Inflation, Unemployment, and Growth in Pakistan, Free Essay in Economics

Growth, inflation, and unemployment are major macroeconomic problems in the 21st century. The rate of unemployment in a country significantly affects the inflation rate at least in the short term. When the government introduces policies to reduce unemployment, the rate of inflation increases which can be severe to the economic well-being of a nation. Inflation has worse effects on an economy especially when it is unexpected. It alters the normal pricing system, leads to haphazard redistribution between creditors and debtors and also creates incentives for speculative. Ultimately, it becomes very costly and involving to eradicate (Kagel & Roth, 2016). Unemployment is also bad for an economy since it affects the lives of the common citizens and is also linked to the irrecoverable loss of property. Economic growth of a county is determined by investment in human capital, technological advancement and the growth of labor force in a nation. When national income in a country increases, it will have a ripple effect on the employment rate. There exists numerous factors that contribute to the variation is economic growth, inflation, and the unemployment rate in Pakistan.

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Economic Growth

This is a progressing increase in national income over a specific period of time. In other words, it is an increase in the flow of goods and services within Pakistan over a long period of time. Values of income often increase when there is an increased production of goods and services while the prices of these goods and services do not change. Subsequently, the value of income can increase when commodity prices increase while production remains constant. This is also known as nominal growth or income. In the world of economy, there are only two terms used in describing economic growth; actual and potential growth. Actual growth is achieved or realized economic growth while potential growth is achievable growth.

Table 1

Subject Descriptor Units Scale

Gross domestic product, constant prices National currency Billions

2008 8549.148

2009 8,579.99

2010 8,801.39

2011 9,120.34

2012 9,470.26

2013 9,819.06

2014 10,217.06

2015 10,629.66

2016 11,130.04

2017 11,686.50

2018 12,294.23

Source: IMF

Figure 1

The Growth domestic product and other structural changes in the economy are the significant determinants of economic growth. For the last 10 years, the economy of Pakistan has been on the rise. This is attributed to the agricultural activities that the country has been involved in (Khan et al., 2018). Pakistan agricultural sector has different types of major and minor crops that promoted economic development. Despite the challenges in the agricultural sector linked to water problems, salty soils, natural calamities, and inadequate mechanization, Pakistan has achieved significant economic growth over time. This has helped reduced poverty levels of Pakistanis and stabilized the exchange rate of the country.

Inflation

This is the persistent increase in the general level of commodity prices in a country. There are different types of inflation in an economy namely demand-pull inflation, structural inflation, and cost-push inflation. Structural inflation happens when there is excess demand for goods or services that are produced to the point that the economy cannot produce or supply the needed economy. People want to buy more than what the economy offers. In a bid to control the circumstances, the prices are increased. This is often caused by an increase in money supply in the market. Cost-push inflation happens when there are restrictions placed on the supply of one or more commodity or when the price of one or more resource increases. This means that markup is placed on the selling price of the commodity to create profit. Markup is often signified as a percentage of the commodity price or as a fixed amount of the total cost. With cost-push inflation, there is an autonomous rise in some component or other cost leading to inflation (Arshad, Zakaria & Junyang, 2016). Structural inflation is induced by a shift in production in response to the structure of the economy of a nation. This show that there is a shift in demand pattern and production mechanisms.

Figure 2

As shown in the graph, there has been a steady increase in the rate of inflation over the last ten years. The rate of inflation averaged 10.68 percent from 2008 to 2018. The prices of crude oil have increased over the years, and their impact passed to the consumers. This means that the effects of increased prices of petroleum and related products are transferred to other commodities which are used frequently by the Pakistan consumers. The gradual increase of domestic demand has been witnessed in the rising core inflation in the country. Nevertheless, there has been a tight monetary policy which has helped control the prices of food and other basic commodities in the country.

Liquidity preference theory indicated that when there is increased liquidity among consumers, the interest rate increased. This translates to the rate of employment and inflation in an economy. When inflation increases, it is expected that liquidity preference will fall, but in high inflation, there is always an increase in interest rates because people hold into interest rates. This means that inflation rates increased with interest rates.

