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Inflation
Inflation can be defined as a decrease in the purchasing power of money, or conversely as an increase in the aggregate cost of goods and services. It is conventionally given as an additive percentage, so for example 5% inflation is taken to mean that any given quantity of goods and services (often referred to as a basket) would cost 105% of their pre-inflation price.
Deflation is the inverse of inflation — i.e. an increase in the purchasing power of money. In practice (and for our purposes) it may be more convenient to talk in terms of negative inflation rather than deflation. Adopting this convention we can say that 5% deflation is the same as -5% inflation and accordingly a basket would cost 95% of its original price.
Inflation may be easy to define, but in the real world it is difficult to measure, principally because goods and services do not all increase or decrease in price at the same rate. Much attention therefore is given to the contents of the 'basket', which are generally chosen to represent the basic requirements of a 'typical' persons life. Since these also change as a result of both technological and socio-political changes, an acceptable, if somewhat arbitrary standard has to be agreed by economists, politicians, and statisticians. In the UK the official standard is defined and updated by the Office for National Statistics.
MicroSim has, with one important exception, no concept of prices. It is assumed that when someone makes a purchase (in MicroSim terms, when a worker pays a firm) they get what they pay for — the value of the goods is assumed to equal their cost. The question of inflation doesn't arise, because we are not concerned with what the money is spent on, or its price.
The crucial exception to this is the cost of labour. MicroSim uses a standard (but user-modifiable) unit labour cost. This represents a rather subtle concept, the intrinsic value of a standard unit of labour over a unit period of time.
Now, labour isn't always easy to come by. To take the (theoretical) extreme case, if 100% of the population is already employed the only way a business can recruit more staff is by persuading the employees of other businesses to change employers. Unless an employee is unhappy in his present position (and MicroSim doesn't model unhappiness) he will only change employers if the new employer offers more money.
But we are assuming the reason for this change is simply that there are no other potential employees available, not that the employee's labour is inherently worth more than the standard unit labour cost. Let's suppose the employee requires a 20% increase to change jobs; then the employer is paying 120% of the standard unit labour cost for 100% of the standard unit of labour. If this were to happen generally it would mean that, as far as labour is concerned anyway, the level of inflation was 20%.
In MicroSim terms then we can treat inflation as an increase in the cost of labour, given by actual unit labour cost divided by standard unit labour cost (generally converted to a percentage increase or decrease for discussion or commentary purposes).
Of course, if it were to happen generally it wouldn't stop there. Employment would still be at 100% and whatever an employer had gained by acquiring the employees of other companies would almost immediately be lost again as other companies acquired their employees. The increased costs of labour would have to be passed on to customers, who are, of course, those self-same employees, and the process would repeat but with an ever-rising baseline.
This scenario has led many economists to regard full employment as inherently inflationary and try to devise an acceptable level of unemployment that would avoid the problem.