Micro economics issues and the solution

1. MACROECONOMIC ISSUES
INFLATION
Inflation is the rate at which the general level of prices for goods and services is rising
and, consequently, the purchasing power of currency is falling. Central banks attempt to
limit inflation, and avoid deflation, in order to keep the economy running smoothly.
Core Inflation Rate in Sri Lanka increased 4.20 percent in September of 2016 over the
same month in the previous year. Core Inflation Rate in Sri Lanka averaged 6.91 percent
from 2004 until 2016, reaching an all-time high of 12.76 percent in September of 2008
and a record low of 0.82 percent in February of 2015.
Source - central bank of Sri Lanka.
CONTROLLING INFLATION
The types of investments that provide protection against inflation or the rise in prices of
goods and services. Most hard assets are typically protected against inflation. This is
because commodities tend to appreciate during times of high inflation. Normally the
fiscal policy and monetary policy are the main tools to control the inflation
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2. ADOPT MONETARY POLICY
The Central bank could increase interest rates. During that situation people don’t like to
get loan so they will not have money in hand due to that people don’t like to buy goods
and services. Higher rates make borrowing more expensive and saving more attractive.
This should lead to lower growth in consumer spending and investment.
A higher interest rate should also lead to higher exchange rate, which helps to reduce
inflationary pressure by making imports cheaper, reducing demand for exports and
increasing incentive for exporters to cut costs.
ADOPT FISCAL POLICY
The government can increase taxes (such as income tax and VAT) and cut spending. This
improves the budget situation and helps to reduce demand in the economy. Both these
policies reduce inflation by reducing growth of Aggregate Demand. In our case, the
economy seems to be growing reasonably strongly. Therefore, we can reduce inflationary
pressures without causing a recession.
UNEMPLOYMENT
Unemployment Rate in Sri Lanka increased to 4.60 percent in the second quarter of 2016
from 4.20 percent in the first quarter of 2016. Unemployment Rate in Sri Lanka averaged
5.53 percent from 1996 until 2016, reaching an all time high of 11.30 percent in the
fourth quarter of 1996 and a record low of 3.90 percent in the third quarter of 2011.
Source - Department of Census and Statistics - Sri Lanka.
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3. REDUCING THE UNEMPOYABILITY
Many people have the right skills to find fresh work but factors such as high house prices
and housing rents, family and social ties and regional differences in the cost of living
make it difficult and sometimes impossible to change location in order to get a new job.
Many economists point to a persistently low level of new house-building as a major
factor impeding labour mobility and the chances finding new work.
Some points to reduce unemployability,
• Improve skills / human capital to make people more flexible in the workplace
• Provide stronger incentives to look for and accept work
• Increase the occupational and geographical mobility of labour
• Maintain a sufficiently high level of demand to create enough new jobs
• Encourage entrepreneurship and innovation as a way of creating new products
and market demand which will generate new employment opportunities
GROWTH RATE
Sri Lanka's economy advanced 2.6 percent year-on-year in the second quarter of 2016,
following a downwardly revised 5.2 percent expansion in the previous period. The GDP
growth slowed significantly mainly due to inclement weather conditions. Agricultural
sector shrank 5.6 percent (+0.7 percent in Q1); industry increased at much slower 2.2
percent (+7.7 percent in Q1) and services rose 4.9 percent (+5 percent in Q1). GDP
Annual Growth Rate in Sri Lanka averaged 6.18 percent from 2003 until 2016, reaching
an all-time high of 16.12 percent in the first quarter of 2012 and a record low of 0.50
percent in the fourth quarter of 2013.
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4. Source - Department of Census and Statistics - Sri Lanka.
INCREASE THE NATIONAL GDP
According to the country GDP chart economic growth include infrastructure spending
and taxes.
Infrastructure includes roads, bridges, ports and sewer systems. Economists who favor
infrastructure spending as an economic catalyst argue that having top-notch infrastructure
increases productivity by enabling businesses to operate as efficiently as possible. For
example, when roads and bridges are abundant and in working order, trucks spend less
time sitting in traffic, and they do not have to take circuitous routes to traverse
waterways. Additionally, infrastructure spending creates jobs as workers must be hired to
complete infrastructure projects that are green lighted. It is also capable of spawning new
economic growth. For example, consider the construction of a new highway, followed by
gas stations and retail stores opening to cater to its motorists.
Taxes are designed to put more money back into the pockets of consumers. Ideally, these
consumers spend a portion of that money at various businesses, which increases the
businesses' revenues, cash flows and profits. Having more cash means businesses have
the resources to procure capital, improve technology, grow and expand. All of these
actions increase productivity, which grows the economy.
CONCLUSION
In this report I discussed about the main macroeconomics issues such as inflation,
unemployment, growth rate. According to the final analyze I came to the conclusion that
when we reduce the inflation, unemployment the Growth rate will increase.
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