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viernes, 19 de febrero de 2016

Phillips curve, the relationship between unemployment and inflation

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In this article we moved virtually to a class of macroeconomics at the University. But, unlike those tedious explanations where the slate is filled with graphics and symbols, we will understand easily and briefly this important economic theory.

William Phillips was first engineer and then economist, influenced by Keynesian theories. In 1958, the New Zealand put on a graph the inflation rate and the unemployment rate of the last hundred years (1861-1957), and observed a downward sloping curve reflecting that at higher unemployment, lower inflation and vice versa. In other words, "there is a negative relationship between inflation and unemployment". We see it in the red curves.

Phillips appreciation was widely accepted among economists of the twentieth century and was considered as the basis for economic policies.

In the short term (red curve A-B)

Lets see an explanation of what happens in the short term: if the demand for goods and services increases, companies have to increase their production, so they will need to hire more workers and unemployment declines. As in the short term, consumer demand is greater than supply from companies, consumers agree to pay more for goods and services. Thus prices rise (higher inflation). The graph show this in the course from point "A" to point "b".

In the long term (red curve C-D)

However, long term supply and demand tend to adjust, which is reflected in successive displacements of the curve to the right (red curve C-D), until unemployment reaches the "natural rate of unemployment" or NAIRU (Non Accelerating Inflation rate of unemployment), ie, the unemployment rate that does not accelerate inflation (green line). At that time, we should be on the point "C" and the long-term effect only involves a higher rate of inflation.

Therefore, long-term unemployment is not affected by the rate of inflation (prices will rise and fall, without thereby increasing or decreasing unemployment).

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