Phillips curve, Managerial Economics

PHILLIPS CURVE 

The Phillips  curve,  named  after  A.  W.  Phillips,  describes  the  relationship between unemployment  and  inflation. In  1958  Phillips, then  professor at London School  of  Economics,  took  time  series data  on  the rate  of unemployment and  the  rate of increase in nominal wage rate  for  the United Kingdom for the period 1861-1  957 and attempted to e'stablish a relationship. He took a simple linear equation of the following  form: 

w = a - bu

where  w  is the rate of wage  increase, a and b are constants and u is the rate of unemployment. He  found  that  there  exists an inverse  relationship between  w and u, with the implication  that lower rate of unemployment is associated with higher rate  of  wage  increase.  The  policy implication of  such a  result  was astounding  - an  economy cannot have both low  inflation  and  low unemployment simultaneously. In order to contain unemployment an economy has to tolerate a higher rate of wage increase and vice versa. 

Subsequent  to the publication of  the results by  Phillips,  economists followed suit  and  attempted  similar exercises for  other countries. Some of  the studies carried out refinements to the simple equation estimated by Phillips such as the use of inflation (the rate of increase in prices) instead of wage rate increase. 1n/ many cases the scatter of plot of variables appeared to be a curve, convex to the/ origin. As empirical studies reinforced the inverse relationship between the rate: of  inflation and  the rate of unemployment the Phillips curve  soon became an: important tool of policy analysis. The prescription was clear: during periods of high unemployment the government should  follow an expansionary monetary policy which  leaves more money  in the hands of people. It may  accelerate the rate of inflation while lowering unemployment.  

Posted Date: 10/26/2012 6:13:19 AM | Location : United States







Related Discussions:- Phillips curve, Assignment Help, Ask Question on Phillips curve, Get Answer, Expert's Help, Phillips curve Discussions

Write discussion on Phillips curve
Your posts are moderated
Related Questions
Problem 1: The national budget exercise is nothing more than a political exercise. Discuss. Problem 2: a. What do economists mean by the term ‘efficiency'? b. What

Demand analysis Demand analysis is undertaken to forecast demand, which is a fundamental constituent in managerial decision-making. Demand forecasting is of important because a

Q. What is Internal Diseconomies of Scale? Internal economies of scale exist only up to a certain size of the plant. Size of plant is called the optimum plant size since with t

Provide two examples of identity economics other than those given in the article

Q. What is Marketing Economies? They are allied with selling of the product of the firm. They arise from advertising economies. Because advertising expenses increase less than

what is market

Airbus Boeing Demand P = 182.868 - 0.0003Q P = 198.6592 - 0.00013Q TVC Curve TVC = 104.8822Q - 0.001Q^2 + 0

how realistic is the sales maximization model from experience with business objectives as pursued by Zimbabwean firms

Monetary policies This is the direction of the economy through the variables of money supply and the price of money.  Expanding the supply of money and lowering the rate of in

A mother is torn among choosing her son Leonardo and her daughter Meryl to have the last bar of chocolate in her cupboard. As both her children's needs the chocolate and she needs