The main forms in which macroeconomic instability is manifested: unemployment and inflation, cycles.
Inflation is a depreciation of money due to the excess in the economy of the number of monetary units over the sum of the value of goods formed in the sphere of circulation and a certain number of banknotes that are not provided with goods. There is a relationship between unemployment and inflation, which we will examine in more detail.
As a rule, inflation is expressed in the widespread rise in prices, with a falling purchasing power of the monetary unit.
An important circumstance is that in addition to the total increase in value, the ratio of cost levels can change in relation to each other, in other words, in the process of inflation, the value of some goods can grow faster than others. Inflation, by definition, is a violation of the normal ratio of the amount of money that circulates in the economy, as well as the mass of goods that are available on the market. With the money supply growing too fast in relation to the growth of the commodity supply, money depreciates and becomes less valuable. There is a persistent increase in prices, which is due to excessive growth in the money supply.
One of the causes of inflation is “demand inflation”. Due to a lack of capacity, production cannot satisfy the increased demand, which leads to higher prices for the same volumes of commodity production. Here you can clearly trace the relationship between unemployment and inflation. Although the results are not immediately visible.
Initially, at low total expenditures, there is a high level of unemployment, while a significant share of production capacity is inactive, increasing demand has a positive effect on the use of reserves and does not lead to a large increase in prices. At the next stage, as demand grows in the economy, almost full employment is noted, while in some sectors the reserves of resources run out, which leads to an increase in their value, as well as an increase in salaries. Inflation has already appeared, and the labor market is still narrowing, which allows for a further increase in salaries. Thus, the increased costs are passed on to consumers in the form of price increases. Further, a state of full employment is achieved, now enterprises are forced to hire not qualified, not so productive workers, which is reflected in an additional increase in production costs and prices. Widespread, full employment is noted , but the economy can no longer increase the production of goods, while prices are also rising.
It should be noted that at the second stage, the relationship between unemployment and inflation comes to a certain balance between employment and moderate inflation.
Another reason for inflation is “cost inflation”. Let us analyze the relationship between unemployment and inflation in this situation. In the economy there are situations in which employment and the volume of goods decrease with increasing prices.
In such a situation, the demand for goods and, as a consequence, for working hands is not at all excessive. Rising prices causes an increase in unit costs. goods. Increased Unit Costs products at an unchanged price level leads to a decrease in production volume, i.e. to a decrease in the supply of goods, which determines the increase in prices.
Cost inflation leads to a decrease in the actual volume of services and products, and, consequently, to an increase in unemployment.
In practice, it is quite difficult to distinguish between these two inflation without knowing its primary source, and therefore it is difficult to timely solve the problems of unemployment and inflation. But solving the problem of unemployment and inflation will contribute to the development of the economy of society.
Thus, macroeconomic instability, unemployment and inflation are much more important for the economy than it seems at first.