Indicators of

Macro Environment

Dr.Mrutyunjay Dash
Key Indicators
Gross Domestic Product
– Nominal GDP: It is the value of the total goods and services produced
in an economy over a specified period of time (usually a year) at current
market prices. In this calculation only the products for final
consumption, capital goods are included.
– Real GDP: It is the physical quantity of goods and services
produced. Real GDP is derived by applying GDP deflator
to nominal GDP data.
– GDPdeflator: It is a price index number which can be applied to
nominal GDP figure to remove the effect of changes in
the price level. Thus it gives the real or physical
quantity of goods and services produced in a particular
year.
• However, GDP, whether measured in nominal or real terms, is the sum
total of the output of the various sectors of an economy , computed on an
annual basis
GDP Deflator: It is the numerical factor by which GDP value
at current prices discounted so that the impact of increased
prices in the valuation of GDP is removed and the real GDP
figure is arrived at.
GDP Rs 300bn -2002 ---Rs 390bn---2003
The general price level rises -20%
2002-Base year
Price index in 2002-100 ----120---2003
GDP Deflator 120/100=1.2
Real or inflation –adjusted GDP value for 2003
390/1.2=325bn
In nominal terms GDP rises by 30%[300-390]
But in real terms it is 8.3% [300-325]
Real GDP=Nominal GDP/GDP Deflator
Or GDP Deflator =Nominal GDP/Real GDP
Consumer Price Index (CPI):
It measures the cost of buying a standard basket of goods
and services at different points of time.
The standard basket is constituted to represent as closely
as possible the consumption pattern of the population.
It may include food and clothing, housing, entertainment,
electricity, fuel, and other common items of consumption in
day-to-day life.
Weights are to be given to each item for calculating
weighted average.
How the weight is decided?
Based on the proportion of the item in the total consumer
expenditure on the basket.
How to find out the proportion?
Extensive household surveys are conducted.
Calculation of Inflation Rate based on CPI
Pdt.Group Share in Basket Price Index Weighted Index
Expenditure 2002 2003

Food 0.10 100 110 11

Clothing 0.05 100 100 05
Housing 0.25 100 120 30
Fuel 0.10 100 110 11
Transportation 0.20 100 115 23
Education 0.30 100 125 38
Total 100 118
Sectoral Shares:
The sectoral shares of GDP indicate the type and nature of an
economy.
In agrarian economies the share of agriculture and allied
sectors is the largest and the sector provides employment to
the largest chunk of population.
Economies with higher rates of growth are generally observed to be those in
which the share of industry in national output is rising and that of
agriculture is falling over time.
Industrialised country: contribution of service sector to national
income normally happens to be the highest; more than 60%.
Environment for firms in manufacturing or services is rated
higher where these sectors account for a predominant share in
national output.
• Agricultural Output: A dwindling agricultural sector can destabilise an
economy with far reaching consequences for the economy.
Agriculture:
Food for population
[lapses-food insecurity/food imports]
Raw materials to industry
Employment to masses
Agricultural stagnation:
In the face of rising population what would be the possible
consequences?
Inflation if how?
Agriculture, Industry and service sectors interface
Industry: electricity, seeds, fertilisers, pesticides and insecticides,
tractors, farm implements, etc as inputs .
Service sector: credit, transport, insurance, training and marketing
services.
Technical interpretation: Thus in economies where there is found
strong forward linkage of the agricultural sector,the level and rate of
growth of agriculture is taken as a key indicator of the macro
environment.
Agricultural stagnancy leads to inflation
Increase dependence on imports: A country with deplorable f. exchange
reserves will impose tariff on import duty.
This leads to rising cost of input cost making it uncompetitive in both
domestic and foreign markets.
 Domestic Saving

PUBLIC SECTOR PRIVATE SECTOR HOUSEHOLD SECTOR

Savings and Investment:

