PHILLIPS CURVE

• PHILLIPS CURVE
  MACRO ECONOMICS
  INFLATION
  INTRODUCTION

1. THE PHILLIPS CURVE IS A SINGLE EQUATION ECONOMETRIC MODEL NAMED AFTER WILLIAM PHILLIPS DESCRIBING A HISTORICAL INVERSE RELATIONSHIP BETWEEN RATES OF UNEMPLOYMENT AND CORRESPONDING RATES OF RISES IN WAGES THAT RESULT WITH IN ECONOMY.THE THEORY CLAIMS THAT WITH ECONOMIC GROWTH COMES INFLATION,WHICH IN TURN SHOULD LEAD TO MORE JOBS AND LESS UNEMPLOYMENT
2. IN SIMPLE WORD DECREASED UNEMPLOYMENT(INCREASED EMPLOYMENT ) IN AN ECONOMY WILL CORRELATE WITH HIGHER WAGES RATES OF WAGES RISE.
3. PHILLIP DID NOT HIMSELF STATE THERE WAS NAY RELATIONSHIP BETWEEN EMPLOYMENT AND INFLATION BUT DEDUCTION FROM HIS STATISTICAL FINDING.
4. THE PHILLIPS CURVE DEPICTS AN INVERSE RELATIONSHIP BETWEEN THOSE TWO VARIABLES I.E RATE OF UNEMPLOYMENT AND ANNUAL RATE OF CHANGE OF MONEY WAGES OR PRICES.
5. THE INVERSE RELATIONSHIP BETWEEN UNEMPLOYMENT AND INFLATION IS SHOWN AS DOWNWARD SLOPING L SHAPED WITH INFLATION ON Y AXIS AND UNEMPLOYMENT ON X AXIS.INCREASING INFLATION DECREASES UNEMPLOYMENT AND VICE VERSA. ALTERNATIVELY A FOCUS ON DECREASING UNEMPLOYMENT ALSO INCREASES INFLATION AND VICE VERSA

• EXPLANATION

1. RATE OF WAGES INCREASE DECLINES WITH THE INCREASE IN THE RATE OF UNEMPLOYMENT AND VICE VERSA
2. WHEN THE UNEMPLOYMENT LEVEL IS VERY LOW,GENERAL EXCESS DEMAND WILL EXIST WHICH WILL CAUSE DEMAND PULL ON WAGES SO WAGES WILL BE HIGH
3. BUT WHEN UNEMPLOYMENT INCREASES,TRADE UNION DEMANDS WILL BECOME WEAKER GRADUALLY WHILE EMPLOYER’S RESISTANCE WILL BECOME STRONGER SO THE RATE OF WAGE INCREASE WILL DIMINISH
4. FROM THE GIVEN RELATIONSHIP BETWEEN WAGE RATE AND UNEMPLOYMENT IT IS EASY TO DRAW RELATIONSHIP BETWEEN INFLATION AND UNEMPLOYMENT RATE BECAUSE PRICE LEVEL IS CLOSELY ASSOCIATED WITH WAGE COST IN COMPETITIVE MARKET

• PHILLIPS CURVE
• D
• 
  
• EXPLANATION

1. AN INCREASE IN THE DEMAND FOR LABOUR AS GOVERNMENT SPENDING GENERATES GROWTH
2. THE POOL OF UNEMPLOYMENT WILL FALL
3. FIRMS MUST COMPETE FOR FEWER WORKERS BY RAISING NOMINAL WAGES
4. WORKERS WILL DEMAND MORE NOMINAL WAGES
5. WAGE COST WILL RISE
6. FACED WITH RISING WAGE COST,FIRM PASS ON THESE COST INCREASE IN HIGHER PRICES

• CONCLUSION
• SIMILAR RELATION BETWEEN MONEY WAGE RATE AND RATE OF UNEMPLOYMENT
• IF WE WANT TO HAVE A LOWER RATE OF INFLATION  THEN ACCEPT THE HIGHER RATE OF UNEMPLOYMENT AND ON THE CONTRARTY LOW RATE OF UNEMPLOYMENT THEN PREPARED TO ACCEPT HIGHER RATE OF INFLATION.
• LONG PERIOD PHILLIPS CURVE

1. MILTON FRIEDMAN AND E,S PHELPS HAVE POINTED THAT THIS TYPE OF PHILIPS CURVE EXPRESSES ONLY TRANSITORY SHORT PERIOD RELATIONSHIP
2. FOR LONG PERIOD,THEY HAVE INTRODUCED THE CONCEPT OF NATURAL RATE OF UNEMPLOYMENT WHICH REFERS TO THE RATE OF UNEMPLOYMENT CORRESPONDING TO REAL WAGE WHICH TENDS TO CLEAR OFF FROM THE LABOUR MARKET.
3. NATURAL RATE OF UNEMPLOYMENT INFLATION IS IN EQUILIBRIUM NEITHER INCREASES OR DECREASES,MAXIMUM LEVEL OF EMPLOYMENT AT THE POINT OF THE FULL USE OF THE PRODUCTIVE CAPACITY OF THE ECONOMY, AT THE NATURAL RATE OF UNEMPLOYMENT   ACTUAL INFLATION IS EQUAL TO EXPECTED INFLATION

• LONG PERIOD PHILLIPS CURVE
• D
  
• EXPLANATION

1. LONG RUN PHILLIPS CURVE IS A VERTICAL STRAIGHT LINE NN1 INTERSECTING THE X AXIS AT A POINT OF NETURAL RATE OF UNEMPLOYMENT
2. WHEN A DECLINE IN UNEMPLOYMENT BELOW THE NATURAL RATE THAT IS INDUCED BY  A RISING EFFECTIVE DEMAND WILL BE TEMPORARY AFFAIR AS THE RISING PRICES LOWER THE REAL WAGES AND WORKERS RELAISE THIS THEY WILL BARGAIN FOR HIGHER AND HIGHER MONEY WAGES AND UNEMPLOYMENT TENDS TO RETURN AT THE NATURAL RATE, SO THERE IS NO POSSIBILITY OF ANY TRADE OFF BETWEEN UNEMPLOYMENT AND INFLATION.