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Phillips Curve

Last updated date: 09th Apr 2024
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About Phillips Curve

The Phillips Curve is an economic concept, and it has been proposed and initiated by A. W. Phillips to state the reasons for inflation and consequent unemployment. It will lead to the inverse and the stable relationship, and the theory claims the kind of insufficient economic growth, which can, in turn, lead to a more developed job structure leading to less unemployment. However, the authentic concept, as proposed by Phillips Curve, has been empirically disapproved due to the happening of stagflation in the years of 1970s. Here you can notice the high levels of both unemployment and inflation, and you are quite into the field, making ways for the experts. 

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There are expectations augmented by Phillips Curve, and the concept is more innovative and encouraging of its kind. The curve is there to state the rate and reasons for unemployment and inflation and also talks about the inverse relationship of the same. The high rate of inflation has a connection with the lower rate of unemployment, and it can even be vice versa. Once you get to know what is Phillips Curve is, you can have a better understanding of the rate of inflation. 

What is Phillips Curve?

In trying to understand the concept of the Phillips Curve, you get to know about the change in the rate of unemployment within the specific economic setting. There are the expectations augmented Phillips Curve, and it is something that can have a conventional effect in matters of price inflation. It is all about the inverse relationship between inflation and unemployment, and the same is depicted in the kind of downward economic slopping. One can see the concave curve with the rate of inflation shown by the Y-Axis, and you even have the unemployment being depicted by the X-Axis. 

In the year 1960, there has been a fiscal stimulus that can help in increasing the aggregate demand and also helps in initiating the favourable effects. In the process, an increase in the amount of labour demand will help augment the pool of unemployment, and there is a subsequent decrease in the workers with the subsequent increase in the company wages. It is perfect to follow the Phillips Curve equation to attract the portion of the talent pool. The corporate cost of the wages can increase in time, and the companies will pass over those costs to most of the customers in the form of prices. 

A simple Phillips Curve equation can be represented as -

U = -h (unemployment - u)

\[\Pi = -h \times (u -u_{n})\]

A simple Phillips curve is typically represented with inflation as a function of employment rate and the hypothetical unemployment rate that would exist if inflation existed as zero. The inflation rate is represented by and the employment rate is denoted by ‘u’. The ‘h’ in the Phillips curve is a positive constant that guarantees that the curve slopes downwards. The ‘\[u_{n}\]’ is the natural rate of unemployment that would result if inflation was zero.

The Concept of NARU

There is an increase in the central bank inflation, and it can help in pushing the level of unemployment to the lower level, as depicted in the Phillips curve equation. There can even be an initial shift along the curve, causing an increase in the expectations of the workers. This will help the inflation get adapted to the new environment, and in the longer run, the curve can have an outward shifting, as you get to see in the Phillips curve PPT. However, things have a relation with NARU or the natural rate of unemployment. This can help in representing the normal rate of institutional and frictional unemployment as part of the steady economy. 

The concept will become better clear once you start following the Phillips curve diagram. Especially in the stage of stagflation, the workers and most of the consumers can start to have a rational expectation, and once again, this helps increase the rate of inflation, and with this kind of financial awareness, the money based authority will have plans to embark on expanding monetary policy. Based on the details of the Phillips curve PDF, you can have a better idea about the apt monetary policy with all the necessary fiscal inclusions. 

The Phillips curve in economics plays a major role in the probable monetary expansion. Several surveys have proved that the presentation of the Phillips Curve has made things clear in the field of finance. Once you check with the PDF and the diagram, you can see the vertical graph that will show you the rise in the graph and make you better aware of the possible economic growth and development. It is the genre where you can put your trading skills and get into depth with the Phillips curve example. This is sure to have the least effect on the reduced rate of unemployment, and this will make the curve acquire the vertical line. 

The entire concept of the Phillips curve is an indispensable part of Economics. It is imperative to have at least rudimentary knowledge of the subject to be aware of the several real-life economic phenomena that we experience and observe. Thus, this well-written article has comprehensively explained all the vital concepts related to the Phillips curve in economics.

FAQs on Phillips Curve

1. What are the sheer limitations of the Phillips Curve?

The Phillips Curve has the right effect on both the wages of the workers and the price level. However, the same has limitations and will not have any effect on the price that is based on the wages. This can act as a limitation and can cause an increase in the price in the long run. The limitation in the curve can cause an increase in the standard of living from the level of price and then to the increase in the daily wages. This is how the limitations are augmented gradually.

2. Is Phillips Curve still functional?

Phillips Curve has both the linear and the non-linear slopes, and both of them are very near to zero. Things are consistent with the common and the general view, and this causes flattening of the Phillips Curve. However, you can say that the wage Phillips Curve is greater resilient, and it is extremely evident and functional in the present era. Phillips Curve acts as a guide for the financial policymakers, and it is the right economic graph fitted to the present scenario.

3. What is the cause of the failure of the Phillips Curve?

There are many reasons for the breaking down of the Phillips Curve. With the implementation of the concept, the USA economy has witnessed a constant and dramatic increase in the rate of income inequality. This has made the workers lose their bargaining power, and they can now easily translate the increased demand for labour into a higher wage. The failure of the curve has been constant, and this has made the concept dysfunctional in the long run.