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The Phillips Curve
Unemployment
• Number of people willing and able to work but don’t have work
• Calculated as a percentage of the working population
• Method of Measurement
Government statistics on the number of people getting
unemployment benefits
Inflation
• A sustained increase in the general price level (average price of goods
and services)
• Calculated as a percentage increase per year
• Method of Measurement
– Creation of a basket of goods and services bought by an average household
– Calculate total expenditure on the basket
– Calculate increase in expenditure on the same basket over years using a
Weighted Price Index
– Rate of Inflation = Percentage increase in the WPI
Phillips Curve
• Proposed by economist AWH Phillips (1914 – 1975)
• Theorized the Inverse (indirect) relationship between Inflation and
Unemployment
High Unemployment
Low Unemployment
Low Wage Raises
Low Spending on Goods
Low Increase in Prices of Goods
( Low Rate of Inflation )
High Wage Raises
High Spending on Goods
High Increase in Price of Goods
( High Rate of Inflation )
• Data from late 19th to early 20th
Century supported the theory
• Trade off between Inflation and
Unemployment
• Useful for Government Policies
aimed at controlling either
Inflation or Unemployment
Milton Friedmen & Edmund Phelps
Low Unemployment
Expect Higher Inflation
Demand Higher Wage Raises
Increasing Layoffs
Increasing Unemployment
• Data from late 1960 - 1980
supported the theory
•Oil Price Rises Increased Inflation
in the 1970s
• C
• No Trade off between Inflation
and Unemployment
• Original Relationship no longer
holds
Questions
• Who was right?
Phillips or Friedmand and Phelps?
• Which theory is used in Economics?
• How is the method of formulation of
hypothesis and theories in Economics
different from Natural Sciences?
• Is experimentation possible in Economics?
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