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    Econ Dev

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    Irah May Cruzat
    The Philips curve is an economic concept developed by A.W. Phillips stating that inflation and unemployment have an inverse relationship, such that economic growth leads to inflation which then reduces unemployment. It was proposed in 1958 based on data from 1861-1957 in the UK showing this inverse relationship, but was disproven in the 1970s by stagflation of high inflation and unemployment.

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    Econ Dev

    Uploaded by

    Irah May Cruzat
    20 views2 pages
    The Philips curve is an economic concept developed by A.W. Phillips stating that inflation and unemployment have an inverse relationship, such that economic growth leads to inflation which then reduces unemployment. It was proposed in 1958 based on data from 1861-1957 in the UK showing this inverse relationship, but was disproven in the 1970s by stagflation of high inflation and unemployment.

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    The Philips curve is an economic concept developed by A.W. Phillips stating that inflation and unemployment have an inverse relationship, such that economic growth leads to inflation which then reduces unemployment. It was proposed in 1958 based on data from 1861-1957 in the UK showing this inverse relationship, but was disproven in the 1970s by stagflation of high inflation and unemployment.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    20 views2 pages

    Econ Dev

    Uploaded by

    Irah May Cruzat
    The Philips curve is an economic concept developed by A.W. Phillips stating that inflation and unemployment have an inverse relationship, such that economic growth leads to inflation which then reduces unemployment. It was proposed in 1958 based on data from 1861-1957 in the UK showing this inverse relationship, but was disproven in the 1970s by stagflation of high inflation and unemployment.

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    The Philips curve is an economic concept developed by A.W.

    Phillips stating that inflation and


    unemployment have a stable and inverse relationship. The theory claims that with economic
    growth comes inflation, which in turn should lead to more jobs and less unemployment.
    It was proposed in 1958 by economist A.W. Phillips. In his original paper, Phillips tracked wage
    changes and unemployment changes in Great Britain from 1861 to 1957, and found that there
    was a stable, inverse relationship between wages and unemployment.
    However, the original concept has been somewhat disproven empirically due to the occurrence
    of STAGFLATION in the 1970s, when there were high levels of both inflation and
    unemployment, because it contradicted the idea of the said curve.
    Why is there a trade-off between Unemployment and Inflation?
     Changes I aggregate demand translate as movements along the Phillips Curve. For
    instance, if the economy experiences a rise in AD, it will cause increased output.
     As the economy comes closer to full employment, we also experience a rise in inflation.
     However, with the increase in real GDP, firms take on more workers leading to a decline
    in unemployment (a fall in demand deficient unemployment)
     Thus, with faster economic growth in the short-term, we experience higher inflation and
    lower unemployment.

    Economic Output
     In economics, output is the quantity of goods and services produced in each time period.
    The level of output is determined by both the aggregate supply and aggregate demand
    within an economy. National output is what makes a country rich, not large amounts of
    money.
     Anything that causes labor, capital, or efficiency to go up or down results in fluctuations
    in economic output.

    Fluctuations in output
     SHORT RUN – output fluctuates with shifts in either aggregate supply or aggregate
    demand.
     LONG RUN – only aggregate supply affects output.
    SHORT RUN VS. LONG RUN

    SHORT RUN
     Outward shift in the aggregate supply curve would result in increased output and lower
    prices.
     Outward shift in the aggregate demand curve would also increase output and raise prices
     Increase in money will increase production due to shift in the aggregate supply.
     More goods are produced because the output is increased and more goods are bought
    because of the lower price.

    LONG RUN
     The aggregate supply curve and aggregate demand curve are only affected by capital,
    labor, and technology.
     Everything in the company is assumed to be optimal
     The aggregate supply curve is vertical which reflects economists belief that changes in
    aggregate demand only temporarily change the economy’s total output.
     An increase in money will do nothing for output, but will increase prices

    CLASSICAL THEORY
    Classical economics focuses on the growth in the wealth of nations and promotes policies that
    create national expansion. During this time period, theorists developed the theory of value of
    price which allowed for further analysis of markets and wealth. It analyzed and explained the
    price of goods and services in addition to the exchange value.
    ASSUMPTIONS
     Supply creates its own demand; based on Say’s Law, classical theorists believed that
    supply creates its own demand. Production will generate an income enough to purchase
    all of the output produced. Classical economics assumes that there will be a net saving or
    spending of cash or financial instruments.
     Equality of savings and investment; classical theory assumes that flexible interest rates
    will always maintain equilibrium.
     Calculating real GDP classical theorists determined that the real GDP can be calculated
    without knowing the money supply or inflation rate.
     Real and nominal variables classical economists stated that the real and nominal variables
    can be analyzed separately

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