Discuss the analytical foundations of the Phillips curve - Essay Example

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Having been discovered by AW Philips, a British economist, Philips curve has become one of the important tools used to undertake a macro-economic policy…
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Discuss the analytical foundations of the Phillips curve
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Download file to see previous pages most of the policy makers believed that unemployment and inflation could not occur at the same time and whichever occurred, it became a major determinant of the policies that would be adopted by a given economy. Another issue that the economists believed was that it was possible to achieve one objective without having negative implications on the other. However, the research that Philips undertook in 1958 provided information that generated quite a number of questions to those assumptions. On his part, Philips used the available UK data to make an analysis on the rates of inflation and unemployment in UK. After plotting the result of the research, Philips noted that there existed an inverse relationship between wage inflation and unemployment. As a way of checking the relevance of the Philips conclusion, other economists used price inflation instead of wage inflation and noted that the results were similar curves and this became the origin of the Philip curve. This paper seeks to discuss the analytical foundations of the Phillips curve as well as how unemployment rate of 5% may be inflationary in one country, while it is deflationary in another country.
According to the curve, any change in the level of unemployment produced a predictable as well as direct impact on the level of price inflation. Philips, together with other policy makers adopted the relationship between the two variables and noted that an increase in aggregate demand as well as fiscal stimulus in the economy triggers various responses. First, they noted that an increase in demand as the spending by the government rises results into national growth. This is followed by falling on the pool of unemployed. On their part, firms will be involved in competing for fewer workers available in the economy by increasing their nominal wages making the workers to have a higher bargaining power as they seek to have their nominal wages raised further (Forder, 2014). As the economy gets near to full capacity, ...Download file to see next pagesRead More
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