For the purpose of estimating the domestic saving, the economy
has been divided into three broad institutional sectors.
Public Sector: It comprises the public sector undertakings
Corporate Sector: The private corporate sector limits itself to
ownership and management.
Household sector: The household sector is a residual sector
embracing all economic units other than the units of public sector and
private corporate sector.
Mobilisation of Saving: Low level of savings acts as a serious bottleneck
on the path of growth. In case, domestic saving is inadequate
Then what is the way out?
It must be compensated by foreign saving. But foreign savings must have
to be paid back with interest.
Thus it was argued that development does require sacrifice in the form of
restraining consumption to force a higher rate of saving.
Investment:
Sustained high economic growth would require considerable
improvement in investment. Given the country’s limited domestic
resources, it is essential to enhance further the inflows of foreign direct
investment. Enhancement of domestic investment would depend upon
structural reduction in inflationary expectations and real interest rates,
reduction in the fiscal deficit and so on.
Rate of Inflation:
•Creeping: 2-5%
•Walking:5-10%
•Running:10-20%
•Galloping:20-50%
•Hyper:>50%
An inflation rate upto 5% is generally considered as a good sign of
macroeconomic conditions and indicates stable and profitable
conditions for business. It facilitates business planning and enables a
firm to make reasonable projections about the future.
• However in macroeconomic dynamics inflation rate impacts the rate of
exchange, rate of interest, exports and imports, money supply and credit
and so on which affect the business environment.
• Money Supply: Money supply in an economy determines liquidity
conditions in the market, interest rate structure and hence the cost of capital
to the firms and the rate of inflation.
• Being a sensitive variable money supply should match the rate of growth of
output for maintaining price stability in the economy. As when the MS is
significantly lower than the growth of output then it badly affects economic
growth. Why?. It creates liquidity shortage/increased market rate of
interest/depressed demand/finally output.
• Similarly excess of MS begets inflationary Spiral in the economy.
• SLR and CRR:
• As per the stipulation of RBI banks are required to maintain a certain
percentage of their deposits with RBI on which interest is also paid. While
the banks have also to maintain a certain percentage of deposits in the form
of cash and permitted assets and securities and investments. A fall in SLR
or CRR makes more funds available.
• Foreign Trade: It not only affects national income but also
is an indication of its openness and competitiveness in the world
markets. Foreign trade as percentage of national income is used as
a measure of a country’s openness or globalisation.
WHY?

• A country with low level of exports and imports indicates its inward
orientation and poor international economic relations.
• The composition of trade also speaks of a country’s growth.
HOW?
If a country primarily exports food products & raw material for
industry and imports principally improved and sophisticated items
then it is said to be an underdeveloped economy. Various ratios
have been formed to assess a country’s growth like:
– Growth rate of exports and imports
– Exports as per percentage of foreign exchange reserves
– Imports as a percentage of foreign exchange reserves
Foreign Exchange Reserves:
– Foreign exchange reserves act as important indicator of economic well-being of a
country for the following reasons.
•It determines the ability to pay for imports
•It enables to meet external liabilities
•It enables to raise fresh borrowings in international market.
The adequacy of foreign exchange reserves: Why is it so important?
Not only to meet all such requirements but also to project a good image of the
economy countries should maintain a comfortable level of reserves even by
borrowing from abroad. This is probably the reason why a good level of reserves
is often seen to co-exist with a high level of external indebtedness.
In case of any eventualities of exchange depreciation the central bank should go
for a sale of a part of its foreign currency in the market to stabilise its own
currency.
Therefore for a manger it is not the absolute level of reserves but factors like
exchange rate fluctuations, external debt liabilities and the level of imports that
really matter a lot.
Implications: A dangerously low level of foreign exchange reserves of a country
indicates an imminent and substantial devaluation of currency, a foreign exchange
crisis and heavy restrictions on imports. All these signs indicate a negative macro
environment for the economy as a whole.
Economic Infrastructure:
• Quality infrastructure is necessary for economic efficiency. Insufficiency or
poor quality of infrastructure constraints business operations and raises
operational costs.
– For example : Poor quality of roads and congested ports increase delivery time
and wear and tear charges. Cargo clearance in Indian airport is 15 days where
as in Japan it is only 48 hours.

