The Phillips Curve Essay - 1316 Words

The Phillips Curve Economists agree that unemployment and inflation are two of the major macroeconomic problems of the twentieth century. If a relationship between the two existed then this would be a major break through for the macro management of the economy. Phillips work was empirical - started with evidence and worked towards a theory. The causation for the Phillips theory was that the level of unemployment caused the rate of change in money wages to be what it was. What economic theory lies behind this? As unemployment decreases the available pull of labour goes down. This means that resources become increasingly scarce and workers can push for higher wage rates. Or as unemployment decreases more people have more†¦show more content†¦They held that it was the governments duty to achieve the correct level of demand by manipulating its own spending and tax receipts, or in other words, to have an active fiscal policy. This policy required the government to spend more than it received if the economy had less than full employment. As a consequence, aggregate demand would rise through a multiplier effect and unemployment would fall. The inflation controversy - Demand-Pull or Cost-Push? Keynesian economists were divided into two camps. Some believed that inflation was caused by too much demand for goods and services, or excess demand i.e. Demand Pull Inflation. Such economists were very enthusiastic about the Phillips curve because it seemed to provide strong evidence for their views. The second camp of Keynesian economists believed that inflation was caused by cost pressures arising from high wage settlements gained by strong trade unions and from increases in import prices i.e. Cost Push Inflation. They were doubtful about the usefulness of the Phillips curve. On the Nicholas Perry evidence of the Phillips curve they thought that wage inflation and unemployment could be traded off against each other, that policy makers could decide to have a bit less unemployment in exchange for accepting a bit more wage inflation or vice versa. The Phillips curve helped the demand pull Keynesians in another way as in order to manage the levelShow MoreRelatedPhillips Curve : A Relationship Between The Inflation Rate And The Unemployment Rate Essay3200 Words   |  13 Pages Name: Instructor: Course: Date: Phillips curve The Phillips curve history and overview The Phillips curve represents a relationship between the inflation rate and the unemployment rate. The Phillips curve is named after its first exponent A.H.W. Phillips who was a classical economist who first came up with this relationship. He posited that the lower the employment rate firms are forced to source for funds so as to increase wages and be able to attract labour. This in turns leads to a rise inRead MorePhillips Curve Essay1198 Words   |  5 PagesPrinciple 10 of Mankiw and Taylor’s Ten Principles of Economics: The Phillips curve shows the relationship between unemployment and inflation in an economy. Unemployment involves people who are registered as able, available and willing to work at the going wage rate but who cannot find work despite actively searching for work. Unemployment can be counted by using the claimant count which includes all those who are unemployed and actually claiming benefit in the form of Jobseekers AllowanceRead MoreDeveloped Countries and Economically Developed Countries Essay examples927 Words   |  4 Pagesvarious approaches to achieve the same objective. Hogan (1998) said that exist a negative relationship between this two variable in a short run. The low of unemployment rate in United State has increased the inflation rate. Using the estimation of Phillips Curves model that has apply in the research, his conclude that the non-accelerating inflation rate of unemployment (NAIRU) may be decreased a little bit. Besides, nowadays inflation in United States cause d the cost of import decreased due to the appreciationRead MoreThe Positive Relationship Between Inflation And Inflation1067 Words   |  5 Pagesestablish this comparison in a short-run period of time, it will be beneficial to use the Phillip Curve. This curve can be used as a tool to represent the positive relationship between inflation and unemployment in the short-run. In order to comprehend the positive relationship between inflation and unemployment first, we must know what inflation is, how we define unemployment, and how we can use the Phillip Curve to make a functional comparison of these two variables. Moreover, it will be very beneficialRead MoreTheories Of Growth And Growth Models2257 Words   |  10 Pagesdetermined as a given premium over a fixed average subsistence level of wages in the traditional agricultural sector. At the constant urban wage, the supply curve of rural labour to the modern sector is considered to be perfectly elastic Todaro and Stephen (2011). 2.3 Review of Related Literature There exists a vast body of literature on the Phillips Curve. Research studies on the topic began appearing as early as in the 1960s. Samuelson and Solow (1960) examined the relationship between unemployment andRead MoreThe Phillips Curve : The Epitome Of Antiquity Essay1384 Words   |  6 PagesMichael Liotti and Brian Levine Professor Predescu MA 235-H01 Final Project The Phillips Curve: The Epitome of Antiquity Abstract In this paper, we will present a model discussed at length in Todorova (2012) representing the Phillips curve, the textbook macroeconomic relationship posting a negative relationship between unemployment and inflation. Specifically, the model posits that when unemployed workers are scarce, employers must compete with one another for the remaining, qualified workersRead MoreEconomics Natural Rate of Unemployment2526 Words   |  11 Pagesstable over time. Philip’s Curve The Phillips curve represents the relationship between the rate of inflation and the unemployment rate. Although he had precursors, A. W. H. Phillips’s study of wage inflation and unemployment in the United Kingdom from 1861 to 1957 is a milestone in the development of macroeconomics. Phillips found a consistent inverse relationship: when unemployment was high, wages increased slowly; when unemployment was low, wages rose rapidly. Phillips conjectured that the lowerRead MoreGrowth Theories Of Growth And Growth Models2256 Words   |  10 Pagesdetermined as a given premium over a fixed average subsistence level of wages in the traditional agricultural sector. At the constant urban wage, the supply curve of rural labour to the modern sector is considered to be perfectly elastic Todaro and Stephen (2011). 2.3 Review of Related Literature There exists a vast body of literature on the Phillips Curve. Research studies on the topic began appearing as early as in the 1960s. Samuelson and Solow (1960) examined the relationship between unemployment andRead MoreRelationship Between Unemployment And Inflation1947 Words   |  8 Pages1991-2014. Model specification Model specification The study will use the time series data. This study investigates the relationship between unemployment and inflation in Namibia depending on the formulation provided by Blanchard (2005). The Phillips curve can be expressed in the following format: ï  °_t-Ï€_t^e=ÃŽ ²_1 (U_t-U_(NR ) )+ e_t (6) Whereï  °_t: The actual inflation rate at time t. Ï€_t^e: The expected inflation rate at time t. U_t: The actual unemployment rate prevailing at time t. U_(NRRead MoreThe Triangular Phillips Curve Model Essay2275 Words   |  10 PagesThe triangular Phillips Curve which was proposed by Gordon (1996) states that the factors cause inflation can be summarized as demand pull, cost push and inflation inertia. Similarly, Gal and Gertler (1999) construct the a kind of hybrid New Keynesian Phillips Curve model and claim that the main factors that affect inflation are the excess aggregate demand, inflation expectation and inflation inertia. In reality, the determinants of inflation are very complex, and the most common four mechanisms