Why does stagnation in GDP cause unemployment


Stagflation simply explained

The wordstagflation is a combination of the terms "stagnation" and "inflation". When the economy stagnates, gross domestic product (GDP) (the standard measure of a country's total economic output) either grows very slowly or may even shrink.

With inflationthe prices are increasing steadily for goods and services or the purchasing power of money is falling.
In a normal year, inflation could rise by two or three percentage points.
If the inflation rate However, this can rise above five or even ten percent have serious consequences.

The natural consequence of economic stagnation is one increased unemployment:

What is the difference to a recession?

An economic slowdown is a normal part of the macroeconomic cycle. When financial speculation gets out of hand, as it did with tech stocks in the late 1990s and real estate markets in the mid-2000s, the market needs to stabilize. This usually happens through a temporary, albeit painful, one recession.

However, there is one between a recession and stagflation significant difference: The persistent phase of slow economic growth is with stagflation associated with high inflation rates.

The dangerous scenario of stagflation

In stagflation, the economy stagnates and inflation gets out of hand:

Stagflation creates possible Consequences for certain asset classes. Investments in real estate and bonds can lose value. This is because real estate prices fall during stagflation and companies lose their creditworthiness.

Stagflation as an undiscovered phenomenon

Before the 1970s, economists believed the economy was stagnant and inflation was high at the same time impossible.

John Maynard Keynes was an influential British economist. According to its economic principles, inflation was oneBy-product of economic growth.
The Keynesians did not yet recognize the causes and importance of stagflation. They did not realize that there were other powerful economic forces that could cause inflation to spiral upwards.
They kept stagflation in the economy not for possible.

The example of stagflation in the 1970s

The term stagflation has only existed since the economic crisisthat began in the USA in the 1970s.
At that time the Economic boom after the Second World War to decrease due to:

  • of increasing international competition
  • the cost of the Vietnam War
  • the decline in manufacturing jobs

President Nixon attempted these problems through a Devaluation of the dollar and the explanation of Wage and price freezes to solve. But the measures did not bring the hoped-for success.
Instead, the crisis worsened as oil-rich nations in the Middle East Retaliation Embargoed the United States in support of Israel.

The consequences for the national economy resulted in the first stagflation. This was reflected as follows:

  • exploded oil prices
  • higher production costs
  • Terminations with high unemployment rates

Only when the oil price stabilized a few years later did stagflation decline. The Situation relaxed.