Implications:
– Inadequate infrastructural facilities act as a restrain on establishment of
multinational projects for factors such as power shortage, rationalisation
of user charges, political risk, lack of resource commitments, long
gestation periods and the like.
Social Indicators:
– The test of Economic growth depends much on the extent to which it
brings about an improvement in the quality of life of the masses.
• Components of Social Development:
– Education
– Health care
– Sanitation
– Family welfare
– Water supply
– Social security
– Nutrition
– Social welfare
– Poverty ratio; defined as the percentage of population living below the
poverty line
Strategy for Corporate Growth:
• Competition based on cheap labour is increasingly
vulnerable.Comparative advantage can be better achieved by:
Focusing on the global market opportunity
Competing through technology
And,as such competition will not make vulnerable to:
Competition from other low-wage countries
Products which higher labour contents
Can it be possible through higher productivity of labour forces only?
or
In terms of natural and capital resources.
This can be possible through
Quality features with cost advantage
Concentration on total cost, not just labour cost.
Prevailing Constraints for Growth:
Internal constraints:
Lack of latest updated technology
Poor infrastructure
Access to foreign markets
Purchasing power of the domestic market
Political intervention in corporate decision
Constraints due to business laws and their administration
Lack of customer focus
Poor use of information technology
Under-utilisation of manpower potential

Concerns that often affect business:

Ecological and environmental degradation, as brought out in the Rio
Summit.
Fear of higher unemployment in the richer countries, due to cheaper
imports.
Fear of political leaders and administrators getting more corrupted.
Strategic Human Resource Management:
Strategic HRM is characterised by a long-term focus.Each move in
people management is made with an eye on the organisational goals.
While this shift in the HRM approach seems to be catching on, let us
refer to statistics relating to HRM in 115 units of the fortune 500
companies in the U.S.
Pertinent Questions:
How many of them practised strategic HRM?
Whether this approach improved organisational performance?
What was the role of the HRM managers in the new scenario?
The GM were asked to several questions related to HRM in his
organisastion.
HRM managers are included in strategic planning
HRM in most of the cases lack proper attention as subjects
like Product development, production and sales.
HRM policy decisions range from that of hiring,
firing,rewards, compensation,promotion,etc which will affect
the organisational growth in the long-run.
Thus strategic HRM is a long-run focus.
• Inexpensive Labour a blessing or a curse?
Cheap availability/undervaluation: Labour
Inexpensive labour/less incentive to impart for higher productivity through
greater investment in technology and human resources.
Hard Reality: An Indian worker produces just about 5.5% as much as his
American counterpart or just 75% as much as a Chinese worker.
Bench mark : west or Asian Tigers like Singapore or Malaysia
What went wrong?
Poor infrastructure
Unprofessional working conditions
And……….
Besides, Approach towards labour.
What is the basic flaw in our approach?
Are we globally competitive?
Position of Indian Managers in the world
Country Rank
New Zealand 1
Honkong 2
USA 3
Taiwan 9
UK 16
Turkey 27
India 43
China 48
Global Competitive Report,2001
COUNTRY RANK
WEF’s Observations for India
Switzerland 1 The penetration rates of the latest
technologies are still quite low by
Finland 2 international standards, reflecting India’s
low levels of per capita income and high
Sweden 3 incidence of poverty. Insufficient health
services and education as well as a
Denmark 4
poorly developed infrastructure are
Singapore 5 limiting a more equitable distribution of the
benefits of India’s high growth rates.
USA 6 Moreover, successive Indian governments
have proven remarkably ineffective in
Germany 7 reducing the public sector deficit, one of
the highest in the world.
India 43
• Why it has so happened?
• Is it due to poor TQM score?
• Total Quality Management (TQM) is a comprehensive and structured
approach to organizational management that seeks to improve the quality of
products and services through ongoing refinements in response to continuous
feedback.
• TQM requirements may be defined separately for a particular organization or
may be in adherence to established standards, such as the International
Organization for Standardization's series.
• TQM processes are divided into four sequential
categories:
• Plan
• Do
• Check
• Act (the PDCA cycle).
Treating labour as cost rather than asset:
• Implications:
Reduction of cost may be possible but what about productivity?
Literate and well educated workers could add much needed value
significantly virtually anywhere.
Key issues:
Flexibility in utilising labour in varied options
Least importance to productivity aspect
Absence of exit policy/Disguised unemployment.
A slight change in our approach: Productivity Aspect
Higher Productivity/increased output/more margins
More margins/more fruitful investment/more meaningful employment and
so on………..
CHECK PLAN

ACT DO
In the planning phase, people define the problem to be addressed, collect relevant
data, and ascertain the problem's root cause;

In the doing phase, people develop and implement a solution, and decide upon a
measurement to gauge its effectiveness

In the checking phase, people confirm the results through before-and-after data
comparison

In the acting phase, people document their results, inform others about process
changes, and make recommendations for the problem to be addressed in the next
PDCA cycle.

