TRADE BALANCE AND THE EXCHANGE RATE

Trade Balance And The Exchange Rate

Trade Balance And The Exchange Rate

The Relationship between Inflation and the Unemployment Rate Inflation is when there is a constant rise in the general level of prices, within the economy. This can sometimes be seen as devaluing the worth of the currency. Although inflation is constant, it is however very irregular and does not rise to an alarming rate very often.

There are numerous causes of inflation, however the highly popular reason maybe be caused by the demand-pull inflation, this is caused by the continued rise in aggregate demand (total amount of spending in the economy) exceeds the aggregate supply at current prices.Some firms will deal with this situation by raising their prices and by increasing their output. Depending upon how much their costs have been raised as result of increasing their output, will also determine how much their prices will be raised.

Discussion

In addition, cost-push is another cause of inflation; this is when the costs of production are constantly increasing, despite the level of aggregate demand. This will result in firms raising their prises, or by passing their costs onto the consumer and also by reducing their production.

By restricting demand in order to control inflation, has costs this is by either control of the money supply or by cuts in the government spending However, if wages are increasing rapidly and the government attempts to bring demand into the economy, unemployment may be the result of their actions. “Unemployment is when those who are of working age are willing and able to work for a rate of pay, however are unable to find such means of employment”. (Sloman and Sutcliffe) This is because employers will be unable to pay their staff because they cannot raise their sale prices, due to low demand. The wages would be high, as well as sale prices, although the demand is low, which will result in businesses going bankrupt or by sacking their employees.

Therefore, by allowing higher demand, inflation will occur, however unemployment will be lower than normal, and vice versa. The Philips Curve shows that when demand-pull inflation is at a low, then the demand-deficient unemployment rate is at a high. AW.H.Philips also discovered the more change in the wages and inflation, the lower the rate of unemployment (demand-deficient) became, and this was known as the 'Philips Curve'. From looking at the graph in appendices 1, this shows that A.W.H.Philips theory was correct, as the higher inflation rises, the lower unemployment falls.

Economic Growth within the UK from 1980 to 2000 Economic growth basically means higher incomes; higher incomes determine a higher standard of lifestyle. Every government tries to stimulate growth within the economy. However, too much growth can lead to a number of problems, this is it is the governments objective to stimulate as much growth as possible, however, without inflation and balance of payment problems.

There are two types of economic growths, these are: actual growth and potential ...