· Inflation remains lower or/and shows further signs of falling down;

· employment rate falls/unemployment rate grows;

· Industries resort to ‘price cuts’ to sustain their business.

Source: TMH Ramesh singh

A concept developed by Irving Fisher (1867–1947) which shows relationship between inflation and the interest rate, expressed by an equation popular as the fisher equation, i.e., the nominal interest rate on a loan is the sum of the real interest rate and the rate of inflation expected over the duration of the loan:

R = r + F; where R = nominal interest rate, r = real interest rate and F = rate of annual inflation.

Source: TMH Ramesh Singh

Phillips’s curve is a graphic curve which advocates a relationship between inflation and unemployment in an economy.

· As per the curve there is a ‘trade off’ between inflation and unemployment, i.e., an inverse relationship between them.

· The curve suggests that lower the inflation, higher the unemployment and higher the inflation, lower the unemployment.

· During the 1960s, this idea was among the most important theories of the modern economists.

· This concept is known after the economists who developed it—Alban William Housego Phillips (1914–75).

Source: TMH Ramesh Singh

There are multi-dimensional effects of inflation on an economy both at the micro and macro levels.

· It redistributes income, distorts relative prices, destabilizes employment, tax, saving and investment policies, and finally it may bring in recession and depression in an economy.

· Inflation redistributes wealth from creditors to debtors, i.e., lenders suffer and borrowers benefit out of inflation.

· Rising inflation indicates rising aggregate demand and indicates comparatively lower supply and higher purchasing capacity among the consumers.

Source: TMH Ramesh Singh

Consumer Price Index or CPI as it is commonly called is an index measuring retail inflation in the economy by collecting the change in prices of most common goods and services used by consumers. Base Year for CPI is 2012.

· Wholesale Price Index, or WPI, measures the changes in the prices of goods sold and traded in bulk by wholesale businesses to other businesses.

· With an aim to align the index with the base year of other important economic indicators such as GDP and IIP, the base year was updated to 2011-12 from 2004-05 for the new series of Wholesale Price Index (WPI), effective from April 2017.

· The present base year for gross domestic product is 2011-12.

Source: TMH Ramesh Singh

The government has set up a working group under Niti Aayog member Ramesh Chand to revise the current series of Wholesale Price Index (WPI) with base 2011-12 and devise a new Producer Price Index (PPI).

· The group will review the commodity basket of the current series of WPI, suggest changes in commodities in the light of structural changes in the economy witnessed since 2011-12 and decide on the computational methodology to be adopted for monthly WPI/PPI.

· The government had in 2014 constituted a committee under Professor BN Goldar to devise a PPI after the Reserve Bank of India began considering consumer price inflation as a better gauge of inflation than WPI.

Source: The Hindu

Wholesale Price Index (WPI) measures the average change in the prices of commodities for bulk sale at the level of early stage of transactions.

· The index basket of the WPI covers commodities falling under the three major groups namely Primary Articles, Fuel and Power and Manufactured products.

· The index basket of the present 2011-12 series has a total of 697items including 117 items for Primary Articles, 16 items for Fuel & Power and 564 items for Manufactured Products.

Source: TMH Ramesh Singh

PLFS is an initiative aimed at generating estimates of various labour force indicators.

· The National Sample Survey Office (NSSO) under the Ministry of Statistics and Programme Implementation conducts the survey.

· Quarterly survey (For urban areas only) – Captures only the current weekly status (CWS) data.

Source: The Hindu

A stimulus package is a number of incentives and tax rebates offered by a government to boost spending in a bid to pull a country out of a recession or to prevent an economic slowdown.

· A stimulus package can either be in the form of a monetary stimulus or a fiscal stimulus.

· A monetary stimulus involves cutting interest rates to stimulate the economy.

· When interest rates are cut, there is more incentive for people to borrow as the cost of borrowing is reduced.

· An increase in borrowing means there’ll be more money in circulation, less incentive to save, and more incentive to spend.

· Lowering interest rates could also weaken the exchange rate of a country, thereby leading to a boost in exports.

· When exports are increased, more money enters the economy, encouraging spending and stirring up the economy.

Source: TMH Ramesh Singh