The document discusses the Phillips curve, which was developed by economist William Phillips and represents the inverse relationship between unemployment and inflation. It notes that Phillips found a consistent relationship in UK data from 1861-1957 where unemployment was high, wage growth was slow, and when unemployment was low, wages rose rapidly. The summary explains that the Phillips curve shows the tradeoff between inflation and unemployment, and how shifts in expected inflation or the natural unemployment rate cause the curve to shift positions.

1. Philips Curve Nino
Bazhunaishvili

2. A.Wiliam Philips
Wiliam Philips a New
Zealand born economist ,
wrote a paper in 1958
titeled The Relation
between Unemployment
and the Rate of Change
of Money Wage Rates in
the United Kingdom from
1861 to 1957, and he found
a consistant inverse
relationship: when
unemployment was hight,
wage increased slowely;
when unemployment was
low, wage rose rapidly.

3. Philips Curve
The Philips curve
represents the relative
relationship between the
rate of Inflation and The
Unemployment rate.
Unemployment is
considered low or high
relative to the so-called
natural rate of
unemployment. Inflation is
considered low or high
relative to the expected rate
of inflation.

4. Philips Curve
The Phillips curve must pass
through that point on the graph
at which actual inflation is
equal to expected inflation, and
at which the actual rate of
unemployment is equal to the
natural rate of unemployment.
Any shift in the natural rate
of unemployment (and the
natural rate of unemployment
can shift) will shift the Phillips
curve to the left or the right.
Any shift in expected inflation
(and expected inflation does
shift) will shift the Phillips curve
up or down.

5. The basic Phillips Curve idea –
economic trade-offs
• In 1958 AW Phillips from whom the Phillips Curve takes its name
plotted 95 years of data of UK wage inflation against unemployment.
It seemed to suggest a short-run trade-off between unemployment
and inflation. The theory behind this was fairly straightforward.
Falling unemployment might cause rising inflation and a fall in
inflation might only be possible by allowing unemployment to rise. If
the Government wanted to reduce the unemployment rate, it could
increase aggregate demand but, although this might temporarily
increase employment, it could also have inflationary implications in
labour and the product markets.
• The key to understanding this trade-off is to consider the possible
inflationary effects in both labour and product markets arising from
an increase in national income, output and employment

6. Explaining the Phillips Curve
concept using AD-AS and the output gap
LRAS
Diagram shows the original short-
run Phillips Curve and the trade-off
between unemployment and
inflation

7. NAIRU
New theories, such as
rational expectations and the NAIRU
(non-accelerating inflation rate of
unemployment) arose to explain how
stagflation could occur. The latter theory,
also known as the "
natural rate of unemployment",
distinguished between the "short-term"
Phillips curve and the "long-term" one.
The short-term Phillips Curve looked like
a normal Phillips Curve, but shifted in the
long run as expectations changed. In the
long run, only a single rate of
unemployment (the NAIRU or "natural"
rate) was consistent with a stable inflation
rate. The long-run Phillips Curve was thus
vertical, so there was no trade-off
between inflation and unemploymen.

8. Philips Curve
A Steep Philips Curve
A Shallow Philips Curve

9. Expectations and modern view of PC
People won’t correctly
anticipate the rate of inflation
particularly if there is an abrubt
change in the rate. Within the
expectations framework it is the
difference between the actual
and expected inflation rate that
will influence output and
employment.

10. Philips Curve Formula
π=π-1+α(y-ye)
It is a measure of the price reaction to excess output,as
follows:
y(e) is the equilibrium level of national income [which stands
for employment, output, etc]
y is the prevailing level of national income etc which may be
above or below the equilibrium level
a is a mathematical constant that determines the fit of data to
a Phillips curve
π is the current price level and
π-1 was the price level in the previous period.

11. Philips Cure Formula
If y exceeds y(e), that level of national income cannot be sustained
without creating inflationary pressures, so that α(y-ye) will be positive
and π will exceed π-1 Prices are rising .
If y(e) exceeds y, that level of national income is below the equilibrium
level and here will be deflationary pressures created from
unemployment, under-production and so on. And so α(y-ye) will be
negative and π will be lower than π-1 Prices are falling

12. Resources:
http://in.answers.yahoo.com/question/index?qid=20091028041351AAqVCum
http://tutor2u.net/economics/revision-notes/a2-macro-phillips-curve.html
http://books.google.de/books?
id=yIbH4R77OtMC&pg=PA322&lpg=PA322&dq=expectations+and+modern+view+of+philli
ps+curve&source=bl&ots=Ph0DEYo8bl&sig=INkHf74j3K1KdUGMQWCVrJjmoZ8&hl=de&s
a=X&ei=Pm-vT9jiIqX54QTD4YS9CQ&ved=0CHEQ6AEwBA#v=onepage&q=expectations
%20and%20modern%20view%20of%20phillips%20curve&f=false
http://tutor2u.net/economics/revision-notes/a2-macro-phillips-curve.html

13. Questions...??????