One of the fundamental steps a country can take to improve its economy is to lower its inflation and the unemployment rates. The degree of how low these two rates should be, to allow optimal economic growth is the point in question. Can there be zero inflation and or zero unemployment in the country at this age?
Absolute zero inflation is largely an ideal. This is because of the circumstances needed to lower a countrys inflation rate to zero (Ireland 1040-52). Many economists agree that to achieve a zero inflation rate a nation needs to have a stable economy. This calls for a situation of no change between the productivity of labor and capital. If zero inflation is achieved, it will result in the following outcomes. Under absolute zero inflation, money in the bank would earn more interest. Inflation happens when there is too much money in circulation. Zero inflation would, therefore, mean that there is high demand for money. This means that the interest rates would be higher in these conditions. Saving your money in the bank will get you higher interests.
High inflation rates push the government to undertake measures to limit the effects of the inflation. Scenarios with governments intervening in the form of rules like price ceilings and price floors are referred to as market distortion. Markets distortion results in market failures. These failures are because other forces other than the demand and supply forces are affecting the market (Shleifer 127). No inflation, on the other hand, ensures that that market forces only dictate the market. Prices are allowed to be as competitive as possible depending on what the market forces dictate. There is perfect information between the producer and the consumers; each knows the prices of all the products or utilities and what each would get from each product. Markets under these conditions can thrive improving the lives of all those involved.
The difference between the asking price and the bid price in stocks is referred to as the drift. Inflation makes this drift unpredictable which can lead to high losses for people dealing with stocks or the missing out on profitable investment opportunities. Zero rate of inflation eradicates these uncertainties (Barry 182). Stockbrokers make informed decisions without inflation than they would under the circumstances with inflation. In the short run, a country with zero inflation and improved production methods can experience economic growth. These enhanced production methods would result in higher production at lower costs hence the economic growth (Ugarte 530). An excellent example of a field where this is possible is the Information technology sector. Advancement in technology can help increase productivity with lower costs. Higher production levels within lower prices would result in higher revenues and over time economic growth.
On the other hand, the possible disadvantages of zero inflation include, hiking the value of debt. Low inflation makes debtors use more of their income to pay back what they owe (Min 20). Spending too much of one's income in paying debts means that less money is spent on other needs. This results in lower investments due to the reduction of people's disposable income. Lower investing over time leads to more moderate economic growth. The other possible effect of zero inflation is raising interest rates, with a zero inflation rate; the value for money would be higher (Adam 730). This would mean that the demand for money would also be high. To limit this demand banks would have to raise their lending rate. High-interest rates on loans would result in fewer investments, and this would slow down the rate of economic growth.
Low inflation rates would make the price of most goods to come down. While this is welcomed for most products, it is not so for luxury items. One of the reasons people buy luxury goods is their high cost. The people who purchase such goods for their value would be forced to delay their purchases until the prices go up again (Boyce 1647). The last adverse effect of zero inflation is that zero inflation is a sign of low economic growth. Ordinarily, economic growth stirs up an inflation rate of about 2%. A zero inflation rate means that there is pressure to foster spending and the recovery process of the economy is also fragile.
Absolute zero unemployment rate is a scenario where all the people looking for employment are employed. At first glance zero unemployment may seem like a blessing but a closer look reveals the possible complication it could bring. According to Professor Mark Thoma (45), a country with zero unemployment has a stagnant economy. For a state to be continually developing, there need to be a small number of people who are unemployed at every time. These people help by motivating those who are employed to work harder. They also bring new ideas into a business once they get hired.
The possible benefits of zero unemployment are apparent. Among the significant advantages are, each person to work would be in a position to positively contribute to the growth of the economy. With more people working the country's GDP would increase and this would result in higher economic growth.
The government would also be in a position to use the large sums that go to youth improvement and courses meant to help people get jobs (Brueckner 250). These funds could then be directed to other channels where they could contribute to the overall improvement of peoples living standards. Higher employment rates would also lead to lowering social problems. Cases of social crimes like prostitution and burglary would go down.
Among the disadvantages of zero unemployment is that it is not a good sign for the economy. A country with this kind of unemployment would mean that no one person is willing to change position at work (Lang, 26). This state points to lack of ambition which paints such workers unmotivated. An economy that is growing involves people changing their occupation to get the better fitting jobs. The other disadvantage of zero unemployment is a stagnant economy. Given that all the people willing to work are employed, new firms would not have had anyone to use (Lang 28). This scenario would result in a case of a stagnant economy at best due to lack of growth of new companies. Employees would also ask for very high prices given that there would be no one else to take their positions. These high prices are likely to be transferred to the cost of the commodities. This transfer would see the value of goods rise and bring about inflation that would also negatively affect the economy of the country.
A closer look at both zero inflation and zero unemployment reveal underlying repercussions from these scenarios. Zero inflation would most likely result in raising interest rates, delay in the purchase of luxury goods, and increasing the value of debt. Zero unemployment, on the other hand, would result in employees asking for exorbitant wages, a stagnant economy and lack of employees to employ for new companies. Achieving these two scenarios would also be very challenging for most countries, and the results may wind up harming their economy. Rather than aiming at these particular situations, a government would be better of aiming at reducing the rate of inflation and unemployment as these would benefit its economy better than seeking zero unemployment and inflation.
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Barry, Simon C., and Alan H. Welsh. "Generalized additive modeling and zero-inflated count data." Ecological Modelling157.2 (2002): 179-188.
Boyce, W. Thomas, et al. "Social inequalities in childhood dental caries: the convergent roles of stress, bacteria, and disadvantage." Social science & medicine 71.9 (2010): 1644-1652.
Brueckner, Jan K., and Yves Zenou. "Space and unemployment: The labor-market effects of spatial mismatch." Journal of Labor Economics 21.1 (2003): 242-262.
Ireland, Peter N. "On the welfare cost of inflation and the recent behavior of money demand." American Economic Review 99.3 (2009): 1040-52
Min, Yongyi, and Alan Agresti. "Modeling nonnegative data with clumping at zero: a survey." Journal of the Iranian Statistical Society 1.1 (2002): 7-33.
Lang, Gunter. "The difference between wages and wage potentials: Earnings disadvantages of immigrants in Germany." Journal of Economic Inequality 3.1 (2005): 21-42.
Shleifer, Andrei. "The age of Milton Friedman." Journal of Economic Literature 47.1 (2009): 123-135.
Ugarte, M. Dolores, B. Ibanez, and A. F. Militino. "Testing for Poisson zero inflation in disease mapping." Biometrical Journal 46.5 (2004): 526-539.
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