Are we really conscious about TQM?

Richard Y Chang, eminent quality management expert opines” companies are
viewing TQM as a hobby, a programme, an extra thing to do rather than integrating
it”.
• Where do our managers really stand in the global
market?
India Rank
• Availability of Managers 18
• Infotech 44
• TQM 42
• Global Managerial Experience 44
World competitive Report,2001
BANKING & Its Operation
Commercial Bank
It is an institution which accepts, for the purpose of lending or
investment, deposits of money from the public repayable on
demand or otherwise and in the course of its business creates
money.
Prof. Sayers Words:
CBs are identified as institutions “whose debts- usually referred
to as bank deposits-are commonly accepted in final settlement of
other people’s debts.”
Acceptance of deposits

Advancement of loans

Repayment of deposits on demand

Creation of money
Functions:

Acceptance of deposits

Current account deposits
May be withdrawn at any time

Does not involve any interest payment

 Fixed deposits/Time deposits

Constraint on withdrawals

More returns

 Savings Bank deposits

May be withdrawn but under certain conditions

Relatively lower rate of return

Advancement of loans
 Making ordinary loans: Undertaking/collateral security/an
account is created & total loan amount is credited to that
account.
 Overdraft: Privileges granted to the customers of a bank
overdraw his account. [limit being fixed by the concerned
bank]
 Cash-credit: Cash credits are loans, granted against the
borrower’s promissory notes guaranteed by two sureties at
least and often supported by a pledge of securities or goods.
 Discounting bills of exchange:
 Holder of a bill of exchange
 Commission is deducted
 Face value of bills of exchange
 At the time of maturity- bank receives final payment from the
party [initial; who submitted the bills of exchange]
Process of Discounting Bills of Exchange

Businessman A- Rs 60,000 [Delhi]

Goods purchased from B [Mumbai]
A Submitted the bill in his bank
After acceptance by the bank A sends to B
B deposits in his bank & his bank makes payment after deducting
the appropriate commission
At the time of maturity bank [A’s bank receives final payment
along with interest from A]
 Can bank create credit?
Can the credit created by banks leads to multiple
credit creation?
What is the mechanism of multiple credit creation?
What would happen to the liabilities of the various
banks during the process of multiple credit creation?
Will it continue at the same rate or; every time will go
on increasing at a diminishing rate?
Multiple Credit Creation:
Banks are not merely purveyors but also in an important sense,
manufacturers of money." Comment [Sayers]
Net addition to the total supply of money-Credit Creation
Deposits

Passive Active

Passive Deposits: Acceptance of deposits.

These deposits do not make any net addition to the stock of money in
the economy.
These deposits merely convert currency money into deposit money.
Do these primary or passive deposits carry any importance to the
bank?
Yes, as these deposits provide funds out of which the bank
makes loans and advances to its customers.
Derivative or Active deposits:
These deposits are created by the bank in a more active manner
by opening a deposit account in the name of the person applies
for advancement of loans.
Grant Amount-Rs 20,000 /collateral security
Opening the Account- Rs20,000
Every loan creates a deposit.
Initial Deposits-Rs 2000
CRR-10%
Rs 1800- Excess Reserves
Borrower A receives Rs 1800 as loan and issues a cheque to B who has
an account in PNB.
PNB receives Rs 1800 as primary deposits CRR being 10%
Excess reserves would be Rs 1,620
In this way the process of multiple credit creation will continue; every
time the liabilities of the various banks will go on increasing at a
diminishing rate.
This process will continue until the entire excess reserves of Rs 1800 with
the first bank have been distributed amongst the various banks in the
economy.
The result will be that the total liability of all the banks would be 10 times
the original amount of the primary deposit.
Credit Multiplier
Credit multiplier may be defined as the ratio between the ultimate
amount of derivative deposits created and the original amount of
excess reserves in the banking system.
Derivation of the Credit Multiplier:
CM= The volume of Derivative Deposits
Original Excess Reserves
= Rs 18,000/- 10
Rs1,800/-
Interpretation:
Lower is the CRR higher will be the credit multiplier & Vice
Versa
Thus CM is the reciprocal of the CRR.
Example:
CRR= 10%=10/100
Its reciprocal=1/10/100=10=CM
If CRR=20%
CM=1/20/100=5
“state in which the value of money is falling,
i.e., the prices are rising.”: Crowther

“Inflation is a persistent and appreciable

rise in the general level or average of
prices.” : Ackley
However there is no generally accepted
definition of inflation and different
economist define it differently.
• Modern economists analyse inflation in
a comprehensive and unified manner.

