June 23, 2014

Philippines Economy: Unemployment and Price Increase

The graph above shows what happens to inflation rate when unemployment rate increases and vise versa. The graph depicts a positive relationship between the change in inflation rate and unemployment rate of the Philippines. This means that when unemployment rate increases, change in inflation rate increases and vise versa.

The data of inflation rate and unemployment rate were collected from World Bank Data covering year 1981 to 2005. Technically speaking, the graph is called Phillips Curve in the study of economics. What is fascinating with the result is that the relationship between the two data should not be (slight) positive; but, should be negative.

Normally when unemployment rate increases it would follow that demand for products (goods) and services would decline. Yet, the reverse was projected by the Philippines data; even though unemployment was increasing, prices of goods were increasing. It's difficult to imagine that people are jobless and prices of goods and services are increasing.


The reason why price goes up is due to increased in demand for specific products and services; which is influenced by increased in money supply (amount of money circulating in the country). The government can control the money supply to prevent damaging increase in prices of goods and services using Fiscal and Monetary Policy.  

From 2006 to 2012 the trend reversed. The graph above shows that in the said years, inflation started to respond to unemployment in a good way. The graph shows that when unemployment rate increases, change in inflation rate decreases. In other words, price of good decreases (slightly) when unemployment rate increases. Relatively, it can be said that there was a big difference on how economic policies were implemented on the past compared to recent years.

The use of Macroeconomic fundamentals in shaping the countries growth is truly important. Philippines Q1 2014 growth was recorded at 5.6%.

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