Unemployment

Unemployment means personal hardship for those without a source of income. Other than reducing output, unemployment in a country will mean that it uses a lot of resources to manage welfare programs compensations, ultimately leading to high taxes on the consumers. It is evident that an increase in tax rates reduces productivity and efficiency. This, therefore, means that the issue of unemployment does not restrict to the unemployed people, but rather it has negative effects on the economy. In any country, any person between the age of 15-60 with the ability to work but has no source of income is considered unemployed. There are three types of unemployment which are described based on their causes: unemployment due to the deficiency in demand, unemployment due to a shortage of capital resources and frictional unemployment. Unemployment based on the deficiency of demand has been dominant in advanced nations while unemployment due to inadequate resources is found in developing countries. Frictional unemployment can occur in any form of an economy. There is also natural unemployment which means that unemployment is at equilibrium. Wages are in equilibrium; the aggregate demand and supply for employment is at balance (Ismail & Husain, 2012). This is to mean that if there is a decrease in labor, wages reduce and the required labor also reduces. This follows that at a specific wage, those in need of work will find work.

This elements play a critical role in economic performance, and it affects gross domestic product (GDP) of a country. When the rate of unemployment reduces, there will be a ripple effect on industrial production and economic growth. The lower unemployment rate can be achieved through expansionary fiscal or by implementing monetary policies that help create jobs for the youth. Back in Pakistan, there has been an increase in the rate of unemployment for the last 10 years. This is attributed to the increased labor force on the available job opportunities. The supply for labor has been higher than the demand (Rasheed, 2016). The increase in economic growth has not been proportionate with the reduction in the unemployment rate.

Figure 3

Data source: IMF

Figure 1

Figure 4

Recommendations for Pakistan

The economic situation of Pakistan is slowly deteriorating as evident in the presented data. There was a budget deficit of Rs541.7 billion during the last financial year, and this is expected to increase by 6 percent in the coming financial year. Even though there has been an increase in economic growth over the years, the rate of rate of inflation and unemployment do not act well to the economy. For this reason, there is a need for hefty external inflows which also has some risks. Indeed tough decisions need to be taken to change things, and this should be done without putting more burden to the common citizens through taxes. There is a need to implement a monetary policy that will prevent taxation of basic commodities such as gas and electricity which are already on the higher side. Increase in the cost of basic commodities affects household budget which in the long run affects the cost of production. Increase in taxes and tariffs is not a sustainable solution to the ailing economy of Pakistan. Other economic sectors such as tourism and exports can be enhanced to improve the overall picture. Increased spending and taxation can affect work, investment and innovation in a country. There is a need therefore to set reasonable tax rates that will not affect allocation of resources. On the other hand, tax cuts can lead to long term deficits in the Pakistan economy.

Conclusion

There has been an increase economic growth, inflation and unemployment rate in Pakistan for the last ten years. Nevertheless, the gains made in GDP have been derailed by increased inflation and unemployment which exerts a lot of pressure on the available resources. For this reason, the government has imposed taxes and tariffs on the basic commodities which has made the situation worse. It is for this reason that the government need to implement monetary policies and seek for alternative source of funds to finance the development agenda and create employment.

References

Arshad, A., Zakaria, M., & Junyang, X. (2016). Energy prices and economic growth in Pakistan: A macro-econometric analysis. Renewable and Sustainable Energy Reviews, 55, 25-33. https://www.sciencedirect.com/science/article/pii/S1364032115011302

Kagel, J. H., & Roth, A. E. (Eds.). (2016). The handbook of experimental economics (Vol. 2). Princeton university press.

Khan, I., Ahmad, A., Khan, M. T., & Ilyas, M. (2018). The Impact of GDP, Inflation, Exchange Rate, Unemployment and Tax Rate on the Non Performing Loans of Banks: Evidence From Pakistani Commercial Banks. Journal of Social Sciences & Humanities (1994-7046), 26(1). http://jssh.aiou.edu.pk/wp-content/uploads/2018/06/5.-Ihtesham-Khan.pdf

Ismail, M., & Husain, F. (2012). Fiscal Discretion and Its Impact on Pakistan Economy. The Pakistan Development Review, 51(4), 339-362. Retrieved from http://www.jstor.org/stable/23734765

Report for Selected Countries and Subjects. (2018). Retrieved from https://www.imf.org/external/pubs/ft/weo/2017/01/weodata/weorept.aspx?pr.x=77&pr.y=5&sy=2009&ey=2015&scsm=1&ssd=1&sort=country&ds=.&br=1&c=564&s=NGDP_R%2CPCPI%2CLUR&grp=0&a=