Inflation is always accompanied by a

rise in the price level. It is a process
of uninterrupted increase in prices.
Inflation is essentially a monetary
phenomenon and is generally caused
by excessive money supply.
Demand-Pull Inflation
• Demand-pull inflation or excess demand inflation
occurs when aggregate demand for goods and
services is greater than the available supply of
these goods and services at the existing prices
level.
• Thus, demand-pull inflation may be defined
as a situation where the aggregate demand
exceeds the economy’s ability to supply the
goods and services at the current prices, so
that the prices are pulled upward by the
upward shift of demand function.
Demand-Pull Inflation:
Inflation is caused by an excess of demand or spending
relative to the available supply of goods and services at
existing prices.
Inflationary Gap: As an excess of anticipated expenditures
over available output at base prices. This inflationary gap
measures the extent of excess demand.
Total output: Rs 3000 crores/ available for consumption in
exchange of money income.
If the economy injects Rs 5000 crores.
Tax paid Rs 800 crores
Net disposable income:Rs 420 crores
Then the inflationary gap woul be Rs 1200 crores.
How the inflationary gap can be bridged?
Increased Tax:
If 20%, then Net disposable income would be 4000.
[5000-20 % 5000]
Inflationary gap would be reduced by Rs 200 crores.
Increased Saving:
If 15% is saved then Net disposable income would be
4000-15% of 4000=Rs 3400
Inflationary gap would be further reduced to 3400-
3000=400
Increased Supply:
Existing supply can be increased to bridge the gap.
Cost-Push Inflation
• The true source of inflation is the
increase in cost of production
• The increase in cost of production is
autonomous of the demand conditions
• The push forces operate through
important cost components, such as,
wages, profits or material costs, so that
cost-push inflation may take the form of
wage-push, profit-push or material-push
inflation.
 Reasons for Wage-Push
•
Inflation
In the modern times, the trade unions have become very
strong and they succeed in securing higher wages for
their members. This raises the cost of production and, to
maximise their profits, the businessmen raise the prices
of their products.
• Wage rise may be induced by an excess demand for
labour, which may be the result of excess demand
conditions in the commodity market.
• For wage-push inflation to ocuur, it is necessary that
trade unions have substantial control over the supply
of labour.
• In a country like India where the major portion of the
labour force is not unionised, trade unions do not
have much influence on wages.
Profit-Push Inflation
• Cost-push inflation also occurs when the
monopoly power of the business enables
them to raise prices to create their profits.
Once started by a few powerful firms
other small firms follow the suit and the
over all consequence is inflation.
Material-Push Inflation
• Cost-push inflation is also caused by the
increase in the prices of some key
materials such as steel, basic chemicals,
oil, etc. Since these materials are used
directly or indirectly, in almost all the
industries, the increase in their prices
affect the whole of the economy and the
prices everywhere tend to increase.
Monetary Policy

• Monetary policy is essentially a programme

of action undertaken by the monetary
authorities generally the central bank, to
control and regulate the supply of money
with the public and the flow of credit with a
view to achieving predetermined
macroeconomic goals.
Shaw defines monetary policy as “any
conscious action undertaken by the
monetary authorities to change the quantity,
availability or cost…. Of money”.
Instruments of Monetary Policy

Quantitative Measures of Monetary Control

Bank Rate
Open Market Operations
Cash Reserve Ratio
BANK RATE

• It is the rate of interest charged to a

commercial bank which wants to borrow
from the central bank.
• How a rise in bank rate is anti-inflationary?
Open Market Operation
• It refers to purchase and sale of govt.
securities in the open market by the
central bank on its own initiative. A central
bank can also buy and sell not merely
govt. securities but also other kinds of
assets ,viz., bills,bonds,gold and foreign
exchange.
Variable Reserve Ratio
• It is a method by which the central bank can
alter the reserve requirements of commercial
banks. The commercial banks are required by
law to keep a minimum proportion of their
deposits as cash with the central bank. This is
called the statutory minimum reserve and any
amount of cash kept by the banks in excess of
this is known as excess reserves. The credit
creating power of the banks rests on the excess
reserves.
 Qualitative or Selective Credit
Controls
• Fixation of Margin Requirements
• Consumer credit regulation
• By raising the minimum down payments
• By lowering the maximum maturities or
repayment periods
• By extending the coverage of durable goods for
the purpose of application of this regulation.

