Philips Curve
The findings of A.W. Phillips' research on the historical correlation between the unemployment rate and the rate of inflation in Great Britain were reported in a 1958 paper. Phillips is a New Zealand-born economist.
This paper's goal is to give a thorough overview of Philips's curve, the supposition of Phillips's curve, and the drawbacks of Philip's curve.
This relationship implied that policymakers may take advantage of the trade-off and lower unemployment at the expense of raising inflation.
The Keynesian aggregate demand policies in the middle of the 20th century were justified using the Phillips curve. A Phillips curve is one of the most well-known traditional theories for calculating output and unemployment. The curve posits that when unemployment rises, people curtail their expenditures on goods and services. In response, businesses raise their prices to cover increased costs and make a profit. This feedback process results in lower unemployment and higher economic growth.
The supposition of Philip's Curve
- When an economy experiences inflation, which is typically the result of rising demand, more people are hired to manufacture more items.
- When an economy is in a slump, more resources are lying idle, making workers less in demand and lowering inflation.
- The Phillips Curve's movement reflects changes in the business cycle from year to year.
Diagrammatically,
The Phillips curve is a diagram that shows the inverse relationship between inflation and unemployment rates. The idea was initially developed by William Phillips in 1958 in his work titled "The Relation between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861-1957." Today, every significant economy in the world has disproven this thesis.
According to the notion, unemployment decreases with increasing inflation rates and vice versa. As a result, high levels of employment are only possible with high inflation rates. The results of the Phillips curve have a significant impact on the policies designed to promote economic growth, increased employment, and sustainable development.
Drawbacks of Philip's Curve
The Phillips curve' nevertheless, only holds true in the short run. When both inflation and unemployment are alarmingly high, the Phillips curve cannot explain the conditions of stagflation (stagnation + inflation)
However, utilizing a Phillips curve has significant drawbacks. The main complaint is that because it assumes each percentage point increase in CPI ( Consumer price index) results in a proportional increase in the jobless rate, it understates the impact of rising unemployment. Milton Friedman discovered that unemployment and inflation were rising at the same time in 1970. Milton Friedman developed the Friedman curve in 1970 to take the place of the Phillips curve. Friedman's curve allows for indirect interactions as opposed to a Phillips curve, which supposes a direct relationship between two variables. This increases its adaptability and theoretical accuracy.
Tags:
Philips curve