• Control Through Directives

• Moral Suasion
• Direct Controls
• Moral Suasion: Moral suasion as a form
of selective credit control takes the
shape of advice and direction by the
central bank not to adopt unsound
lending policies. The central bank can
encourage banks to follow policies
which are in the interest of the country.
Moral suasion implies persuading the
commercial banks to co-operate with the
central bank in pursuing an appropriate
credit policy.
Direct Action
• It refers to coercive actions taken by the
central bank against commercial banks for
follwing unsound credit policies.
– It may charge penal rates of discount over
and above the normal bank rate.
Publicity

• It implies weekly statements of its assets and

liabilities ,monthly reviews of credit and business
conditions and comprehensive annual reports on its
own operations, banking conditions published by the
central bank. The central bank may employ this
instrument of publicity in order to enable others to
know its views so that it helps others to shape their
policies in a proper way.
Fiscal Policy
Fiscal policy is defined as the government’s
programme of taxation, expenditure and
other financial operations to achieve certain
national ends.
Taxation:
Revenue function
Regulatory function
Revenue function
• In pursuance of its revenue objective, the
central government and also the state
governments, used their taxing powers
extensively and intensively. The govt. may
stretch its tax net far wide like the Govt. of
India imposed five new taxes such as
estate duty, wealth tax, gift tax,
expenditure tax, Professional tax, etc.
 …………Continued
• Regulatory Function:
• Reduction of disparities in income and
wealth
• Restriction of consumer demand with a
view to containing inflation
• Shift of investment from non-essential to
essential or priority sectors.
How the CPI is Calculated
• Assume that there are only three goods (instead of goods and services in
over 200 categories in the actual calculation) included in the typical
consumer's purchases and, in the base or the original year, the goods had
prices of $10.00, $20.00, and $30.00. The typical consumer purchased ten
of each good.
• In the current year, the goods' prices are $11, $24, and $33. Consumers
now purchase 12, 8, and 11 of each good.
• The CPI for the current year would be the quantities purchased in the
market basket in the base year (ten of each good) times their prices in the
current year divided by the quantities purchased in the market basket in the
base year times their prices in the base year.
• Thus [(10 x $11) + (10 x $24) + (10 x $33)] / [( 10 x $10) + (10 x $20) +
(10 x $30)] = $680 / $600 = 1.133. That is, prices in the current year are
1.133 times the prices in the original year. Prices have increased on average
by 13.3 percent. The quantities are the base year quantities in both the
numerator and the denominator.
• By convention, the indexes are multiplied by 100 and reported as 113.3
instead of 1.133.
• The base year index simply divides the prices in the base year (times the
quantities in the base year) by the prices in base year (times the quantities
in the base year). The base-year index then is 1.00; or multiplied by 100
equals 100.
Causes of Inflation
• Over short periods of time, inflation can be caused by
increases in costs or increases in spending. Inflation
resulting from an increase in aggregate demand or total
spending is called demand-pull inflation . Increases in
demand , particularly if production in the economy is near
the full-employment level of real GDP, pull up prices. It is
not just rising spending. If spending is increasing more
rapidly than the capacity to produce, there will be upward
pressure on prices.
• Inflation can also be caused by increases in costs of major
inputs used throughout the economy. This type of inflation
is often described as cost-push inflation . Increases in costs
push prices up. The most common recent examples are
inflationary periods caused largely by increases in the
price of oil. Or if employers and employees begin to expect
inflation, costs and prices will begin to rise as a result.
• Over longer periods of time, that is, over periods of
many months or years, inflation is caused by growth
in the supply of money that is above and beyond the
growth in the demand for money.
• Inflation, in the short run and when caused by
changes in demand, has an inverse relationship with
unemployment. If spending is rising faster than
capacity to produce, unemployment is likely to be
falling and demand-pull inflation increasing. If
spending is rising more slowly than capacity to
produce, unemployment will be rising and there will
be little demand-pull inflation.
• That relationship disappears when inflation is
primarily caused by increases in costs.
Unemployment and inflation can then rise
simultaneously.